High Tide Inc. Q3 FY2024 Earnings Call

Good morning. My name is Nadia, and I'll be your conference operator today. At this time I would like to welcome everyone to the High Tide Inc.'s Q3 2024 Unaudited Financial and Operational Results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Instructions will be provided at that time for you to queue up for the question-and-answer session. I will now turn the call over to your host, Krystal Dafoe. Please go ahead.

Well, thank you, operator, and good morning, everyone, and welcome to High Tide Inc's quarterly earnings call. Please note that all earnings discussed on this call are presented on an unaudited basis. Joining me on the call today are Mr. Raj Grover, President and Chief Executive Officer; and Mr. Mayank Mahajan, Chief Financial Officer. Yesterday, on September 16, 2024, the company released unaudited highlights from its financial and operational results for the third fiscal quarter that ended April 30th, 2024. Before we begin, please let me remind you that during the course of this conference call, High Tide’s management may make statements, including with respect to management's expectations or estimates of future performance. All such statements other than statements of historical facts constitute forward-looking information or forward-looking statements within the meaning of the applicable Securities Laws and are based on assumptions, expectations, and estimates and projections as of the dates hereof. Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions, and anticipated courses of action. For more information on the company's risks and uncertainties related to forward-looking statements, please refer to the company's press release dated September 16, 2024, our latest annual information form, and our latest management discussion and analysis, each filed with securities regulatory authorities at sedarplus.ca or on EDGAR at www.sec.gov, or on the company's website at www.hightideinc.com, which are hereby incorporated by reference herein. Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on the currently available information to management as of the date hereof, we cannot be certain that the actual results will be consistent with the forward-looking statements in the future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures, measured and discussed, please consult our latest management discussion and analysis filed on SEDAR Plus and EDGAR. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of High Tide. Thank you, Mr. Grover. You may now begin.

Thank you, Krystal, and good morning, everyone. Welcome to High Tide Inc's financial results conference call for the third fiscal quarter that ended July 31, 2024. I'll begin with some big picture comments regarding the quarter and our strategy before Mayank and I dig deeper into the numbers. We filed our press release and financials last night, and once again, I'm proud to report another record-breaking quarter for High Tide. Growth resumed, with revenue up 6% sequentially to an all-time record of $131.7 million. You'll recall how we purposefully slowed growth in 2023. We saw the competitive dynamics and the market conditions and focused our efforts to be among the first cannabis companies to be free cash flow positive, thinking that those who weren't clearly on that path bore a meaningful risk of fading away, and that's exactly what's been happening. We have been free cash flow positive for five straight quarters now, while during this time, a whole series of public and private cannabis retailers have gone under. After proving our ability to consistently generate free cash flow, we said we would resume growth, and here we are with the highest-ever level of quarterly revenue. While that is great to see, I know that we now have 183 stores across the country, which included us opening eleven new cabanas during the quarter. Using internal cash flow, we have now surpassed the lower end of our communicated range to add 20 to 30 new stores this calendar year, and given the momentum we are seeing, we feel that we can now reach the higher end of this range. Investors will remember that a while ago we were aspiring to reach a 10% market share, one of the biggest achievements this quarter. And thanks to our team's efforts over the past couple of years, I'm exceptionally proud that we have already reached 12% market share, and we are well on our way to reaching our current goal of holding a 15% market share in the provinces where we operate. The 12% share we had during May and June 2024 was up from 10% a year ago, 8% during March and June 2022, and 5% when the discount club model was launched in October 2021. We achieved this while only having 5% of the total bricks-and-mortar store count in these markets, clearly showcasing the potency of our disruptive and innovative discount club model. With this market leadership and a differentiated model, we have found the perfect balance between growth and harvesting free cash flow which was $3.1 million in Q3. Over the trailing four quarters, free cash flow was $21.8 million, which represents a yield of over 9% versus our enterprise value. Our Cabana Club has always been the lifeblood of our company and I'm really excited to see it continue to expand at such a rapid pace. We are now at 1.55 million members, up an impressive 8% sequentially and 41% year-over-year, equating to over 500% growth in memberships since we launched the discount club model in October 2021. For the fourth consecutive quarter, ELITE, our paid membership tier has been growing at its fastest pace since inception, currently sitting at 57,000 members, up 30% sequentially and 203% from a year ago. These numbers are worthy of celebrating and add to our confidence about the success of our innovative retail model and the exciting growth trajectory that we are on. I'm also very pleased to announce that our net income continued its upward momentum from breakeven in Q1 to $200,000 in Q2 and now reaching $800,000 of net income in Q3. This is truly an anomaly in Canadian cannabis, and one we are particularly very proud of. Our execution is so solid that not only are we back to revenue growth, but we are at the point where we are able to grow organically by building stores with internally generated free cash flow. In fact, we had the highest CapEx spend during the past 11 quarters in Q3 building out stores. Despite this, we were still able to end the quarter with a cash balance of $35.3 million, which is the most we've ever had. Another point showing how well our model is performing is our same-store sales growth. Since we launched our innovative discount club near the end of October 2021 to the end of June 2024, our same-store sales rose a cumulative 118%. In contrast, the average operator has experienced a revenue decline of 21% during this period. Our impressive performance month-in and month-out has continued. In July, our same-store sales rose another 5% versus June, resulting in a pace that was 129% ahead of where we were back in October 2021. We're especially pleased this quarter by the fact that despite adding 21 new stores in this calendar year and 11 stores during Q3, we have still been able to generate our best-ever EBITDA level as well as continued free cash flow. Each new store we open takes anywhere from six to 12 months to reach maturity, and payback periods based on an average are about 10 months. Thus, new stores initially represent a drag on consolidated results due to the ramp-up that is required. Given our track record and the strength of our business model, even in this hyper-competitive landscape, we expect all these new stores to be additive to results within a few quarters. We recently began disclosing our annualized sales per square foot, another critical metric for retailers. In Q3, it totaled $1,658, which marked an improvement from $1,637 in Q2. We are extremely proud that we are ahead of many best-in-class blue chip retailers such as Lululemon, Target, Walmart, and Canadian Tire on this metric. This comparative information was included in our revamped investor presentation last week. We have begun to include much more retailer-specific information in an effort to try to broaden our shareholder base and better appeal to investors who buy consumer discretionary or stable stocks. Early feedback on this approach has been very positive. We aren't where we were a few years back when the cannabis industry consisted of companies making promises and projections, relying on hype and optimism to appeal to investors. Several years in, companies need to be real now. While many of those operators from years ago are defunct, we aren't just telling a story. It is backed by a track record, millions of retail transactions, and strong cash flows. We have proven that we know how to run a tight ship, and on that subject, I'm extremely proud that while we have grown to set a new revenue record in Q3, we are taking cost out of the system where we can at the same time. Our Q3 G&A expenses were only 3.7% of revenue. This level exceeded our internal expectations, compares to 5.2% a year ago, and was the lowest level in four years. In dollar terms, G&A was just $4.8 million, marking the lowest level in 11 quarters, even though our revenue has more than doubled during this period. I will now go over the highlights from the financials and Mayank will do a deeper dive. Revenue for Q3 was $131.7 million, an all-time record, up 6% year-over-year and sequentially. Our bricks-and-mortar segment led the way, up 10% year-over-year and outperforming our expectations. In the month of June, our average store was an annual revenue run rate of $2.6 million, which compares to our average peer revenue of just $1 million in the provinces where we operate. In Ontario, the largest market and the focus of a future expansion, our outperformance was even more pronounced. Excluding newer stores opened six months or less, which are still ramping up, the average Canna Cabana store was in a $3.5 million annual revenue run rate, whereas the average of our peers in Ontario was just $1 million. Our same-store sales were up 1% year-over-year in Q3. While this is less than levels we have historically achieved, there's no doubt that the overall market has slowed considerably and in many cases has actually turned negative. For example, according to Statistics Canada, total industry sales in the five provinces where Canna Cabana has a presence actually experienced a 10% year-over-year decline during May and June, making our 1% gain for the quarter a huge outlier to the upside. Sequentially, our 5% same-store sales growth is even more encouraging. Even accounting for the extra days, our average daily same-store sales posted a 3% sequential increase in Q3, which is a 13% annualized pace. In addition to the sales of merchandise in our stores, our Cabanalytics data and advertising platforms continue to expand. Given the increase in our footprint, our sales volumes and operational outperformance, as well as the persistent struggles experienced by many of our competitors, more and more interest is pouring into our retail ecosystem. Cabanalytics business data and insights platform advertising revenue and other revenues, which includes management fees, interest income, and rental income, was $9 million in Q3, up 36% year-over-year and 1% sequentially. Consolidated gross margins were 27% in Q3 2024, which was a percent lower than the 28% we generated last quarter and in Q3 last year. We have been holding the line on gross margins in our stores, not raising them, to not encourage marginal players from staying in the race and renewing their leases as they come up; the strategy is working. We are outlasting our competitors, as shown by our increasing market share. As this industry shakeout becomes more pronounced, there will be opportunities to raise gross margins down the road. Turning to expenses, salaries and wages increased in Q3, both in dollar terms as well as a percentage of revenue. This is entirely due to the rapid pace of store growth with 11 stores open during the quarter. We have to hire a full team for each new location four to six weeks before a store opens. Good people can be hard to find, secured, and trained so that they can provide cabana-level service to customers on day one. And, of course, stores aren't running at full speed on day one as it takes time to grow the regular customer base. Accordingly, we aren't too concerned with the salaries and wages increase this quarter as it's part of the normal growing pains of expanding the store network. In contrast, we were able to drive our G&A expenses much lower both in dollar terms and as a percentage of revenue. One reason for this was our ability to react and take cost out of the e-commerce segment as a result of revenue declines in what is a tough market, which is also impacted by inflationary pressures. In particular, we were able to reduce operating expenses in our e-commerce segment by 45% year-over-year in Q3, which was greater than the 37% decline in gross profit dollars, which actually resulted in improving the segment's adjusted EBITDA to approximately $700,000 from $300,000 in Q3 2023. Adjusted EBITDA was $9.6 million for the quarter, excluding the impact of the removal of the one-time social responsibility fee in Manitoba. Adjusted EBITDA was up 24% year-over-year. Adjusted EBITDA was down 4% sequentially versus $10 million in Q2, as I explained earlier, this was entirely due to the heightened pace of growth with 21 stores added this calendar year, 14 of which were open since the start of Q3. The expenses for new stores start before they even open, and it is taking longer for the stores to ramp up today than a year or two ago due to heightened competition. That said, we aren't worried. Our new stores are in excellent locations and backed by the power of the discount club model, we are confident that they will ramp up and start adding to adjusted EBITDA a few quarters in even though they result in a net cash burn initially. I know that if you look at EBITDA without the customary adjustments for items such as share-based compensation, it was $8.9 million in Q3, which was up 4% sequentially and its highest level ever. Our income from operations was $3.1 million this quarter. This marked a reversal from a loss of $0.7 million a year ago, an increase of 54% versus $2 million in Q2, and a new record high for High Tide. This strength flowed all the way down to net income, which also improved to approximately $800,000 in Q3 from a profit of $200,000 in Q2 and a loss of $3.6 million in Q3 last year. Fully diluted earnings per share were $0.01 this quarter versus breakeven in Q2 and a loss of $0.04 a year ago. In conclusion, Q3 was another excellent quarter for High Tide with no shortage of highlights, including reaching a 12% market share and a return to revenue growth. Our company has continued to strengthen since the end of the quarter, including the initial closing of our $15 million debt facility, breaching the 1.5 million Cabana club member and 50,000 ELITE member milestones, as well as overhauling our Canna Cabana website and investor presentation for the better. This all happens because of the dedicated team we are blessed to have at High Tide, for which I'm eternally grateful and remain optimistic for new heights to come. With that, I'll turn it over to Mayank for his comments and deeper dive into the numbers.

Thank you, Raj, and hello everyone. Q3 was my first quarter as part of the High Tide team, and what a fantastic quarter it was. We set records on most key metrics including revenue, EBITDA, store count and cash balance. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was an all-time record at $131.7 million, up 6% year-over-year and sequentially. Our bricks-and-mortar segment, which drives the vast majority of our business at over 90% of revenue, performed even better, up 10% year-over-year and 7% sequentially. On a consolidated basis, our gross margins of 27% were just below the 28% generated in Q3 last year and Q2 this year, in line with our ongoing strategy to capture market share. As Raj highlighted, we have been able to simultaneously demonstrate revenue growth and cost cuts, which is truly remarkable. Over the past 12 months, our quarterly revenue has grown by $7.3 million, while our total expenses actually fell by $2.8 million. The main drivers for this were lower G&A expenses, primarily driven by taking cost out of the e-commerce segment, lower depreciation and amortization, primarily relating to intangible assets, particularly the license valued from the meta acquisition back in 2020 as they are now fully amortized, and lower share-based compensation. Adjusted EBITDA margin was 7.3% in Q3. This was an improvement versus 6.3% in Q3 2023, excluding the one-time impact of the removal of the SRF in Manitoba. However, it was below the 8.1% achieved in each of the prior two quarters. This was due to the unprecedented rate of expansion. We added 11 stores in Q3 alone versus 13 stores during all of calendar 2023. We are confident that the addition of these stores will yield meaningful returns for shareholders. Free cash flow was $3.1 million in Q3. Cash flow from operations before changes in non-cash working capital was $8.9 million during the quarter, up 11% sequentially, highlighting the increasing cash generation potential of our business. However, largely due to an unfavorable investment in working capital of negative $2.7 million in Q3 versus a benefit of $4.8 million in Q2, this quarter's free cash flow of $3.1 million was less than the record $9.4 million generated last quarter. It is for this reason that we focus on the longer-term trends, and I note that we have now generated $21.8 million in free cash flow over the past year, which represents over 9% of our enterprise value. Our balance sheet has never been in better shape. Despite all the growth in CapEx, building out new stores and paying off the remainder of our convertible debentures in cash. We ended the quarter with $35.3 million of cash in the bank, which is more than we have ever had. Further, just after quarter-end, we made a significant improvement to our debt schedule as we received the funds from the initial closing of our $15 million debt facility, which will be used to pay off the $13 million debt we have maturing at the end of this calendar year. Remember that we delayed the drawing of the second and final tranche of this new facility to November 2024 so that it lines up with the maturity of our debt with OCN in December, while not paying double the interest until then. Meanwhile, the Bank of Canada has cut its key interest rate by 75 basis points in June, which will result in savings in the interest we pay our senior lender, Connect First. In closing, Q3 was a milestone quarter for us. I like it, in particular by our 12% market share. We are now back to growing our revenue and increasing our store count, which should set the stage for significant growth ahead. Our balance sheet has never been stronger, which should provide us the ability to take advantage of the expansion opportunity we have, particularly in Ontario, which is a big contrast to the troubles so many other companies in our industry are experiencing.

Thanks for the opportunity. Good morning and congrats as there are only a handful of cannabis companies reporting positive EBITDA and net income. Congrats on that. Just wanted to follow up on stores providing, your tracking to hit the top end of your 24-store guidance here of 20 to 30. Do you see any changes or strategy regarding opening new stores into 2025 or still driven primarily organically versus more M&A opportunities out there? And then can you touch base on the new store economics as they become fully optimized? As you mentioned, after two or three quarters regarding kind of average sales and margins compared to your existing profitable stores, kind of, obviously you're still seeing strong economics in the Ontario store ramps. Just a little bit of color on your store kind of outlook as we move into '25 here?

Good morning, Scott. Thank you so much for your question. So, on the topic of 20 to 30, I think you asked me how is organic store growing for the year? It has been going very, very well. We've already put up 21 stores at the end of Q3, and since then, we continue to do our... We are in construction mode, so we're very confident that we will reach the upper end of our guidance that we had provided. Between 20 and 30, we'll be close to like 27 or 28 stores, I think, and nothing will change going into next year. Scott, we found our secret mantra of growing organically. When we're building stores organically, I'd like to remind investors that we're spending just $260,000 to build out these locations and then loading them up with $100,000 or so in inventory and working capital. And then we just go back to ramping up these stores, and you can get better, higher-quality growth in amazing locations that you can cherry-pick than what we are doing currently. So we're going to keep this approach exactly the same going into 2025, especially given we have five consecutive quarters or positive free cash flow. We've always said the quantum can significantly vary, but our intention is to remain free cash flow positive. Going into 2025, you talked about store economics a little bit. I had provided in my previous calls, I had noted that we may be able to raise margins towards the back half of this year. I don't see that happening. We're holding the line on margin. We may even go slight reduction in margin given the illicit market resurgence that we are seeing a little bit. And you're clearly seeing a lot of competitors go out of business. Tokyo Smoke just went bankrupt. I believe that over 100 locations, or they filed for CCWA proceedings. And we don't want to help the larger chains, the smaller chains, and the independents that are just hanging by the thread. So we're going to hold the line of gross margins because we already have amazing economics. As you pointed out, one quarter up or down on adjusted EBITDA is not going to change anything. When we're growing at the pace that we're growing and generating 12% market share, this clearly exceeded our expectations. We thought we would be around that 11, 11.2, and that is a victory. But getting to 12% is an absolute win. So everything that we've been doing is working out for us and we're going to stick to our plan going into 2025, Scott.

Thank you for that detail. I have a follow-up question. You recently launched Queen of Bud and the branded white label products in your five provinces, with BC now on board, which is great. Can you provide more information on the delivery timing and expectations for white label sales for the remainder of 2024, as well as your expectations for the ramp-up into 2025? Additionally, you announced a joint venture with Positive Intent Events for more pop-up opportunities. Does this allow you to promote your white label products there, and how do you see this strategically from the joint venture perspective?

Yes, absolutely, Scott. We're very excited about our long-term strategy. I always emphasize the importance of a long-term perspective for white label products because we need to be aware of market dynamics. I've mentioned countless times that licensed producers still have a significant amount of cannabis, although those levels are decreasing. We're observing stability in wholesale prices, and in the long run, we expect white label products to make up 20% to 25% of our overall sales in our stores, compared to just 2.53% currently. While cannabis represents a smaller portion of our offerings, we aim to increase that percentage over time. A brand like Queen of Bud, which has been established in Canada for over four years and has generated millions in sales, will be easier for us to promote when we feature it in our stores as part of our own brand. We're very optimistic about the growth of the Queen of Bud brand under Cabana Cannabis Co. and about introducing new brands in the future. Regarding our 2024 and 2025 launches, we just introduced the Queen of Bud candles in our stores, and I'm pleased to share that we've sold 222 units in the first two days. We've never sold candles before, but they are performing exceptionally well. In a couple of weeks, we'll also launch Queen of Bud Zippos, complete with all our branded lighters, which Zippo is excited to feature in their spring catalog across 170 countries. Additionally, we will be launching six unique, female-focused cannabis SKUs throughout October, potentially extending into November, across all four provinces—Alberta, Manitoba, Saskatchewan, and Ontario. Accessories will also be available in BC. In 2025, we plan to build on this success and continue launching more Queen of Bud and Cabana Cannabis SKUs, along with expanding our accessory offerings under white label. We are taking a long-term approach and are not rushing to implement our strategy. We're enjoying the current cannabis availability in the country, which allows us to showcase some of the best product varieties to our customers. As the market stabilizes and licensed producers resolve their current challenges, we will be well-positioned to introduce more of our own products and enhance our profit margins. Regarding your question about events and pop-ups, our partner for the positive intent events worked diligently to secure regulatory approvals. We found excellent partners for this joint venture, and we can showcase all available varieties, including our in-house brands. Queen of Bud will be prominently featured at these events. Our first event is scheduled for 15 to 20 days from now, and while I'm excited about the opportunity, I prefer not to speculate on the outcomes. However, we believe this will enhance our market share in Alberta, and we're optimistic that BC and Ontario will follow suit with similar cannabis event opportunities.

Thank you for your question. Raj, I wanted to follow up on your comments regarding the abundance of cannabis. While that definitely applies to the biomass, I'm curious about purchasing patterns in the consumer packaged goods segments like vape pens, edibles, and beverages. Are there differences in your ordering from the provinces based on consumer brand awareness of these products? I know there are still hundreds of licensed producers in the market, but I'm interested if the more consumer-friendly products are seeing any changes in demand in the current environment.

Good morning, Matt. Thank you so much for your question. So, look, you nailed it. There's hundreds and hundreds of LPs out there, Matt. And we've had the same situation for years and years now, but we know that a lot of LPs are going out of business and new ones are not coming back into the game at the same pace. My estimates were that the Johnnie Walkers and the Grey Gooses of the world that are built in alcohol will be built in cannabis. But I can tell you it's proving extremely difficult, although good businesses are good businesses. Amazing LPs are amazing LPs, there's some that are doing a tremendous job that we know. We get customers asking for their brands, right? There are a ton of brands that customers ask by name now, which is great. But what I also see, Matt, at the same time that for some reason, three to six to nine months in, the product starts to fiddle away or fade away. But the one thing I've noticed, what the producers are doing better is that they're keeping the brand. So even at the SKU levels, their interest is starting to fade away because there's just so much innovation in cannabis. The producers are doing a better job in terms of brand positioning, and of course, the ecosystem that we have in Canna Cabana where we move so much cannabis, we are also helping generate brand visibility. Just like we're helping take down the illicit market, we're also helping generate brand visibility for a lot of these producers. So, yes, the brands are picking up, perhaps not at the pace that the producers would be expecting, where people come and ask by name. Now, let me put another spin on this. We bought the Queen of Bud having 183 locations. By the way, we bought the Queen of Bud brand for just a million dollars, and having 183 locations and doing close to $500 million in brick-and-mortar revenue, with only 5% of the countries or the provinces where we operate the brick-and-mortar store count, we couldn't be more happier to position our own brand front and center to the millions of customers that we have or to the hundreds of thousands of customers that come visit our stores. So we're in a good position. But to go back to your answer, certain producers are definitely doing a better job, and brands are starting to pick up.

Thanks, everyone, for the good quarter. In terms of what you said before about Tokyo Smoke going bankrupt. Are those 100 stores actually still operating, or are they closing? And sort of what are you seeing just on the competitive landscape of stores closing as their five-year leases come up, five years into adult use at this point?

Good morning, Mike. Thank you so much for your question. So I believe they have 101 stores. Don't quote me on it, but that's my very good educated guess. They have announced that they are closing 29 stores, or they have already closed 29 stores. I can tell you that we are looking at many of these closed locations. But again, let me remind everyone listening on this call that these companies are not going bankrupt because they've done a great job on site selection criteria and the size of these units and the rental rates that they're paying. I look at a lot of these stores with our real estate team, and I'm shocked sometimes to see a three, four, or 5,000 square foot store in Canada pop up. Who's going to take that at $100 a square foot, even if it's in the best location ever? The landlords are not going to take a haircut because it's a fully built store, and they're trying to pass the store on to some other business, some other operator. That's not going to be us, Mike. We are disciplined. We like quality locations, we like square footages that we can live with and we like rental rates that can stand the test of time, which is an opportunity for the landlord and the tenant and not one directional. A lot of these leases were signed when legalization took place in 2018 or even prior in some cases, and those groups are licking their wounds. It's not a good place to be in. Fire & Flower, Kiaro, Trees, Tokyo Smoke, 420, I can keep going, ShinyBud, there's endless companies that have gone bankrupt. And again, the reasons for them going bankrupt is just how they've looked at their real estate portfolio and how they've managed their operating expenses. So, as much as we are in these portfolios, the opportunities are thin because we don't want to get a three, or 4,000 square foot store paying $80, or $90 a square foot. It defeats the purpose of just making an announcement that we took over ten Tokyo Smoke stores. But I'm not taking over that pain and bringing it over to High Tide. So, we're looking at everything, Mike, but it's not a slam dunk by any means.

Yes, Mike, this quarter has provided us with significant insights. Towards the end of Q2, we began noticing a surge in unauthorized brick-and-mortar stores emerging across Canada, particularly concentrated in Regina. We've also observed similar trends in Ottawa and Toronto. Current estimates indicate that around 200 illicit stores have opened since the start of the year, many located on the periphery in indigenous reserves, but also within city limits, such as Bench Street in Ottawa and King Street in Toronto. In addition to navigating legal competition, we now face challenges from these illicit brick-and-mortar establishments. However, it's worth noting that the Ontario government has committed $31 million to enforcing against the illicit market. Our government relations team is actively working to highlight these issues to the governments and provinces where we operate, emphasizing that we are the ones contributing through taxes and job creation, in contrast to the illicit market. We provide safe cannabis, whereas 96% of illicit market products contain prohibited pesticides. While this situation is frustrating, it’s part of our ongoing challenges. I did not anticipate this resurgence of the illicit market at this juncture. We must not only maintain our stance against the illicit market, but it has forced us to significantly reduce our margins in Regina by 5% to 7% due to the competition from nearby illicit dispensaries. Consequently, we are experiencing some pain, as indicated by a 10% year-over-year decline in sales reported by Statistics Canada. According to recent figures, overall sales are down 12%, although our same-store sales have increased by 1%, and we are achieving record revenues, which is encouraging. Nevertheless, the decline in legal sales can largely be attributed to the illicit market's resurgence and the reduction in cannabis wholesale prices, which leads to lower revenue per unit even when margins remain the same. These factors are challenging our revenue, but it's gratifying to see we are still ahead by 1%. This is a long-term strategy for us. With 12% of the market and moving swiftly towards our 15% goal, I believe we have a promising future. Unfortunately, the resurgence of the illicit market will likely cause more strain on independent operators and smaller chains. While I don't wish harm on them, our challenges signify that they must be feeling it even more acutely. This situation could, in the long run, level the playing field as less resilient operators exit. We are certainly pushing the government to take action, as this resurgence after five years is simply unacceptable.

Hi there. Good morning, Raj and team, and congrats on the fiscal Q3 results. Just as we get kind of near the end of the fiscal year here in 2024 and beginning to look ahead and sharpen our estimates for 2025. Raj, just wondering if you have maybe any early thoughts on what High Tide would target for a store count and new stores opening next year, and how that mix might be between organic and acquisitions in terms of store growth?

Good morning, Andrew. Thank you so much for your question. So let me take this first question first, like what would 2025 store count look like. So Andrew, like I said, we're already at 21 stores opened this year in August, and we balance the art of generating free cash flow really well while growing so aggressively and rapidly and we are still free cash flow positive. So think of 2025 mirroring 2024 plus some additional M&A. We've been very, very disciplined on M&A. As you know, I bought one location in cash, and we paid just 1.5 times EBITDA; now those are the type of deals I'd like to do. When we're trading at 5 times EBITDA, you can't justify paying 4 or 5 times EBITDA to a different operator. And some operators still have high hopes. And some of us are learning very fast that you join the big High Tide family, consolidate, which is the right thing to do at this point, or face the risk of completely fading away. So 2025 will probably do the same thing, Andrew, to answer your question, 20 to 30 new stores added. Let's see where we are this year. I would like to end this year as close to 30 stores. We like to under-promise and over-deliver and then we'll put our new milestone out in December when we provide a corporate update. And on top of that, we hope to do additional M&A in '25, which has been very, very lean in 2024 because we've been waiting for the right opportunity. But we're winning on net income. We're winning on free cash flow. We're absolutely crushing in our market share, which is my favorite bullet this quarter was 12% market share. How happy can you be if you already have 12% of the market in Canada? So we don't need to do anything out of the ordinary to derail our momentum. So think of 20 to 30 new stores in 2025 plus M&A.

Hi, good morning, guys. Terrific work on the quarter. I just want to dive down to a little bit the net income, I think you nailed it, Raj, I think is an important milestone for the company. Now, part of the driving of the positive net income, it looks to me like amortization went down almost, I guess, $2 million sequentially, and interest expense was down $1.5 million sequentially. Can you just sort of talk about what's dragging those two down so much sequentially?

Good morning, Doug, and thank you for your question. We did not benefit from our net income when high depreciation and amortization were working against us. This is part of business operations. If we hadn't acquired Meta in 2020, expanded our footprint, and outpaced Fire & Flower to become the leading company in the country, none of this would have been possible. We've spent five years managing the depreciation and amortization of the assets we purchased, and now that period is stabilizing. We are now benefitting from this situation. The same applies to interest payments. When we first initiated the Connect First payments, the loan was $19 million and is now reduced to around $13.5 million. We have already settled the convertible debentures we had. We now have more to refinance the OCN debt coming up in December, which will offset each other at a slightly higher interest rate in this market, where funding is hard to come by. We secured a $15 million debt facility with an additional $10 million accordion. Regarding your original question, Doug, this is just the nature of doing business. Sometimes conditions can be unfavorable, as these assets depreciate; this is a normal aspect of business, affecting net income even when we broke even in net income in the previous quarter. Despite generating net income, I encourage investors to concentrate on our market share, revenue growth, EBITDA, G&A, and free cash flow. Looking at these metrics, we are clearly accelerating. Net income may fluctuate quarterly for a growth-stage company. However, who can replicate a 12% market share? Any of my competitors would strive for our position. We're already there. Our focus is not solely on net income; it's encouraging to see that, with our tight operational management, we're achieving net income even in this environment.

Hi. This is Brenna for Federico. Thanks for taking our questions and congrats on the quarter. On the retail front, I'd just love to get some commentary on consumer trends across your regional footprint. Specifically, the extent of product trade downs that you're seeing now versus, say, three to six months ago? And how the traction of the Cabana Club has played into that?

Hi, Brenna. Good morning. Thank you for your question. Dry flower continues to be the leading category. Within that, pre-rolls account for about 29% of all dry flower sales, and infused pre-rolls are growing rapidly. Another emerging category performing well is all-in-one disposable vapes, which are also on the rise. In our stores, we focus on offering the best value for the best price, attracting many value-focused consumers who are purchasing ounce bags, or 28 grams, and popular 14-gram formats. Edibles have slight improvements but are still below our expectations, currently making up around 5.5% of our sales. We anticipate that once the 10-milligram THC limit imposed by Health Canada is addressed, edibles could potentially increase to 10% to 12% of our sales, contributing without replacing smokable options since many consumers purchasing edibles may prefer that format. Currently, edibles are only 5.5% to 6% of our total sales, while dry flower remains the leading category at about 60%, with pre-rolls and infused pre-rolls following.

Thank you. It appears we have no further questions. I'd like to turn the session back over to High Tide's Chief Executive Officer, Raj Grover, for final comments.

Thank you, operator, and thank you to everyone for your interest and continued support for High Tide. We're very proud of what we achieved this quarter and remain excited about the road ahead. With that, I will ask the operator to close the line. Have a great day, everyone.