Cansortium Inc

Good afternoon, ladies and gentlemen, and welcome to Consortium's second quarter 2022 conference call. Joining us today are the company's CEO, Robert Beasley, and the company's CFO, Patricia Faveca. 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 would 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 conference call over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.

Thank you, Charisse, and good afternoon, everyone. We generated exceptional results during the second quarter across all key financial metrics, including double-digit revenue growth, growth margin expansion, a near double in adjusted EBITDA and a material increase in cash flow generation. The investments we've made from 2021 forward to improve our cultivation and scale in Florida are now beginning to pay dividends. I encourage everyone to take a look at the revenue and adjusted EBITDA chart in our press release to see the phenomenal growth record that we're on at this time. As highlighted during our last quarterly update, we've been working diligently to refine our growth processes and environmental controls and our product quality has consistently improved with higher THC THC flower and significantly better yields per harvest. Our Sweetwater indoor cultivation facility is now fully operational and producing high quality products, while our yield per harvest in Tampa has more than doubled since the start of the year. All of this has culminated in better store economics across our 27 dispensary footprint in the state of Florida. where same-store sales were up 15% compared to Q1 and 21% year over year. In Tampa, the final phase of our cultivation expansion is nearly complete, which will add 5,000 square foot of canopy. We expect product from this new space to hit the shelves in the next couple of months, just in time for the fall season. Recall that Q3 is typically a slower part of the year for Florida, as many of our resident patients leave for the summer hot months. So this additional product coming into the fall when those residents return is well-timed. The benefit of our improved cultivation is also evident in our new patient acquisition, which continues to increase quarter after quarter. This has been supplemented by our community outreach program as well as the launch of several new branded products, including three different flavors of our agave line and now several high THC flower offerings. We expect to open an additional four to five new stores in Florida this year, which will bring our footprint up to more than 32 dispensaries by the year end. Looking at our other markets, in Pennsylvania, we opened our third dispensary in the state during the second quarter in Anvil, which brings us up to our three store cap in that state. In Michigan, as outlined in the earlier press release, we have discontinued operations in the state due to unfavorable market conditions. Over the last few quarters, I have referenced the many challenges in operating in Michigan, particularly with the illicit market and the lack of regulatory enforcement. Although we've consistently produced high-quality products in Michigan, contending with the illicit market has been a drag on margins, and we believe it's best to walk away as opposed to pouring more money into these operations. By exiting the state, we'll be eliminating the remaining amount due under the purchase agreement of approximately $7 million and expect to save approximately half a million per year in costs and expenses. Before I hand the call over to Patricia, I want to acknowledge the hard work and dedication of our team. Despite a challenging macroeconomic environment and inflationary pressure on the consumer wallets, we have continued to generate strong growth while improving profitability, which speaks to the quality of the products we're bringing to the market. It has not been an easy path of the last 18 months. However, I could not be more proud of the perseverance and hard work of our team. We still have ample room for growth as we continue to expand our footprint in Florida, and we look forward to executing our plan in the back half of the year. 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, Robert, and good afternoon, everyone. Please note that all figures are in US dollars, and all various commentary is going to be over your basis unless otherwise specified. So I'll jump right into results. Second quarter revenue increased 36% to 22.4 median compared to 16.5 median. The increase was largely driven by greater revenue from our 27 Florida dispensaries. Florida revenue increased 33% to 18.8 median compared to 14.2 median in the year goal period. Adjusted gross profit in Q2 increased 40% to 15 median or 67% of revenue compared to 10.7 median or 65.1% of revenues. in the year-go period. The increase was primarily driven by higher revenue for the quarter compared to the prior year. Second quarter operating expenses remained flat at 8.2 compared to the same period in 2021, but as a percentage of revenue, OPEX decreased significantly to 36.6% compared to 49.9% in 2021. Second quarter net loss totaled 12 million or 5 cents per share compared to net loss of 25 million or 11.5 11 cents per share in 2021 in the same quarter. Adjusted EBITDA increased 95% in the second quarter of 2022 to 10.2 million or 45.4% of revenue compared to 5.2 million or 31.7% of revenue due to 2021 with the increase due to improved productivity in our Florida and Pennsylvania dispensaries as well as two additional stores in each state compared to the prior period. Starting from the balance sheet, at June 30, 2022, we had $8.9 million in cash and a total debt of $69.3 million. That includes the debentures that were issued in the quarter. Regarding our outlook for 2022, we are reaffirming our previously issued guidance, and we continue to expect for the year revenues to range between $90 and $95 million. This reflects approximately a 42% increase from 2021 at the midpoint. In addition, we continue to expect adjusted EBITDA to range between 25 and 20 million, reflecting approximately 35% increase from 2021. 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 two. We will pause for a moment as callers join the queue. The first question comes from John DeCourcy with Viridian Capital Advisors. Please go ahead.

Hey guys, congratulations on the quarter, the continued strong progression. And, uh, also say thank you for the abbreviated earnings call. If we get to the end of the cycle here, um, just a couple of questions out of me. Um, so first off, uh, you know, everybody else is talking about the inflationary pressures and the macro headwinds impacting the business. Um, you guys alluded to it, but didn't really give any color or stand behind that, um, in any way. So just wanted to kind of see, you know, how are you seeing those pressures play out in Florida and what are, you know, what kind of hindrance to results was it?

Thanks, John. It has been interesting. It is what I would call episodic at this point. A lot of the operators who have come into the state and made the big splash are Most of what we're seeing are very episodic, very gimmick-like sales, showings, big rollouts, but nothing that's stable or is consistent. While you note our growth is consistent and stable, and while we're growing in sales, we're also growing in inventory. We're also growing across all categories. The competition pressure we're seeing at this point is akin to several different startup-type footprints. that make a big push and then fall back. I expect they will continue to increase their consistency. But for now, with the market lead that we gained last year, as long as we continue to make those same gains, we're really not that concerned. Having said that, we are seeing some margin compression, a little bit of price competition, which is driving margins down. But again, it's not anything we have not anticipated, and it's not consistent, if that makes sense.

Okay. No, that makes sense, and that's a good answer. So another question is regarding the manufacturing capabilities that you guys are bringing online here in the near term in Florida. What, you know, can you kind of discuss what that does for, you know, the top line, what that does for margins, et cetera?

Sure. The Florida being vertical, it represents essentially three business segments. You have the retail, which as you know, we're expanding from 27 to 32 stores. Then you have the manufacturing, packaging, processing, logistics segment, and the cultivation segment. Our 2021 work was really focused on the cultivation segment. Then we did a pivot over about mid-year to build manufacturing. It's a 20,000 square foot facility. We go from just one mechanism of extraction up to four, which includes the BHO. BHO is not yet certified by the engineers, but all the equipment's there and in place, so we anticipate that going live soon. With the new manufacturing center, which includes new packaging equipment, a new pre-roll machine, the want-to-roll machine, and new logistics support with respect to labeling and boxing and all the downstream that needs to happen to be able to get this biomass digested through a system and out to the stores. We now, with the new facility open and staffed and running, we've now moved in. There are a few components still not live like the BHO, but we are moved in and running. We are now 50% more capacity than we have biomass feed coming in. So what that means for me is it's time to go back to the biomass side. It's time to increase cultivation again as we continue to bring up the various parts of the three segments of a vertical operation.

Okay. And do you have the capabilities to do that in the existing footprint that you have on the cultivation side, or is that going to be a whole from scratch investment?

So we're waiting to absorb the 5,000 square foot that I mentioned. First harvest on that should be in about two weeks. That is the new segment of the Tampa facility. The manufacturing building also includes a mom room, veg room, and flower room, which was about 5,000 square foot. Those couple crops are coming out. We should start absorbing those into our system in late September. We also should, in about three weeks, be planting in the Polk City facility, which is not yet DOH approved. We just got the roof on. And it's a smallish greenhouse facility, but it will allow us to get our CBD materials out of Tampa and over into the greenhouse facility. It's about another 14,000 square foot. Again, it'll be CBD mission focused, but it will relieve some of the inside of Tampa. So those two segments are already in place as far as increasing square footage of biomass and canopy square footage. After that, I'm working on three parallel projects. Can't tell you about them because I'm not sure which one's going to take the lead, but we're working on three projects to increase cultivation square footage yet again within the system.

Okay, great. And then, you know, that kind of answers the question on what I was going to ask about Florida expansion. But, you know, particularly with the decision to exit Michigan, do you see yourselves expanding in Pennsylvania in the near term, possibly more than, you know, you'd necessarily planned?

um you know kind of upon last reporting um yes i mean we're still looking for a cultivation partner in pennsylvania i think that's our next step you know there's no dispensary licenses available at this point that come freestanding without being part of a bigger package there's a lot of small operators there that are really starting to feel the competition of the larger msos we believe that there's a player in that group that would be a good partner And we think that's our next step in Pennsylvania. We have not identified a partner yet, but what I really would like to do is get our own higher margin product on the shelves in Pennsylvania because we all sell the same products. The other thing we're doing now is now that we have cut back on Michigan and kind of really stopped the bleeding there is we're focused on Texas. I'm proud to say we have a go-forward plan. We have a budget now for Texas. We're advertising for market positions there. And we're going to make a run at developing out Texas, the legislative conditions. You know, we didn't get all that we wanted, of course, but we got enough to make the go-forward plan. The patient count's now at 30,000. So I think it's time to make a real legitimate funded run at Texas, and that'll be one of our focal points here in this last quarter. Interesting.

All right, that's exciting. And thanks for taking the questions. I'll hop back in the queue. Thanks, John.

The next question comes from Phil Larson with Mill Street Capital Management. Please go ahead.

Hey, Rob and Patricia. Obviously, fantastic quarter here. Nice to see a solid sequential increase. I had a couple of kind of smaller housekeeping questions and then one kind of larger strategy type question. Firstly, could you guys provide us with an expected CapEx figure for the full year?

but from the remaining of the year or what we would spend so far? I'm sorry if I misunderstood that.

Yeah, for the remainder of the year.

I think at this point, Robert, I'm going to go over that, but it depends on which cultivation facilities we're pursuing and which ones and the timing of them. Like Robert said, we had three projects that are brewing and we are probably executing on them. We just don't know which ones are going to fall this year or which ones are going to fall this following year. So I don't know if Rob has anything to add there.

Yeah, I mean, the one thing I can tell you, Phil, is we're finishing up the additional stores, moving us from the 27 to 32. One of those may land over in January, but we anticipate those being complete. That's about a million dollars, roughly, a little under, and I couldn't tell you right now how much of that million's been spent. or not. So we definitely have that capex on the books. We have a little bit of completion in the manufacturing component that we just discussed getting the C1D1 certified and that equipment purchased. So probably another 250, 300,000 just in manufacturing equipment to accessorize our completion of manufacturing. And then from there, it really just depends. Again, we have two pretty significant cultivation projects going. And, of course, the landlord in those case would support most of the CAPEX input, but there may be some CAPEX requirement on our side. So, we'll be able to feel a little bit better about answering that and give you a little bit more definite answer probably in about two weeks.

My second one on kind of the housekeeping type stuff was, you know, the guidance for the year is 25 to 28 million of adjusted EBITDA. but you've done $16 million here in the first half. So is that implying some margin compression in the back half, or is that just reflecting that kind of Q3 seasonal slowdown that you mentioned earlier, Rob?

Yes, exactly. And as you know, Phil, this is our first year, Patricia and I, doing these projections ourselves using our own data and so forth because we kind of picked up data from others when we started back in 21. But We anticipate the Q3 to show some of the, I guess, plateauing or leveling out. Again, it's a very unique scenario that most people don't think about. We have 800,000 customers in Florida and a lot of them leave in the summer and they go elsewhere. And so all our customers disappear until August and then they come back and it causes a flat spot in our growth throughout the year. We've built that in. And I think we will expect to – I don't think we will shrink during Q3, but we certainly won't grow at the rate you see at Q2. And then Q4 is always strong for us. So we're contemplating a little dip in that Q3 due to seasonality.

Okay, understandable. And then the larger kind of strategy question I wanted to ask was, you know, Rob, you did an interview at the end of June with New Cannabis Ventures. You were talking about, you know, potentially partnering with some of the social equity applicants in New Jersey and maybe looking for, you know, another operator with a similar size footprint, you know, as a potential merger partner. I just wonder if you had anything further you could share on kind of some of those points.

Sure. It's It's funny. First of all, Phil, let me just thank you for being such a great lender partner. Mill Street has been great with us and has allowed us the capital that you guys provided is what's reflected in these Q2 numbers. We took those dollars and turned them into these revenues. And without you and your loan and such, we could have never made it here. And I think people overlook the role of a lender as a partner. And I just appreciate your involvement every step of the way. Having said that, let me answer your question. First of all, it's interesting. I was misquoted in that article. I never said that, but it's okay. I said something similar to that. The question was, are we looking to continually grow organically, or would we look for some type of partner or market partner to leverage, to combine with, to have exponential growth? And I gave an answer you would expect, which is we're always looking for opportunities and partners in any market to grow past organically. And so that general statement made the headlines as we're looking for an acquisition partner, which isn't necessarily accurate. Having said that, we're always looking. There is tremendous opportunity opening up in the Northeast, you know, still waiting to see what New York's doing. It's kind of settling out. But when those New Jersey licenses came out, I don't know how many came out, but we received 10, 12, 15 calls of want to be partnerships to support the what they're calling social equity licenses. I think everybody understands they're more like entitlements than licenses. We're getting calls as we become more and more known as efficient operators and rising, making a reputation for that. We're getting more and more calls for license holders or awardees or even lenders that are looking for an operating group. And so we're continuing to vet those. There's a right partner there and we're looking at the opportunities. Yes, we're looking at some right now, You know, they do include some of those states you mentioned, and hopefully we'll find a good fit because, you know, we're using our success in Florida and how to run a vertical market, and our management team is sharpened now, and we're ready to move. We're just trying to find the exact right partner.

Okay, great. Well, I appreciate the clarity and the kind words, Rob, and, you know, best of luck on Q3 and going forward. Thank you.

The next question comes from Adam Wilk with Greystone Capital Management. Please go ahead.

Hey, everyone. Thanks for taking my questions. I appreciate it. A couple from me. First, really phenomenal quarter and congrats on everything you guys have been able to accomplish during the past 18 to 24 months or so. It's been really impressive to watch. I'd love to dig a little bit more into the Florida revenue increase, especially on the back of no new store openings. Is it possible to get an idea of maybe same store sales or traffic trends or how you're kind of looking at organic growth in Florida or maybe what your expectations are moving forward?

Sure.

What you're seeing is just pure inventory. We were able to accomplish this growth. This company, like many others, was inventory constrained in 2020 and even in 21. Because inventory, because it's vertical and we cannot obtain our products from any other source, we had to grow it to sell it. And so what you're seeing in the Q4 of 21 and then Q1 and Q2 is just pure biomass coming online. These facilities that we had to invest and build are coming online. So we were able to put more product in the stores. The demand is still there. We could continue to grow in sales and would anticipate that we could in our existing stores. We haven't yet reached the saturation point of demand on our existing stores. Now, projections on when we'll reach that, I'm not able to tell you that. But the fact is, is that we could continue to absorb more inventory, even probably another 15, 20% in our existing stores. The race on footprint is really not part of our growth strategy in the first stage. It is now part of our growth strategy in the second stage. The footprint additions that we made this year were really not to grow revenues, but really to continue to be competitive in what we're seeing with the companies behind us. As these MSOs come into the state, they're pretty well funded and they're grabbing up footprint. And so while we do not need more stores to grow our revenues, we do need more stores for that next stage when And basically to block out and to continue to stay on the same streets or parallel streets with our competitors. If we stop growing footprint now, then we may very well be in a disadvantage next year or the year after, and certainly when it becomes adult use. And so they're kind of a little bit disassociated for us. The footprint growth is really to be competitive in the state in the future. The revenue growth is really a factor of inventory. Okay.

Got it. That's really helpful. Thank you. So I guess it would be fair to say that from this point on and moving forward, especially given the cultivation additions that, you know, shelves should be fully stocked, inventories shouldn't be an issue, et cetera.

That's correct. And that's a tremendous aspect to sales. Our sales group now has the inventory in the vault, so to speak, that they can project out sales strategies. It's very difficult to develop a sales strategy without when you do not have enough product to sell, first of all, and secondly, you don't have that product long enough to do rollouts and to do projective sales and so forth. Before, this company was literally driving the truck to the store, offloading it, and selling it, which sounds like a good problem to have, but it doesn't allow the sales group to properly pace out sales timings and specials and so forth to be competitive. Now they have enough inventory in Vault, that they can be selective about when to run sales, how to be competitive, when to not be competitive. As I said earlier, we're experiencing some episodic competition. Some of these smaller groups with one store, they'll save up their materials and then they'll sell it all at one time. Well, there's nothing we can do about that in that one little region. So we just pull back for a minute, let them sell it out. And then when that consumption has increased,

they're out basically we then come back and continue our steady state towards the top okay great and then um yeah i'd love to just get maybe a quick briefing on your thoughts around gross margins obviously you guys are up there with you know some of the largest cannabis businesses and some that have you know pretty extreme scale and um it's really impressive to kind of see that is there can we maybe suss out the drivers behind that, or maybe if we can get some commentary on the Florida pricing or product mix or anything you'd like to share.

Patricia, you want to talk on margins a minute, and then I'll take part of that question?

Sure. Yeah, and it's something that we've been talking about for a while. All the improvements that we made on the specific needs that we currently have would help add value and increase margins. just by reducing labor and just being more efficient around the facility. We have pretty much the same cultivation space, but we are also much larger. So that increases the margin. I can't point to one specific item that made this, you know, maybe improving the margins, but I can tell you it's all across. It's equipment rental, labor, depreciation, you name it, that help with that. increasing our margins just the progress of putting it together and putting operations and making it more efficient. There's still some capacity and some additional efficiency that we can implement but we're talking about this since I was first started this project and we've seen that now reflected in the margins.

Yeah Adam I mean it's a it's a classic big ship little rudder scenario We, um, you know, I became involved to CEO in September of 20, that year was almost gone. So 21 was spent cutting two and a half, $3 million out of operations. We took, uh, Tampa's facility was produced at 30,000 milligrams a week. Now it's producing 140,000 milligrams a week, the exact same racks, exact same space, exact same plants, all of the cultural practices, the growing practices had to be changed. And this is no easy or quick task in a business this scale and size. And so it comes from everywhere within the company. It's kind of a turnaround scenario where we had to attack all points, but we couldn't attack them all at one time. So we had to spend our time taking each department, looking at it, understanding where the losses were and tightening it up. And then at the same time, uh, producing more. So produce more, sell more, spin less, uh, was kind of the strategy. And, uh, and, and we've reached this point now we have work to do. It's not done. It's just, it, it allowed us to catch the winds right at the right moment and, and, and move up.

Okay, great. That's phenomenal color. Thank you. And then, um, maybe just one or two more quick ones for me. And while I have Patricia's attention, um, I think the GNA leverage has been pretty impressive over the last couple of quarters as well. I know, especially given your rate of growth, I know a lot of that is sort of product availability and inventory based as you mentioned, but is there, is that something we can kind of expect to continue like flattish growth and GNA from here, maybe even some leverage or maybe another way of asking that is given your growth plans and sort of turnaround efforts, I guess, like where do you feel you are in that process in terms of, costs, hiring, I guess, on that line item?

Yeah, on G&A, our costs will increase as we add a new dispensary. You know, on the 280, we have to add most of those costs into G&A, so any retail costs like for rent, payroll. So that's mostly what impacts or we think is going to impact our G&A. So it's going to go up as we increase our footprint. So we won't see that flat, as you see, because we've been in 27 stores for three quarters now. So that's why you see that flattening of SG&A. But once we open more stores, we expect that to go up slightly in amounts, but not at the percentage revenues. We think we can keep that percentage revenues pretty contained and even lower than what we have now.

Okay, great to hear. Last question. Obviously, really strong cash generation during the quarter, which is phenomenal to see, given where you guys came from and I think sort of changes the trajectory of the business at this stage. I guess I'd just be interested in hearing your sort of near-term plans for any refinancing that you might be able to undergo to the extent that you need it. You know, you answered the CapEx question. addressing any near-term capital needs, your thoughts around working capital, et cetera, especially if maybe expansion or partnering with someone might involve some sort of capital outlay.

Adam, those are all good questions. They're all ones we're struggling with now to understand. We've come from number nine to number six in the state of Florida. To get from number six into number two or three, we're going to need to go from about 12, 13 million milligrams a week to 25. To get to 25 million milligrams, we have to move up all three segments. The stores need to go from 32 to 42. Manufacturing is good, as I said, and we need to increase cultivation space. So I'm working on the cultivation space aspect of it right now. There's a lot of REITs and property investors and so forth willing to put the capital in and then roll it out to you in lease payments. And so that solution seems to be a somewhat capex-like solution. As far as refinance, as you probably know better than I, the rates are not that great. When the equity markets have gone down, a lot of the growing cannabis companies have turned to loan funds and borrow funds, and the rates just are not in a scenario where it's advantageous to us right now. There's no savings to us to do a refinance. And so that option's not really on the horizon for us at this time. And again, I mentioned whether or not a consolidation or a merger with another partner is the right answer or not. And the answer is yes. If we can find one with a complimentary footprint and a little bit stronger balance sheet to go with ours, we would love to take our energy and efficiencies that we've learned and apply it on a broader scale and do it with a partner that has a little bit stronger balance sheet than we do. And so those options are available. there's nothing hard, concrete, or clear right now in that direction. You know, we stand kind of at the top of the mountain that we set for ourselves and have reached the stake in the ground that we put out there a year ago, and now we're looking for that next point.

Okay, great. Also very helpful. Yeah, that's it for me. Thank you very much again for answering my questions, and keep up the great work.

Thank you.

That is all the time that we have for questions today 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.