Termination of Research Coverage

Early Indications of Improving Operating Environment

Market Conditions Remained Challenging in 2Q22

Reports First Quarter 2022 Results

Joe Gomes

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Healthcare

Healthcare Providers & Services

Gaby Inc

Operating Results:
GABY reported revenue for the first quarter of the 2022 fiscal year of $7.3 million (CAD$), an increase of $3.9 million or 115% over the previous year&#8217;s revenue of $3.4 million. We forecasted revenue to be at $8.5 million. The increase was driven by the Miramar acquisition, which occurred on April 1, 2021, and management noted that most of the improved financial performance was from the acquisition. Gross profit for the quarter totaled $3.3 million, or a 44% margin, compared to $0.2 million, or 7% margin, in the first quarter of 2021. The increase was due to sales of high-margin retail products versus the lower-margin wholesale product of Sonoma Pacific Distribution (SPD), which effectively shut down in August of 2021, along with minimal indirect costs. The miss to our forecast was due to a more difficult market than we had expected, a combination of both a return to a post-COVID normalcy and a continuing decline in cannabis pricing in the California market. Per pound pricing for cannabis flower declined 16% sequentially and is down 34% year-over-year.
SG&amp;A expenses were $2.8 million in the quarter, a $1.7 million or 149% increase from the same period last year, primarily from the Miramar acquisition. However when comparing the expenses sequentially, there was a reduction of $0.3 million or 9% from the fourth quarter of 2021 due to efficiencies in payroll savings and operating cost reductions. We estimated SG&amp;A expenses to be $2.5 million. Total other income (expense) improved $4 million to $2.6 million from a $1.4 million expense due to the gain on dissolution on the write off of SPD payables, a foreign exchange gain of $0.8 million, and MPS transaction costs of $1.1 million in the year ago quarter, partially offset by an interest expense increase of $0.9 million.
The Company reported net income of $1.5 million, or breakeven per share, an improvement of $4.0 million over the prior year&#8217;s net loss of $2.5 million, or $0.01 per share, driven by the one-time items. We forecasted a net loss of $0.3 million or breakeven per share. Adjusted EBITDA increased by $1.3 million to $0.5 million in the quarter from a loss of $0.8 million in the prior year.
Implementing the Playbook
 Although the come down from the COVID induced highs and factors specific to the California market are near-term obstacles, we continue to believe in the investment merits of GABY. We believe the following are key reasons for our favorable outlook:
<ul>
<li>First and foremost is the California market itself. The largest cannabis market in the U.S. by far, we believe there exists substantial opportunity for growth. In fact, BDS Analytics projects the California legal market to grow from $4.6 billion in 2021 to $7.2 billion by 2024. The California government appears to recognize the need for a new approach to the market, one that includes reduced taxes on the industry and enhanced enforcement against the illicit market. Lower taxes will help the legal market compete against the illicit market, which currently accounts for about two-thirds of all cannabis sales in the state, while enhanced enforcement should drive additional consumers to the legal marketplace. In addition, at a local level, more areas are allowing adult use dispensaries to open in the state. At the end of 2021, there were only 830 licensed brick and mortar dispensaries serving the entire state. In the first quarter of 2022, an additional 80 licenses were issued. Over the past year, the active retail footprint has increased by 20%. Increased availability combined with lower prices are a recipe for attracting a broader audience to the space, in our opinion.</li>
</ul>
<ul>
<li>Secondly is our high regard for management. To a person, GABY&#8217;s senior management team are seasoned retail operators with track records of success in the industry. We believe this provides a differentiating factor to GABY in the cannabis space. Management&#8217;s knowledge of operating systems, vendor relations, marketing, product placement, etc. provide the Mankind dispensary, and by extension GABY, a competitive advantage.</li>
</ul>
<ul>
<li>Management continues to implement its operating playbook. Last year, the low margin wholesale distribution business, Sonoma Pacific, was closed down. As a result, variable gross margin improved from 11% last year to 48% in the just completed quarter. During the March quarter, GABY recognized a $3.1 million gain as a result of the closure of Sonoma Pacific. Management has identified $3.7 million of cost savings in payroll, inventory, and operating cost savings. SG&amp;A expenses declined $281,307 sequentially and we anticipate additional savings going forward. GABY continues to introduce proprietary brands. During 2021, GABY launched Kind Republic, which accounted for nearly $2 million of revenue over the first 12 months at a 75% margin. This year, Dank Space was introduced. A premium cannabis flower brand, Dank Space already is the number one selling flower brand in the Mankind dispensary within its first month of launch. As a premium brand, Dank Space will be additive to the lower price Kind Republic brand, in our view. We expect a continued focus on remerchandising, with a focus on higher margin and proprietary products. Extended hours, an expanded fleet, and increased reach should drive delivery business revenue higher by roughly $1 million, or about 25%. We believe all of the above will enable GABY to continue to take market share.&nbsp;&nbsp;</li>
</ul>
<ul>
<li>We believe the challenging operating environment brings opportunity for GABY.&nbsp;An important part of the GABY playbook is the acquisition of additional dispensaries, that will both grow its overall market presence but also enable the Company to continue to grow its in-house brands. GABY is well positioned to take advantage of any industry consolidation, although raising the necessary capital to complete such acquisitions will be necessary. </li>
</ul>
Updated Guidance
 Although we remain optimistic regarding the long-term potential of GABY, we acknowledge the near-term is more challenging than we had originally anticipated. We believe this to be a temporary condition that GABY, and the overall industry, will work through over the next couple of quarters. As a result, we have lowered our expectations for the next quarters and full year. For the second quarter, we are now projecting revenue to be relatively flat sequentially at $7.5 million. We then expect to see gradual improvement in revenue. We are expecting a modest improvement in gross margin in the quarter sequentially, as more higher margined proprietary products are sold. Operating income is estimated to be at breakeven, resulting in a net loss for the quarter of $1.6 million, or breakeven on a per share basis. For the full year, we are now estimating revenue of $32.1 million, operating income of $1.6 million, and a net loss of $1.5 million, or breakeven on a per share basis.

Gaby Inc (GABLF)

Reports First Quarter 2022 Results

Fundamental Analysis:

Rating: Log in to view

Termination of Research Coverage (GABLF)

Early Indications of Improving Operating Environment (GABLF)

Market Conditions Remained Challenging in 2Q22 (GABLF)

Reports First Quarter 2022 Results (GABLF)

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