High Tide Inc. (HITI) Q2 2023 Earnings Report, Transcript and Summary

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 Second Quarter of 2023 Unaudited Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to your host.

Thank you, operator. 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. Sergio Patino, Interim Chief Financial Officer. On June 14, 2023, the Company released unaudited highlights from its financial and operational results for the second quarter that ended April 30, 2023. 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, estimates, and projections as of the date hereof. The 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 June 14, 2023, our latest annual information form, and our latest management's discussion and analysis each filed with the securities regulatory authorities at sedar.com or on EDGAR at www.sec.gov or on the Company's website at hightideinc.com, and which are hereby incorporated by reference herein. Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on the current 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's discussion and analysis filed on SEDAR 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 begin.

Thank you, Ashley, and good morning, everyone. Welcome to High Tide Inc.'s financial results conference call for the second quarter ended April 30, 2023. I am so happy to share our results today. I believe they show that we are in a stronger position than ever before and cementing our leadership in Canadian cannabis retail. First and foremost, this was our third consecutive quarter of record revenue and adjusted EBITDA. Achieving this milestone is uniquely exciting as Q2 is historically a slower quarter having three fewer days than Q1, and this continued momentum was achieved organically. So let's dive into the numbers. Our total revenue for the quarter was $118.1 million. This was up 46% year-over-year and largely consistent sequentially. You'll recall that during our Q1 call in March, we disclosed that given the three fewer days in Q2 compared to Q1, which is also a seasonally slower period and without much in the way of new store openings, we expected that Q2 topline would look very similar to Q1 and that's what happened. Same-store sales in our stores were up a massive 30% year-over-year and 1% sequentially. However, taking into account that Q2 had three fewer days than Q1, average daily same-store sales were up 5% sequentially for the quarter or over 20% annualized making this the seventh consecutive quarter of sequential same-store sales increases. Our consolidated gross margin was 27% in Q2, which was consistent with the prior three quarters. I note that gross margins earned from selling cannabis in our bricks-and-mortar locations once again, ticked higher sequentially this quarter. Our Canadian revenue represented 88% of total revenue, which being our core business driver is our main focus and continued to pose gains. Adjusted EBITDA for Q2 2023 was a record $6.6 million representing our 13 straight quarter of positive adjusted EBITDA. Our adjusted EBITDA was up 174% year-over-year and 20% sequentially maintaining its impressive upper trajectory. Over the past four quarters, we have now generated $21.4 million in adjusted EBITDA. This is up a tremendous 150% from the $8.5 million we generated during the four quarters ended Q2 2022. Fully diluted earnings per share represented a loss of $0.02 this quarter, which was significantly better versus a loss of $0.14 during the same quarter last year, and a loss of $0.05 in Q1 2023, representing major improvements of 86% and 60% respectively. Regarding our balance sheet, we ended the quarter with $22.5 million of cash on hand and we continue to responsibly navigate this difficult macro environment. Supported by our ever increasing EBITDA, we are in advanced due diligence with ConnectFirst Credit Union to increase the $19 million debt facility we have with them at the same enviable rate of prime plus 2.5%. Cash flows from operations before changes in non-cash working capital were $5.5 million in Q2 2023. This was the seventh consecutive quarter where this figure was positive marking a 241% increase from $1.6 million in Q2 2022 and was 24% higher than the $4.4 million we generated in Q1 2023. Free cash flow was negative $2 million in Q2 2023 marking a significant 66% improvement from negative $5.8 million in Q2 2022. Free cash flow was negative $846,000 in Q1 2023. Note that we meaningfully reduced accounts payable and accrued liabilities during this quarter by $6.8 million in total, which negatively impacted free cash flow. Investments in working capital can be lumpy from what any one given quarter to the next. We also note that we amended our definition of free cash flow to now represent cash flow from operations, less maintenance and sustaining CapEx and less our lease liability payments. We believe this metric provides better insight regarding the true cash generation from our existing business lines and paints a better picture regarding free cash available to fund the growth of new stores. On our Q1 call, we unveiled our new primary goal of becoming amongst the first companies in Canadian cannabis to be free cash flow positive, and that we plan to achieve this feed by the end of this calendar year. Given the momentum in our business in Q2 and beyond, we remain optimistic that we will achieve this goal. With our revenue and gross margin dollars being largely flat sequentially in the second quarter, I'm quite pleased to report that the vast majority of our $1.1 million sequential increase in adjusted EBITDA came from our continued aggressive cost controls. Specifically, G&A expenses of $6.2 million were reduced by $1.3 million sequentially, compared to Q2 2022, G&A rose by less than $400,000 this quarter, while revenue increased by over $37 million. As a percentage of sales, our G&A expenses fell to 5% in Q2 2023 and improvement from 6% in Q1 2023 and 7% in Q2 2022. As mentioned last quarter, we will continue to look for operational efficiencies across all our business lines. We reached 1 million Cabana Club members in the prior quarter and this membership base keeps growing despite no meaningful change in-store growth recently. Today, we stand at over 1,040,000 club members, which remains the largest Canadian cannabis bricks-and-mortar loyalty program by far and is still growing. ELITE signups continue to grow, currently standing at over 13,500 members representing a 42% increase since we last reported our financial results on March 17. We have been steadily ramping up our exclusive ELITE offerings and over the long-term, we aim to have 25% to 30% of our product selection be ELITE only. With the recent launch of ELITE weekly drops, we expect ELITE signups to gain momentum as these unbeatable exclusive weekly deals are only available to ELITE members. As ELITE inventory ramps up and with more word-of-mouth getting out, we expect these signups will continue to climb over the coming quarters. I would like to take a minute now to address the competitive landscape for retail cannabis across the country. While there maybe certain micro markets out there, which represents pockets of growth such as Mississauga, we just opted into legal cannabis. We believe that store counts across Ontario and Alberta have largely crested and will likely subside from current levels over the coming months as we pass the pivotal five-year anniversary of cannabis legalization where many retailers will decide to walk away rather than renew expiring leases. Recent weeks have also demonstrated that even some large retail cannabis chains with business models different from ours are not immune to the current competitive and capital market realities facing the cannabis sector. While this is unfortunate, we see it as a part of making the market healthier overall, and we expect that our same-store sales will continue to grow as a total number of stores declined while the total industry sales expand. As it is based on March data from Statistics Canada, our average store in Ontario, which is the largest market by far, does more than 3.5x the revenue of our provincial peers and our average store in Alberta where we have the widest footprint generates more than twice as much revenue as our peers in that province. Our discount club concept continues to dominate. Our national market share outside Quebec rose again to 9.5% in Q2 from 9% in Q1 marking the seventh consecutive quarter where we made gains and up from 6.4% just one year-ago. Nationally, while our Canna Cabana stores represent 4.5% of the total number of stores excluding Quebec, our market share in dollars is approaching 10%. While 10% represents an aspirational long-term goal for some of our peers, we are already within striking distance of that today and we see room to move our share higher. We are optimistic that 15% is likely within our reach in the not too distant future. Balance sheets continue to be in the focus and the capital market has been unforgiving to companies which have shown uncertainty regarding their financing runway. We have made sure not to put ourselves in this position. Our total debt currently stands at approximately $38.5 million, which is less than 2x at trailing adjusted EBITDA of $21.4 million. In our view, not only are we the biggest Canadian retail cannabis company by revenue and adjusted EBITDA, but we also remain the strongest option for investors in terms of our focus on free cash flow generation, our corporate governance, the fact that we are fully independent, featuring our very successful one brand strategy and discount club models. As mentioned, we are in advanced due diligence to increase our credit line with ConnectFirst, and we are working towards our goal to become free cash flow positive by the end of this calendar year. Achieving this would make us less reliant on the macro sentiment for capital for cannabis companies. Speaking of while we are not happy with our share price, we highlight that our equity has stood out on a relative basis. Specifically, while our share price is down 15% since the end of our last fiscal year of October 31, 2022, we have meaningfully outperformed our Canadian retailer peers and broad baskets of both LPs and MSOs, which are down approximately 50% during this period. So while it has been a frustrating time, our operational outperformance, upward financial momentum, strong balance sheet, superior market positioning and our goal to move towards positive free cash flow are being somewhat appreciated and what is unfortunately an extended bear market. While these are trying times, they won't last forever, and when things turn, we expect to outperform. As you know, we have built Canada's largest cannabis business by revenue, never having more than $30 million at the end of any one quarter. We are confident that we can take things to the next level in the subsequent bull market. Until then, we will continue improving the strength of our operations and keep highlighting the opportunity to investors as forcefully as we can. To those who have stuck with us, thank you. We appreciate your vote of confidence and we are with you. Shortly after we reported our Q1 results in March, several officers, directors, and consultants, myself included collectively bought over a 0.25 million more shares in High Tide in the open market highlighting our collective belief in what we are building together. I will note once again that I remain High Tide's largest single shareholder and have never sold any shares. We've been a leader in Canadian cannabis, we've done it responsibly, and we plan to keep solidifying our position. This has all been possible because of the hard work of our best-in-class team, our Treasure Club members, and our investors who continue to believe in us. My gratitude to you all is immeasurable. Now, I would like to pass it over to Sergio Patino, our Interim Chief Financial Officer for his comments.

Thank you, Raj, and hello, everyone. As Raj mentioned, Q2 was another excellent quarter for High Tide in what continues to be a challenging market environment. Nonetheless, the company continued to experience solid organic growth with sustained margins by cutting costs, particularly in our core Canadian brick-and-mortar business. In the second fiscal quarter that ended April 30, 2023, the company recorded consolidated revenue of $118.1 million, representing an increase of 46% year-over-year, and consistent with Q1 2023 despite having three fewer days in this period and a seasonally slower quarter. As a percentage of revenue, gross profit remained consistent versus the prior three quarters at 27% and down just a touch versus 28% in Q2 2022. This reduction was intentional. Given the new discount club model we launched in October, 2021. This model, without a doubt has worked, and now that we have tremendously increased sales volumes, we have been able to consistently increase our retail store gross margins earned from selling cannabis in Canada over the past five quarters. This drives the vast majority of our revenue and was up sequentially once again in Q2. Our consolidated gross profit was $31.6 million in the second quarter of 2023, up 39% year-over-year, and down 2% sequentially as there were 3% fewer days this quarter. In addition to slightly raising prices, we have other tools we can pull over the coming quarter to help boost margins. These are ELITE, white-label and Fastendr. Regarding ELITE, we believe we can continue to grow our ELITE-only SKU talent. And as word-of-mouth spreads, our ELITE customer base will continue to rise. Our white-label sales are steadily growing, and we generate approximately 5% higher gross margins selling our house-branded Cabana Cannabis and NuLeaf Naturals products compared to selling other SKUs. We are up to [indiscernible] that own SKUs available today, and we have several more under development. Our long-term goal is to get to 25% of what we sell, representing our own products. Alberta potentially allowing white-label, which is something that we are engaged with the province on, will be a big part of that. As for Fastendr, it is already being deployed in the vast majority of our stores and we are looking to roll it out in the remainder in the coming months. We already have meaningful inbounds from U.S. operators looking to license our technology. We would like to start it for our [indiscernible] really assess and quantify how Fastendr is helping our stores, improving basket size, decreasing transaction times, optimizing labor costs, and enhancing customer satisfaction. All of this will help our brick-and-mortar margins further and then place us in a position with real data in hand to be able to properly price the offerings to U.S. operators and generate another compliant high margin revenue stream for our shareholders. We hit at new height in our adjusted EBITDA at $6.6 million in Q2 2023 up 174% versus Q2 2022 and up 20% sequentially while gross margins dollar were down 2% sequentially, given the three fewer days effectively, all of the EBITDA increase came from our cost controls. Specifically, G&A went down by over $1.3 million sequentially from $7.5 million in Q1 2023 to $6.2 million in Q2 2023. There were some non-recurring items in the Q1 figure, however, we also found efficiencies in both retail and e-commerce businesses. In general, we expect the G&A cost base to stay stable around the current level going forward. G&A represent just 5% of revenue in Q2 2023 versus 6% in Q1 2023 and 7% in Q2 2022. Salaries, wages, and benefits were 12% of revenue, which was consistent with the prior four quarters as we have taken continued measures to support our frontline and head office staff during this inflationary times. As highlighted by Raj, our cash flow situation improved significantly in Q2 2023. Operating cash flows before changes in non-cash working capital were $5.5 million in Q2, up 241% year-over-year and 24% sequential. Working capital can be lumpy per quarter, and we did take meaningful strides to reduce our current liabilities in Q2. All told, our free cash flow was negative $2 million in Q2 2023, which was a 66% improvement versus the prior year of negative $5.8 million. Note that this quarter and going forward, we have only incorporated the sustaining and maintenance CapEx component in our definition of free cash flow to better represent the cash flow generation of our existing businesses versus what is being spent on growth. We are making good strides toward becoming free cash flow positive by the end of this calendar year. We ended the quarter with $22.5 million of cash in our accounts and are always looking for ways to strengthen our balance sheet. In terms of our ability to access more non-diluted capital, we are currently in advanced discussions to increase how much we can borrow with ConnectFirst at the same rate of prime plus 2.5%. In closing, Q2 was another great quarter for High Tide. Our company is the clear leader in Canadian cannabis and is the largest revenue generating cannabis company in Canada according to data published by new cannabis bench. With that, I will now turn the call over to the operator to open the lines for the question-and-answer session.

Thank you. [Operator Instructions] Our first question today goes to Scott Fortune of ROTH MKM. Scott, please go ahead. Your line is open.

Yes. Good morning, and thank you for the questions here. I appreciate the color on the competitive landscape, but just wanted to get sense with a large competitor recently going under here. Can you provide a little bit more your comments saying, we're going to see continuing consolidation in the next 12 months, but now we have heightened level of opportunity. But just wanted to get a sense strategically and selectively adding potential accretive M&A. With that said, obviously with a large competitor [indiscernible] business. Just kind of put that in context and then opportunities there to really expand the retail lead that you have and move up to your 15% market share. Just kind of get a sense of how you're weighing the opportunity now with the new developments here going forward, that'd be great.

Hi, Scott. Thank you for your question. So Scott, you're absolutely right. There's a lot of things moving and shaking the cannabis industry here in Canada and it's never healthy for an already challenged industry when a major chain like Fire & Flower files for CCAA protection. But to your point, there could be opportunities for companies like High Tide and some others to bid on some really high quality assets without having to acquire that, more than – less than desirable assets that they have on their portfolio. And at the same time, I am suspecting and our team is suspecting that several of Fire & Flower store locations will simply end up closing in the proceedings, which will help boost our sales in other stores that are around Fire & Flower stores in those surrounding areas. But the bottom line is, Scott, this puts us even in a better position, although this is unfortunate for the industry and for Fire & Flower. But this is not a new phenomena that's taking place. It's a little bit surprising that it's happened to such a large chain. But it's clear now that no one is safe. If you are not running your business well, if you don't understand your operations well and you're not operationally focused, then everything's off the table and which is clearly becoming the norm in the industry. So we remain focused on our business fundamentals. As you can see, we increased our adjusted EBITDA sequentially by 20%. There's a heightened level of opportunities coming to market right now, but we are remaining very, very focused on our business to only act upon the opportunities that are absolutely relative to us right now. So we are going to remain very prudent and very disciplined in our M&A approach now and going forward.

Got it. I appreciate that color. And maybe you can provide a little bit – you mentioned in your comments two new store growth coming onboard kind of second half. Any color on the potential kind of ads. I mean, you slowed down the pace or just waiting to get to free cash flow positive. But just kind of weighing your efforts and kind of great progress and getting cash flow generation there. But with adding new stores in the second half, how can we kind of look at that cadence towards the second half here?

Yes. Thanks, Scott. Yes. So we are definitely going to put up more stores in the second half of the year than the first half that we did as communicated to the market. But our supreme focus remains on free cash flow generation. And as you can clearly see, Scott, we've made major improvements to our loss from operations. Our net losses were practically breakeven. If we stop growing aggressively, which we have, you can see that we are breakeven and then into positive territory. So we are – we remaining focused on that goal. Mississauga market in Ontario presents a very big opportunity for us. So we are going to go after that market relatively quickly, and that would be another four to six stores that we will add. We will add another store in British Columbia that would be our eighth store. We have a very, very good opportunity in BC that we have been working on for quite some time and we're about to realize it. But other than that, we are going to remain focused on our free cash flow generation goal and fortunately for High Tide, our same-store sales growth even though it's naturally slowing down now after seven straight quarters of meaningful gains, it's still growing. As calculated daily, we still grew 5% or 20% annualized in our same-store sales growth, which I was very, very happy with. So the focus is going to continue to remain on same-store sales growth, tighten our operations and add another six to eight locations in the second half of this year.

Thank you. I'll jump back in the queue.

Thank you. The next question goes to Andrew Partheniou of Stifel. Andrew, please go ahead. Your line is open.

Hi. Thanks. Good morning. Thanks for taking my questions. I wanted to maybe start off with your cost savings initiatives that seems to have driven most of your EBITDA gains here, which was nice to see. On the G&A side, seems like advertising has also comes steadily down over the past year. But it's a two-part question. So first, last quarter you talked about synergies that could help with bringing down G&A. Could you give us an update on where you are with that? Is that what drove a lot of the cost savings this quarter and how much is left? And the second part is just on the advertising. Just trying to understand how you – what kind of decision factors do you take into account when determining advertising spend? Are you just seeing opportunities to spend less money and get a better bank for your buck or trying to understand that a little bit better?

Thank you for your question, Andrew. I'm going to pass the first question over to Sergio. And then I will answer the second part of the question on the advertising spend. So Sergio, over to you.

Thank you, Raj. So let's just start with the G&A. So the G&A component, G&A went down by over $1.3 million sequentially from the $7.5 million in Q1 to $6.2 million in Q2 2023. So there were some non-recurring items in the Q1 figure. However, we found efficiencies in both retail and e-commerce business. And this efficiency across the board from store supplies, the way that we manage all the different software licenses in the e-commerce business. And we just started in that area, the consolidation of the business there – or all the multiple platforms that we have looking at the expense of the software from a consolidated basis rather than the six different product lines. So those expense we believe we will continue to see a similar cost base you see in the P&L in Q2. That's from the G&A side of this – in the marketing just one comment before I pass it back to Raj. You do see a significant drop there quarter-over-quarter, and that's with the – it's mainly driven by the e-commerce business. But again, it's because we are taking the approach of consolidating how we do the marketing in all the different platforms. Is it going to be continue going down? I don't believe so, but that's mainly the optimization of the spent in that – in the e-commerce side of business, in the marketing question.

Thank you, Sergio. And Andrew, I'll answer the second part of the question. So yes, we're excited that advertising and marketing spend has relatively gone down a little bit, but this is very much in line with what's happening in our e-commerce business. We have two sides to the story. Luckily for us, 88% of our business, which is Canadian bricks-and-mortar, continues to march ahead, all guns blazing. But our e-commerce sales, which is ancillary cannabis businesses of CBD and consumption accessories, they're definitely feeling those inflationary pressures. During these inflationary times, consumers are still prioritizing cannabis over pipes and bongs and CBD products that they can replace with turmeric and other nice supplements. So as our e-commerce sales have slowed down, we've also meaningfully slowed down our advertising spend, which I believe was down by over a $1 million quarter-over-quarter. And we are being very, very carefully watching this number because again, our entire focus is making sure our business is operationally sound. If one side of the business is slowing down, we want to make sure our expenses are slowing down accordingly. And that is why you are seeing that big marketing and advertising drop. Now, as e-commerce picks up going forward, you may start seeing increases in advertising and marketing spend.

Thanks for that color. And just switching gears here and looking at your balance sheet. I think I see here $17 million in short-term loans and $6 million in short-term convertibles on the balance sheet. Could you talk about when those mature and how do you plan to address those maturities?

Yes. So let's talk about the $17.6 million interest-bearing loans. That's the term loans [with ConnectFirst]. The maturity of the two tranches, the maturity of both tranches are longer, but they're [not current]. The maturity is two, three years, I believe, I'm sorry, I forgot. Five years, the maturity in five years. However, due to the loans are on demand, so they can call it at any given time because of the war. That's the reason why we need to put it in current liabilities. But they don't have any intention to call it. That's why we don't have any, so we put in current liability just because of the structure of the contract, but the ConnectFirst doesn't have any intention to collect it at the moment. The second part of the question was related to the current portion, the convertible debenture. This is debt with private investors, and we are currently negotiating the terms and conditions of the contract.

Do you know when we should expect any kind of resolution to the convertibles so we can watch out for that?

Andrew, we would have to look this up. I don't think it's – anything is a burning and pressing urgent issue on our balance sheet – related to our balance sheet. But we would have to look up the exact timeline on the convertibles and Sergio can get back to you.

Thanks for that. I'll get back in the queue.

Thank you. The next question goes to Matt Bottomley of Canaccord. Matt, please go ahead. Your line is open.

Yes. Good afternoon. Raj, just wondering if you could expand a little more on your outlook with respect to just the retail landscape. I understand the element of potential closures on some of these five-year leases coming up. But maybe just on the top part of that assessment in terms of just the overall ability for the market TAM, regardless of how it's allocated between stores. Its ability to continue to grow, it seems like it's been – it's growing still, but sort of stuck in the $4 billion to $5 billion opportunity set for a while now. And I imagine there needs to be a lot of right changes up from the federal government first and foremost. But just curious on where you see the overall TAM going in the next year or so and what needs to change in order to re-accelerate that?

Hi, Matt. Thank you for your question. So Matt, you're absolutely right that a lot of the brick-and-mortar landscape here has been shaking up and many of these leases that are coming at this five-year anniversary because most of these were signed upon legalization, they may not be renewed. We are hoping that many of these are not going to be renewed, and some of these foregone sales will disproportionately come back to us. Because we have the best brand in the country, we continue to increase our same-store sales growth. And a lot of the reasoning behind the increase in our same-store sales growth is a lot of the neighboring stores around us, they just cannot keep up with us in terms of competing with us and a lot of these dollars are already flowing back to us. So now when you have the double whamming of these leases not getting renewed, I think our same-store sales growth will continue to increase. Now, mind you, our same-store sales growth is naturally slowing down after seven straight quarters of meaningful gains. But we anticipate continued same-store sales growth although not in double digits anymore. And also the second point that I'd like to highlight that the market still remains strong in Canada. March data from statistics Canada showed total retail sales in Canada, excluding Quebec was up 12% year-over-year. And our goal is to have our same-store sales growth consistently exceed industry growth over the long-term.

Appreciate that. And more on the – maybe on the macro front. So if we look at, call it a $4.5 billion to $5 billion opportunity set. Now what is it that needs to change? Whether it's regulations or otherwise in order to get to what historically, some of the estimates might have been $7 billion to $9 billion of an overall cannabis opportunity six, seven years out from legalization. And we're not there yet, but we're sort of inching along. And I'm just curious if there's anything you think is meaningful in order to see the overall TAM expand for the [indiscernible] today?

Yes. So look, Matt, it's no secret that illicit market in Canada has remained strong, although fortunately it has been coming down at a rapid pace, but it's still quite a big chunk of the market. I would still put it at around 20% to 25% of all retail sales going to the illicit market. Now that's a massive number. You take $5 billion where we currently stand today, you could potentially go to $6 billion, $6.5 billion, if we could get that share back from the illicit market. Now it's happening, it's not happening fast enough for my liking and I believe other operators in the industry. But it's heading in the right direction. So I am positive over the next two to three years that industry sales will continue to expand. We also definitely need some burning and pressing urgent changes on the regulatory front and our team along with a lot of other operators in the country, in the industry are engaged with Health Canada to make changes to the Federal Cannabis Act, which is under review currently. So given the review that is going on the Federal Cannabis Act and the support that we're anticipating from the government, plus the continuous take down of the illicit market should resolve in our industry sales expanding over the long-term.

Great. Much appreciated. Thanks, Raj.

Thank you. The next question goes to Andrew Semple of Echelon Capital Markets. Andrew, please go ahead. Your line is open.

Great. Thank you. Good morning, and congrats on solid Q2 results. First question here would just be on the margins, if I have my calculations right, it appears that gross margins on brick-and-mortar retail sales saw a meaningful step up in the current quarter and you pointed to further opportunities to expand this ahead. I guess my question would be whether you have a sense of what level you would like to see gross margins for brick-and-mortar settle ads in the long-term once you've got all the moving pieces, such as white-label products, once those have all fully played out and are widely available and you're kind of running at more of a normalized rate. Where do you see the most gross margin levels trending?

Good morning, Andrew, and thank you for your question. Brick-and-mortar gross margins will likely keep ticking higher as they have over the past five quarters having increased about 1% a quarter. This is better than my expectations, Andrew. We didn't expect to be able to increase our margins so rapidly every single quarter, which we've done over the last five quarters. And the good news on this front is that we feel that this is going to continue going up. I believe, and currently our gross margins from our 4-wall gross margins are sitting at around 20%. We feel long-term we can take this to 24% to 25% and kind of keep that pace of roughly 0.5% to 1% of quarter going forward, because we continue to increase our margins, our same-store sales continue to grow up, our membership base continues to increase. So we see absolutely no problems there. Now, speaking about the all-rounded consolidated gross margins, we are feeling a bit of a weakness in our e-commerce platforms, which is kind of offsetting everything we are increasing on the brick-and-mortar side. But we are quite comfortable in communicating that we can remain consistent at the 27% mark as we've done over the last three, four quarters. That will continue. But nevertheless, we do have an opportunity to increase our gross margins of at least 0.5% to 1% a quarter on the brick-and-mortar level, which is 88% of our business portfolio.

Great. Good color and good to point out the different revenue mix having an impact on the consolidated level, but also good to see the progress on the segment level. My follow-up question here would be on free cash flow. And when I look at the current quarter, barring the relatively outsized networking capital build, which utilized $4 million of cash in the current quarter, if we exclude that or move that maybe to more normalized level, it appears that you would've been around free cash flow positive or free cash flow breakeven in the current quarter. So it appears you're well down the path to achieving your target there. So I'd like to get your thoughts on once that free cash flow positive figures firmly in hand, do you think there's an opportunity here to accelerate M&A given you would be free cash flow positive and you've got a good chunk of cash on the balance sheet today?

Thanks for the question, Andrew. I see Sergio is excited to answer this one. So I'm going to pass it over to him.

Thank you, Andrew, for the question. I do appreciate your comment that, if we excluded these significant changes in working capital one-time items there, they catch up with the AP. We will have been cash flow positive this quarter. Definitely you could see the big increase in working capital requirement between Q2 and Q1. But I think it was close to the – the incremental was $4 million. So now the question also will be more about the free cash flow guidance and so a couple of things that I want to highlight. The reason why we want to keep it, we want to calculate the free cash flow only using the sustaining CapEx is to be able to provide to the investors. The CapEx required to keep the lights on the current operations. You could see there now that is not significant and that will – just from the current operations and removing the growth will allow us to really clearly see what is the free cash flow available for growth opportunities. We continue to be – the outlook to be a free cash flow positive towards the end of the year – at the end of the calendar year. And that will be driven by, again, margins, EBITDA margin, focus on the retail brick-and-mortar gross margins, and the expenses side, the SG&A side of things and professional fees expenses. And also obviously working capital optimization and that's looking at all the different levers that we have there with the AR, AP and inventory management. So that's our guidance for the free cash flow.

Great. That's helpful. And thanks for taking my questions. I'll get back into queue.

Thank you. [Operator Instructions] Our next question goes to Frederico Gomes of ATB Capital Markets. Frederico, please go ahead. Your line is open.

Good morning. Congrats on the great quarter. Thank you for taking my questions. First, just on your e-commerce side, as you mentioned, Raj, you're facing some challenging conditions on CBD and accessories. I know that you don't disclose adjusted EBITDA per segment. But at this point, can you maybe shed some color on the adjusted EBITDA that you're seeing from your e-commerce platforms? Are they becoming dilutive from an adjusted EBITDA margin standpoint? And given those challenging conditions, what are your plans for those segments?

Good morning, Fred. Thank you for the question. So as I mentioned, e-commerce sales have definitely slowed down a little bit, but it's not slowed down to the point where they're not generating adjusted EBITDA. We still have EBITDA generation happening from our e-commerce business and spread it for you to think about. I think the spread that you can think about is roughly 80-20, 80% is coming from brick-and-mortar, don't quote me on this. But roughly 80-20, 80% is coming from brick-and-mortar, 20% is still coming from our e-commerce businesses. And to further clarify, Fred, we are not feeling a very big impact on our accessories business because we are the clear leader in consumption accessories. We have some of the top performing e-commerce consumption accessory platforms in the world, some of the highest ranked and the most searchable e-commerce platforms in the world in GrassCity and Smoke Cartel, which we feel will be very meaningful platforms once federal legalization takes place in the United States. We have some really good ideas on what we can do with these accessory platforms as well as our very large international customer base, which is now exceeding 4.5 million customers, including our Cabana Club members. So we are still in a good spot with our e-commerce platforms. I would like EBITDA generation to be a lot higher out of our e-commerce platforms. But as Sergio mentioned, we are offsetting the sales decline with SG&A decline. We are very, very focused to continue to monitor our expenses very carefully and why we are dealing with these turbulent times and these high inflationary times. Once the tide turns, we will be on the receiving end of it outperforming the sector even on the e-commerce front because we have very, very good platforms. So the only weakness in our business right now is our CBD business, which is roughly about 5%, 6% of our total business. So not a big deal, but nevertheless, we don't give up, and the hope is that we are going to get this in order once we get that positive momentum back as the macro market fixes itself.

Thank you. That's great color. And then just maybe following up on a previous question about the free cash flow guidance, it does seem that you're pretty much very close to reaching that. If you back out working capital changes, you're already there. So I'm just curious now, once you reach that goal, which is very close apparently, what is the capital allocation plan here? Once you reach positive free cash flow, are you planning to maybe accelerate growth in brick-and-mortar, organically or through M&A or what other options would you consider deploying that additional capital from your operations? Thank you.

Thanks for your question, Fred. So our main goal right now is to reach free cash flow generation very clearly and prove it to our investors that, look, we know how to grow. We've grown from roughly $8.5 million of revenue four years ago to close to $0.5 billion of sales run rate. There's no doubt High Tide knows how to grow. Now we're taking a bit of a pause to make sure we can prove to our investors, we also know how to become free cash flow positive and start generating net profits, which is not easy to do in this hyper – very hyper competitive industry. So what we want to do, Fred, achieve that goal and then get back to accelerating our store counts, which we still feel that we can add at least a 100 more stores in Canada and have 15% of market share in the long-term. We're already sitting at close to 10% market share in Canada, which is, if you compare us to our peers, most of them are nowhere near it. So we've got a great thing brewing here. We're going to focus on free cash flow generation, and we have a lot of heightened level of opportunities coming to the market. As I mentioned, Fire & Flower portfolio is one, but there's many other opportunities in the market that exist, but we will strike at the right time at the right price for the right price, and we're not going to rush into this. So we are keeping a very close eye on the opportunities that are coming. I'm a [indiscernible] for good leases and I don't like passing on high quality locations, so we continue to accumulate a few of those leases as well. So as soon as we reach our target, we are back to building our organic portfolio. So you're going to see some more organic growth come out in the later half of the year. And then if a compelling M&A opportunity or an asset portfolio comes through, we are definitely going to take a very serious look at it.

Thank you. I'll pass it along.

Thank you. We have no further questions. I'll now 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 of High Tide. We are very proud of what we've 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.

Thank you. This now conclude today’s call. Thank you all for joining. You may now disconnect your lines.