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spk00: Good afternoon, ladies and gentlemen, and welcome to consortium's third quarter 2021 conference call. Joining us today are the company's CEO, Robert Beasley, and the company's CFO, Patricia Fonseca. At this time, all participants are in a listen-only mode. After the company's prepared remarks, the management team will conduct a question and answer session, and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded and will be available for replay in the investor section of the company's website at www.getfluent.com. Please note that certain subjects discussed on this call, including answers the company may provide to questions, may include content that is forward-looking in nature and therefore is subject to risks and uncertainties and other factors which could cause actual future results or performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings, which can be found on CDAR.com. The company does not undertake to update or revise any forward-looking statements except to the extent required by applicable securities laws in Canada. In addition, during this call, the company will refer to supplemental non-IFRS accounting measures, including adjusted gross profit and adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. These non-IFRS measures are defined in the company's press release as well as in the MDNA as filed on CDAR. As a final reminder on today's call, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. I would now like to turn the conference call over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.
spk01: Thank you, Cherise, and good afternoon, everyone. Q3 was another productive quarter as we worked to complete various cultivation expansion projects. while opening new retail doors in both Florida and Pennsylvania. We generated 9% year-over-year revenue growth to $15.6 million in Q3 and increased adjusted EBITDA by 34% to $4.9 million. In fact, this was our eighth consecutive quarter of increasing adjusted EBITDA on a year-over-year basis, which reflects how far we've come these past few years, and particularly through 2021 during our expansion. In Florida, we opened two new dispensaries during this quarter, Deerfield Beach and Fruitland Park. Both locations present excellent opportunities. Deerfield Beach store services high growth neighboring cities like Boca Raton and Palm Beach, while Fruitland Park location is strategically located 10 miles from the largest retirement community in the U.S. called The Villages. As mentioned on our last quarterly update, we have identified four additional retail locations in Florida. and have those locations under LOI at this time, anticipate those to be opened by mid next year, bringing our total Florida footprint to 31 stores by mid 2022 with a goal of 33 stores by the Q3 of 2022. Also during the quarter, we received approval from the Florida Department of Health to commence operation on all of the indoor rooms at Sweetwater facility and the remaining greenhouse bays. This makes the Sweetwater facility fully operational at this time. Products from these expansions hit the shelves earlier this month, and this is in line with the timeline that we provided on the last quarterly update. Now we continue to refine the grow process and environmental controls at the Sweetwater facility, and it continues to produce higher and higher product quality with significantly better yields. The yields at this date are double our initial projections. In Tampa, we've added an additional 5,000 square foot of indoor grow that will come online in early next year. I anticipate March of 2022. We've continued to see construction delays on this site, both with the grow portion and the production and processing production. But this additional grow space was not contemplated in our 2021 guidance. So there's no impact aside from having the additional capacity come online in 2022. Our focus point remains to be quality and it's now resonating with our patients. New patient capture rates have dramatically improved. We continue to take more and more of each new patients as they register, percentage wise, and we have revitalized our physician outreach program, which is reaping great success now. All said, between Tampa and Sweetwater, we continue to expect having the facilities all dialed in and running to maximum production by February 2022. I've actually given Valentine's Day as the goal date for that, as stated in our last quarterly update. I cannot emphasize the importance of having this new grow capacity enough in our company history. For the first time in company history, this company will be in a position of having a strong, robust inventory in all stores at all times and a continual flow of a full range of products going to the stores. We have set up logistic distribution centers to accommodate servicing all stores with equal and ample supply of material. This component, increased capacity, changes the dynamic for Fluent going forward. Quickly touching on the competitive dynamics we saw in Florida during this quarter, and it's been a much popular and talked about topic, which was the price competition among the several MSOs. From our perspective and our viewpoint, This was viewed as more of a liquidation event than an all-out price war. We had several mergers. The two mergers of the two large MSOs with local Florida companies caused a price disruption, causing that disruption as a result of liquidations that were forced by the regulatory transfer of the licenses. Prices now seem to have normalized, and we have returned to a normal scenario and normal competitive pricing, although competition is heating up. we no longer see the dramatic price discounting that we witnessed in late August and September. Looking at our other markets, in Pennsylvania, we recently opened our second dispensary in the state of Mechanicsburg. This has had a very well-received grand opening. Each of our two stores in the states are trending towards 9 to 10 million annual run rates, and we expect to have a third location opening soon in Anvil. Construction is underway in Anvil. We have completed the demolition and the plans are approved. We have green-lighted the contractor to begin and all permits are obtained. We anticipate completing the build-out in the end of Q1 2022. In Michigan, we sold 2,600 pounds of biomass from last season and our final 700 pounds of flour during the third quarter. The flower was sold to an entity, Green Standard, that's not yet consolidated into our books, so the revenue from the flower sale is not reflected on our revenue figures. However, the sale results in approximately $300,000 in adjusted EBITDA. This year in Michigan, we've turned out a great crop. We're presently in the harvest and bucking process. We are at about 1,900 kilograms harvested so far, with flower ranging from 14% to 25% THC levels. Overall, the crop will be much larger than last year. If you recall, we last year started about a month and a half late. This year we're on time with the crop and actually a little early for the market. We anticipate about 17,000 pounds total harvest over 5,400 plants. However, pricing continues to be volatile in Michigan. We are still continuing to face the type of price fluctuation that we witnessed last year, although a better understanding of the market allows us to be better prepared. In order to deal with the hold pattern that we found ourselves in to allow pricing to return that we found ourselves in last year unintentionally, we have intentionally prepared for that by preparing to have the adequate equipment to treat, process, and seal the product in order to strategically time sales throughout the year with anticipation of the market prices continuing to return as we get towards spring and summer as they did this year. Michigan pricing continues to be volatile as an outdoor harvest state and we continue to suffer from regulatory, really a lack of regulatory oversight in that state. As outlined in our press release earlier today, due to the lower flower sales in Florida, we're revising our 2021 revenue guidance for the year end. and expect now a total range between $63 million and $66 million. However, we're holding our adjusted EBITDA guidance and expect to come in at the low end of our original forecast between $18 million and $26 million. Despite lower sales in Q3 due to the competition issues we mentioned earlier in Florida and other issues with regard to production and construction delays, we still expect to exit the year with a strong run rate, with more flour and oil hitting the shelves this quarter than ever before, and the full production of our expanding cultivation hitting the shelves in February 2022. Particularly, I could say that our Thanksgiving was a phenomenal period of time. We reached record sales and experienced the full volume of the production ramp that has now graced our shelves with full product. With that, I'll pass the call to Patricia to walk through the details of the financial results, and then we'll open the call for Q&A. Patricia?
spk05: Thank you, Robert. Thank you. Good afternoon, everyone. Please note that all figures are in U.S. dollars and all variance commentaries on a year-over-year basis, unless otherwise specified. So I'll go into results. Third quarter revenue increased 9% to $15.6 million compared to $14.3 million. The increase was largely driven by increased retail footprint in Florida, which went from 20 stores last year to 27 this year in the third quarter, as well as improved throughput as we continue to see better production needs. This led to a 4% increase in Florida revenue to $13.1 million compared to $12.6 million, with the growth partially offset by the market dynamics that Robert just mentioned in the call. Adjusted gross profit in Q3 increased to 9.8 million, or 62.7% of revenue, which compares to 9.5 in 2020, or 66.6% of revenue, with the variances there driven mostly by the market price in Florida. Third quarter operating expenses totaled 8.5 million compared to 9.7 million, reflecting a 12% reduction as a percentage of revenue, OPEX decreased significantly to 54.6% compared to 67.6%, with improvements driven by more efficient G&A expanded lower stock-based comp. Third quarter net income totaled $7.4 million, or $0.02 per share, compared to a net loss of 8.7% or 4% per share in the year-ago quarter. Adjusted EBITDA increased 34% in the third quarter, to 4.9 million, or 31.4% of revenue, compared to 3.6 million, or 25.5 of revenue in 2020, with an increase resulting from our continued focus on profitability and diligent cost management. Starting from the balance sheet at September 30, 2021, we had 13.8 million in cash and unchanged total debt of 71 million. From a capex perspective, we continue to anticipate total capex of approximately 20 to 25 median between 2021 and 2022. And through September 2021, we deployed approximately 50 median of that 20 to 25 median, which leaves us about 4 to 9 median headings in 2022. And as Robin mentioned, we have adjusted our whole year revenue guidance for 2021. And now we expect revenues to range between and 66 million, with the good news being we didn't change our EBITDA range of 18 to 26 million. We're going to come in the lower range there, but still within the range, disrespecting margin improvements mentioned earlier. Growth of approximately 23% and 114% for revenue and adjusted EBITDA at the middle point. So good progress there on the adjusted EBITDA, as mentioned by Robert. Operator will now open the call for Q&A.
spk00: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. The first question comes from John DeCourcy with Viridian. Please go ahead.
spk04: Hey, guys. Congratulations on the quarter and the continued execution, particularly in Florida.
spk01: Hey, John.
spk04: Thank you. Yep. Hey, Robert. So I guess just a couple questions out of me. First off, can you just kind of touch on the, you know, typical seasonality that you, or the seasonality that you had been expecting in guidance, um, you know, you saw the drag in the third quarter and it's from the pricing issues. It sounds like that wasn't repeated in the fourth quarter, but then, um, you know, you cut the guidance a bit and despite having, you know, a few more dispensaries open. So can you just touch on, you know, kind of where, where the put, uh, the puts and takes are for, for the fourth quarter expectations on the top line?
spk01: Sure. I'm sorry. I had it on mute. Seasonality is a good way to put it, especially if you use the typical pattern. So typically what we would expect in the Florida market is to see an increase amount of sales actually seasonal. So because Florida is blessed with a tremendous snowbird population which have residences, which means they qualify for cards, we do see an uptick in sales coming into late October, early November. And so we anticipated November to be a good strong month for us and it has been. What we did not anticipate was what happened in August and September. We had two different MSO transactions. We had the Harvest True Leave transaction and we had the Cure Leave transaction, both of which put deadlines on disposing of assets, biological assets, for various reasons, mostly regulatory reasons. Those assets in Florida cannot be transferred between MSOs. There's just no provision to do it. So you have a scenario where you have two of our major competitors coming in the market. They both were stockpiling product because they were waiting to get their transaction approved. And then they both had deadlines, different driven deadlines, I will tell you. But, but in the case of the truly harvest deadline, we saw a 40, 50, 60, 70, 80% off sale, um, running into a deadline of a five o'clock closure deadline. And then it all ended. Um, and so we didn't expect that, um, didn't have a way to plan for it, never knew it was going to happen. And so we didn't, we found ourselves in a liquidation environment where we had to try our best to be competitive. Fortunately, the ramp that I've been speaking of the last few quarters was there, and we were starting to receive a more robust supply from our production center, and so it allowed us to be competitive. Oddly, it didn't give us the top-line revenues that we were expecting, but because we were well-fortified, we can be competitive in that time period. It just did not result in a lot of top-line revenues because of the competition. So That's what occurred. We then came out of that return to a more aggressive pricing that's going on. It's a little bit more aggressive on sales and discounts, but not so aggressive that we're not in a position to be competitive. Again, this is our Q3 call about Q3 and not Q4, but I can tell you that the winds have changed, and we are really happy with what we're seeing now.
spk04: Now that makes sense. And, you know, that leads to another question is just, you know, do you expect with so many MSOs having entered the market this year and then operators like yourself scaling cultivation capacity and production capacity, at what point do you expect, you know, pricing pressure, you know, persistent pricing pressure beyond just kind of the liquidation kind of sentiment that occurred in Q3? Is that something that is a
spk01: 2020 t storyline or is that something that you know it's still further out as the state continues to expand i anticipate just having been to competitors facilities and so forth and generally understanding where they are is we are our expansion and our growth is about 12 to 15 months ahead of those larger msos that have come into the state you know the the Supply chain issues we're having globally, the labor issues we're having, impact those as well as anyone. And unfortunately, having capital isn't enough. You can have all the dollar bills in the world, but it doesn't get your supplies off the boat any faster. And so they're suffering from what the whole market, the whole entire world is suffering from. And so I think you're seeing about 12 months probably see that price compression really start to pick up in Q4 of 2022. We're feeling it now in other areas. Right now we're feeling it in materials and inventory type. As they construct their facilities, we start to feel it. We feel it in employee pressure, a lot of employee poaching. So we kind of feel where they are, if that makes sense. And where they are right now is ramping up their production and constructing their facilities. So I think you're going to see a Q4 price impact. And I anticipate pricing will start to settle down over Q4 22 and into 23. It's a natural occurrence. We've tracked what happened out West and the curves are interestingly comparable to what's going on in Florida. I think price compression will continue. It'll find its own level as we all continue to be more efficient, operate at a larger.
spk04: Okay. And then, you know, just one more question out of me. Just a clarification, as you kind of just referenced, the scaling cultivation capacity and production capacity. One thing I didn't quite understand on the commentary or just maybe misheard was looking for a clarification on, so Tampa is delayed until about March, but you seem to have said that the full ramp of production capacity was still on track for February. I think I think we've talked or you've talked in the past about, you know, getting to a roughly $200 million annualized run rate for Florida in the second half of next year. Does that Tampa delay impact that at all or kind of where – what is the Tampa delay?
spk01: Thank you. And maybe I should have been clearer. I guess my point was is that there is a small – so Tampa, when we talk about it, there's our existing main – grow but practically what is in Tampa that's is a grow and processing and production facility in our kind of our main hub facility adjacent to that is a 20,000 square foot building most of which is being built to streamline and clean up the campus as far as packaging and processing and in taking us from two methods of processing to four methods of processing it's our BHO Center if you would there is in the back of that building There is about 5,000 square foot of grow that is coming online. That grow space, that canopy space, was not part of our 2021 calculations. It is part of our 2022 second quarter calculations. I'm sorry, second half calculations. So what I intended to say was while that building's delayed and will not be done until March, it was not part of our Q1-22 or Q4-2021 guidance anyway. I see what you're saying. When I mentioned full production capacity, I was talking about Sweetwater Indoor, Sweetwater Outdoor, which have all now been fully approved, and they're all running on all cylinders. We just harvested our final bay outdoor, and now we're in full production.
spk04: Okay, great. All right, well, thanks so much, and I'll jump back in the key. Thank you.
spk00: The next question comes from Bobby Burleson with Canaccord Genuity. Please go ahead.
spk03: Hey, good afternoon. So just a couple of quick ones. Outside of the merger-related liquidation activity in Florida, what is the current competitive dynamic that you're seeing there? Maybe just touching that one more time.
spk01: Sure. You know, you have to set aside this last week of August and basically most of September as an anomaly. That is when Harvest was dumping out their materials and Cureleaf was dumping out their materials. And so you've set that aside for a minute. Then you see what resumed in October was a fairly aggressive, you know, 30%, 40% off strategy by Trulieve and others to regain some of the market share that was lost during the price war, if you would. um and now that's kind of settled um you know interesting in florida we do not see pricing competition we've seen discount competition and so pricing has remained pretty steady even during that august and september period but you see the discounts the difference now between then is during that time period it was off all products 40 off everything now we've gone back to selected product discounts, you know, kind of trigger events, you know, 40% off cartridges this weekend. That is more like what we witnessed in Q1 of 2020, but now the 20% have turned into 30% and 40%. So you can see there's another 10% or 15% competitive discounting that's going on now. That's probably where we're going to stay. We're going to stay at a slightly more competitive pricing into Q1 and Q2, And then it's that Q3, Q4 where I think you'll see further price compression.
spk03: Okay, great. Thanks. And then when we think about the production ramp that you guys are achieving in Florida and how that's really going to be a game changer for you in terms of capacity, can you kind of give us some context in terms of average store performance that you would have been able to do? How much have you been leaving on the table theoretically without that capacity that you now are putting in place?
spk01: It's tremendous. You know, I think that we've said before, and I've said before to you, which is, you know, if it were not for the race for footprint that's going on in Florida, I would not open another store. Because if we were in a vacuum, we would spend this year maximizing our existing store shelves to realize what those store ceilings are. We've not yet had and even today have not yet had the opportunity to take a store and have it at full robust inventory all day long every day. We're still somewhat juggling and balancing all the way up into the last three weeks and now we're getting there. So you know if you could ask me that question again in a month I would be able to give you some deltas that would be would be good solid math. Right now all I can tell you is we were operating I couldn't give you a number, but we were operating at probably 40% capacity at our existing stores when I came in in September of 20. And now we're closer to operating at 85% capacity as far as shelf capacity. So it's been a doubling of our overall capacity. But at the same time, I'm adding more footprint. So as you can see, I'm getting broader as I'm increasing capacity. So the math's a little tricky. But I can just tell you it was substantial. I mean, I I think we had stores that just did not have the inventory to satisfy those customers, you know, on a full-time basis.
spk03: Then is there, just one last one, is there some speculative interest in investing in Florida right now ahead of, you know, eventual recession? legalization of recreational use? Is that keeping that market interesting, do you think, for MSOs? What are you guys seeing in terms of the overall investment environment in Florida as it relates to eventual rec sales?
spk01: So I believe that could be one of the events. You know, Florida has seen a series of legislative triggers that have allowed more patients to come on, and now it's kind of curved off at the 630,000 mark. yet our sales are still increasing robustly. And so, you know, the amount of market share is now starting to be traded around a little bit between us. But there are still more legislative events other than legalization. And I've spoken on this before. I think a reciprocity, which is a very simple administrative amount, if you think about the number of cardholders from other states that come to Orlando, Miami, Tampa, and Jacksonville, just a reciprocity measure would which could be an easily regulatory move, which could happen any time now, could be a 30% sales increase across the board without one new patient. So there are regulatory initiatives that could happen short of recreational that would dramatically increase Florida. Then there's recreational. So I think what I'm seeing is the bigger MSOs are here. Investors are here. Everyone's here. Everyone's building more growth space. Florida still remains a very untapped market. We are nowhere near saturation on number of stores, the number of square footage of canopy space. It is still a fast-growing market.
spk02: Great. Thank you for that. No problem, Bobby. Take care.
spk00: This concludes the question-answer session and today's conference call. you may disconnect your lines. Thank you for participating and have a pleasant day.
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