Cansortium Inc

Good afternoon, ladies and gentlemen, and welcome to Consortium's Q4 2021 and Preliminary Q1 2022 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 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 EBITDA, which do not have any standardized meaning prescribed by IFRS. 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 call over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.

Thank you, Sharice, and good afternoon, everyone. We closed out 2021 on a high note with record fourth quarter results, highlighted by 13% revenue growth and a 55% increase in adjusted EBITDA to $5.1 million. or 31 percent of revenue. As I mentioned on our last conference call, we had new cultivation come online during the fourth quarter, as all of the indoor rooms at the Sweetwater facility became operational, and the outdoor greenhouse bays in the adjacent facility became fully operational as well. We've also turned on additional capacity this past February, bringing us to a total of 136,000 square foot of cultivation in Florida, mixed between both indoor and greenhouse grows. We've also been working diligently since last year to refine our grow processes and environmental controls, and our product quality has consistently improved with higher percentage of THCs and significantly better yields per harvest. As I highlighted in our press release issued earlier today, our business has never been positioned better than we are right now. We are seeing better quality products come out of the grow with each and every harvest, and we're currently harvesting significantly more than we were last year. approximately double the biomass per week than the same time last year. As a result of this increased production, we can actually stock inventory now and do things such as planned sales events. Inventory shipped in Florida was up 75% in March compared to this past December, reflecting the highest levels of inventory we've ever had. We have enjoyed building inventory in the store vaults while at the same time experiencing record sales. So we're selling more and producing more at the same time. For perspective, last year we would run out of flour at our dispensaries almost every day. And sometimes we would not make it past the midday before running out of flour. We simply did not have enough production capacity to meet the demand at our stores. And having flour is a key selling point to attract patients through the door to purchase any other products. Today we have an adequate level of flour and an overall supply for our 27 stores with Tampa and Sweetwater running at max production. For those of you who follow the State of Florida OMMU data, The result of these cultivation expansions and improvements are front and center. Dispensary volumes at our stores are ramping significantly. We are now better positioned to support production of branded products like the highly acclaimed Gary Payton strain that we have run out twice now earlier this year, which was flying off the shelves with great customer feedback. Our expanded cultivation space is complemented by an increased processing and packaging capacity at our Tampa facility. Our investment in packaging and label equipment has resulted in a massive increase in the out-the-door production of units. By June, we'll have completely moved into the new production space and will be fully operational. At that time, we'll be using three different methodologies of extraction to include new BHO equipment. At the same time, overall, our higher product quality is resonating with customers and word is getting out. Our store traffic is increasing as so as the press on Reddit and other sources. In fact, our new patient acquisition is up 16% in Q1 compared to Q4, which was already a tremendous increase. This is in part due to better community outreach engagement as well as having fully stocked inventory, specialty products, and more competitive pricing. I've been asked several times about the pricing competition in Florida, especially given the liquidation event which occurred in the fall of last year. I can say that competition continues to pick up in the states. and many operators are discounting products here and there. These targeted discounts are sporadic and not overall like we saw during the liquidation event. The discounting has stabilized but is still present. We're now in a position to be more competitive with this pricing since we have more product to sell, better inventory control mechanisms, and simply can be more competitive across the board. In many instances, it is our sales now that are leading the pack, and many of our competitors watch what we do and copy the sales to be competitive. This lead will just, this will lead to some margin compression going forward. However, we still expect to operate well north of the 25% adjusted EBITDA margins. We also expect to open another four, potentially six stores in Florida this year. Four locations are under contract and under construction. We expect to see those come online around Q3. Two additional locations are under LOI and we're working through the zoning processes at this time. Before I touch on the other markets, I want to acknowledge the delayed filing of our annual filing statements and related materials. I can tell you that we're all frustrated by this as much as the shareholders are as well. We're especially frustrated because we were just recently told by our auditors that we would not make the regulatory filing deadline. We continue working diligently with the auditors and at this time there are no outstanding requests by them pending on our side. At this very moment, it's still unclear whether the OSC will grant a management cease-trade order, or issue a failure-to-file cease-trade order. Our attorneys are currently speaking to OSC related to our application. We expect to find out this evening, and we'll issue a press release in the morning as to that update. Either way, we have provided all of the required information to the auditors and continue to wait on their final product. I also want to make clear that this delay in no way impacts our ability to continue running and operating and growing and continuing the strong growth trends we have outlined today. Hopefully the technical issues needed to complete the audit will be completed soon and we will be able to file those final audited reports. Turning to the other markets, in Pennsylvania, we recently opened our third dispensary in the state of Anvil. Oddly enough, due to regulatory delays and so forth, we opened it on 4-20, which allowed for us to have a fun 4-20 festival in the parking lot and opening day sales for Anvil were tremendous. They were the equivalent of the second or third month sales of our Mechanicsburg store. So Fanvil is off to a good start. In Pennsylvania many operators are starting to comment on the wholesale competition which is picked up in the state. Fortunately in Pennsylvania we are not vertical, although I would like to be vertical at this time we are not. And so our margins remain stable and we have not seen any of the margin compression that the wholesalers are seeing at the grow capacity side. In Michigan, we have finished the final harvest of the 2021 and we have sold most of that inventory. Pricing in Michigan still continues to be variable and we harvested about 17,000 pounds over 5,400 plants and we have sold all but a few remaining units of the 2021. Before I pass the call over to Patricia, I want to take a moment to thank our entire team. from the ground level at our cultivation centers all the way to our dispensary personnel and corporate employees. It has been a challenging turnaround since I took the CEO position roughly 18 months ago. We've weathered the storm, we've worked hard, we've rolled up our sleeves, and I couldn't be prouder with the group that is here with me today. We still have a lot of work to do to clean up our cap structure and fund future expansion plans, but the current asset base and the condition of Fluent is better than it's ever been. It is now in a position to grow and generate cash flow on a standalone basis. we have made it to the finish line that we projected 18 months ago. With that, I'll pass the call to Patricia, who can walk through the details of our financial results, and then we'll open the call for Q&A. Thank you. Patricia?

Thank you, Robert, and good afternoon, everyone. Please note that all figures are in U.S. dollars and reflect preliminary unaudited results. Due to the preliminary nature of our results, we are only providing selected metrics. all variance commentaries on a year-over-year basis unless otherwise specified. Expected four-quarter revenue increased 13% to 16.5 million compared to 14.7 million. The increase was largely driven by our strong retail footprint in Florida, which consists of 27 dispensaries compared to 24 in the year-goal quarter. We also benefited from having two stores in Pennsylvania compared to one in the year-goal quarter. Expected operating loss in Q4 improved to 1.6 million compared to 9.7 million in the year-goal quarter. Expected adjusted EBITDA increased 55% in the fourth quarter to 5.1 million or 31% of revenue compared to 3.3 million or 22.5% of revenue, with a significant increase resulting from our continued focus on profitability, increasing yields, our larger retail footprint in Florida, and cost management. According to the balance sheet, at December 31st, 2021, we expect to have nine median in cash and 69.2 million total debt. Regarding our outlook for 2022, we expect for the year to range between 90 and 95 million. This reflects approximately 45 increase from 2021 at the midpoint. In addition, we expect adjusted EBITDA to range between 25 and 28 million, reflecting approximately 35% increase from 2021. And as mentioned in our press release earlier today, we currently expect Q1 2022 revenue to be approximately 33% over year 2021 to 20.1 million. Such on our recent filing, last week we completed a 4.7 million loan broker private placement That includes a $3.5 million 10% unsecured convertible note, as well as approximately $3.1 million pre-funded common share warrants at a price of $0.39 each for aggregate gross proceeds of $4.7 million. More details on the financing can be found in our earnings press release issued earlier today, as well as on our filing on CEDAR. Operator, we will now open the call for Q&A.

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. We will pause for a moment as callers join the queue. The first question comes from John DeCourcy with Viridian. Please go ahead.

Hey, guys. Congratulations on the reporting, and thanks for taking my question. You know, the first question is just, you know, looking at the Q1 numbers and, you know, kind of the increase in sales you guys have based on the Florida data, can you just give some color on, you know, I'm sure it's multiple factors, but just whether that's based on the scaled cultivation capacity or whether it's better traction amongst your stores. If you're going to handicap it, what are the most important factors there?

Thanks, John. It's good talking to you again. I enjoy talking to you at Benzinga. It's kind of a ground-up answer. The fact is that all the pieces, being truly vertical, you have to have all the pieces line up. It starts with having enough canopy space to produce enough product, both biomass product and flower. And then the middle segment is, and so coming into Q3, end of Q3, start of Q4 last year, we talked about the fact that we were expanding cultivation space in the different components, both an inside component and an outside component. That construction, which we spoke about all year last year, It took an extra two months to get done, but when it caught in late November, mid-December, you started seeing us produce an additional volume of biomass, which was dramatic. Then at the same time, we had to be ready in the middle segment, which was the packaging, processing, extraction, all of the manufacturing component of a vertical operation, and so we had to be ready. We were ready and we were able to handle in order to turn that canopy space into units, whether that's units of whole flour or otherwise. And then the third component is the sales team needed to ramp up and get ready. They were going to get tools that they never had before, meaning inventory. It was hard to be competitive before when everything you grew. I mean, we were at 20 hours from the truck to the customer bag before. Stuff was literally flying off the shelf. The problem is the shelves were bare at the end of the day. So we weren't able to test certain sales theories and sales components. When you run out of product at 2 in the afternoon, you have no idea what you could have sold between 2 and 8 p.m. closing. So the sales team jumped on and started gathering data and compressing data, and that was really what they did in December and January. So by February, they're able to start being competitive with sales, meaning getting percentage sales and discount sales. They're able to understand what products work and which ones don't. And they're continuing to develop tools to help dial in now. We had to have the product first is the short answer. And now we have the product. And now we're being competitive. And as I said a minute ago, it's an interesting turn. The last couple weeks, we see these other entities, they're mimicking us. So they look to us as to what we're doing because we're picking up market share. Even through that big sell-off last September, we picked up market share, and we're continuing to gain market share while others are losing. So we're becoming the ones to watch, which is kind of exciting.

That's great. Okay. And then just to look at the additional stores you're planning to bring on, how should we kind of think about cost on that for the remainder of this year?

So I think we're probably not going to include them. I have not included them into my revised projections only because, you know, right now you're looking at a Q3, like a mid to late Q3 opening date. So we may catch some of them in Q4. And that's okay because we still need to continue to maximize the volume of product push through our existing footprint. I think I've said this before and it bears repeating. If I were in a vacuum with this company, we would not put on any additional stores for another year because I would like to really maximize the existing stores with a real robust inventory. The problem is we're not working in a vacuum, and there's still a race for store footprint in the anticipation likely of going adult use. And so we're putting on stores in coverage areas we don't have. Four of those stores – I'm sorry, three of those stores will be in the Florida panhandle. which, of course, is my home, and it was completely neglected by Fluent in the prior administration. So we're going to add a few panhandle stores. Jacksonville is our big hot market, so we're adding a Jacksonville store across the bridge over there on the other side of the river to service that market. But I do not think I would, unless it picks up a little bit of mid-Q4, I do not think I would change projections based on those new stores.

Okay. And then how much cost to build them out and to get them operational?

A store, you know, we have some friendly investor groups that sometimes go and buy properties and then lease them back to us. We are averaging almost dead on $300,000 of TI. Now, usually the landlord will contribute $100,000 or $100,500, but it's taking just under $500,000 to get one up, running, decorated, point of sale, and staffed and ready to go. So we're contributing about $300,000 a store. We now are cash flow positive, so we have a set-aside budget for

that and we have the funding already set aside and uh scheduled for the construction of those stores i mentioned okay um and then final question out of me and i feel like i've asked it probably the last eight quarters but just uh any color on texas and what's happening in there and you know what you guys are doing there yeah so um we have a go forward plan with dps

We waited on the legislature, then we had to wait on the regulations. They were just getting finalized in February and March. We had to ask for a couple special exceptions. Again, remember, there are some tremendous limitations over there. But now there's a pathway forward. So we have a game plan. We have a market plan. With us being cash flow positive and continuing now to accrue, we'll start paying attention to Texas. Everyone asks me, why don't I just sell Texas? And honestly, that's not a bad idea either. Um, and so we're going to continue to work Texas and start to make it more active. Um, now that we have a pathway forward, the one retail outlet, uh, that must be connected to your grow facility was a real restriction for us. Our grow is out in Schulenburg, which is in the middle of nowhere. And so just having a storefront there, which was the current regulation really was a problem for us. And so we finally worked a solution around that with DPS.

Okay. All right, and I think that's it for me. Looking forward to following up and good work. Thank you.

At this time, there are no more questions, and this concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.