Cansortium Inc

Good afternoon ladies and gentlemen and welcome to consortium's first quarter 2023 conference call. Joining us today are the company's CEO Robert Beasley and the company's CFO Jeff Batliner. At this time all participants are in 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 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, otherwise indicated, all dollar amounts are expressed in U.S. dollars. I would now like to turn the conference over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.

Thank you, Ariel. Good afternoon, everyone. We once again delivered double-digit revenue growth, adjusted EBITDA margin and expansion, and strong cash flow generation in Q1 2023, despite the challenging landscape for the cannabis industry. We are continuing to see meaningful operational improvement in Pennsylvania and Florida and now working to expand our capabilities in Texas. Turning to the first quarter operational highlights, in Florida we delivered 10% year-over-year revenue growth in Q1. As mentioned in my last conference call in May, we recently opened three new stores in Florida, which helped drive our revenue improvement and are still planning to open four more stores by the end of the year. We've continued to gain market share in the state, bucking the trend faced by many of our competitors in Florida. We're also now producing higher THC products on average, as our cultivation improvements and recovery from the hurricane are now starting to bear fruit. This is important because as the average THC increases, the harvests are now averaging 23% on average, with some harvests being well over 30%. Our overall ratio of high-quality flour is increasing. This enables us to sell more products at higher price points and stock our shelves with more A and B quality grade product. Further to our cultivation in Florida, I'm pleased to announce that we recently entered into a contract subject to financing to acquire a property that will become a new 70,000 square foot cultivation facility and a two and a half acre greenhouse. We look forward to providing updates on this project later as the year progresses. Finally, we just recently announced that we plan to move our headquarters from Miami to Tampa, Florida. a change which we expect to finalize in September. This move will see the company create more than 30 key corporate jobs in Tampa with an average salary of $100,000. In addition, we are taking out double the square footage of commercial office space for about $500 less per month. So getting more for less in the move to Tampa, it also consolidates our management team in the proximity of our cultivation center. Turning to Pennsylvania, We generated strong sales growth in the state without opening any additional stores. This really is a reflection of our optimization efforts with respect to new product introductions and inventory management. Earlier this year, we hired a new inventory specialist that has completely reorganized the inventory management in the state. This more targeted approach has led to organic sales growth along with improved gross margins and adjusted EBITDA. In Florida, we've also introduced chocolates and drink powder, which are showing early success. Finally, in Texas, two pieces of legislation recently failed that would have decriminalized cannabis and expanded the state's medical cannabis program. Although we are disappointed in the Texas Senate's failure to take action, we commend Texas Representative Joe Moody and Representative Stephanie Click and their representative authors and co-sponsors for their continued work to enact meaningful legislation on cannabis reform. We continue to believe that Texas has the potential to become a top cannabis market in the long term, and our first mover advantage remains as we are still one of only three license holders in the state. Our Texas business is now fully operational and we continue to gain ground. We're selling to other operators in the wholesale market and have a suite of products, existing patients, and ongoing retail sales. Despite the lack of regulatory or legislative movement, we believe the market is now starting to develop at a manageable pace. In the near term in Texas, we will continue to build out our operations in Houston, and expand our delivery capabilities to service patients in Austin and San Antonio, because we believe that all Americans, including Texans, deserve access to safe, tested medical cannabis. As we near the halfway point of 2023, we look forward to further driving growth and profitability in our existing markets through new store openings. We continue to improve cultivation and manufacturing and increase optimization in operating efficiencies. We're constantly evaluating opportunities in new markets, and we will remain optimistic with our M&A strategy. In the meantime, we're continuing to execute on our organic strategy and well on our way to delivering a year of strong growth in cash flow generation. I'll now hand it over to Jeff Batliner to walk through the financial highlights. Jeff?

Thank you, Robert. Good afternoon, everyone. As Robert mentioned, we're proud to report on another period of strong improvement across all key financial metrics. Please note all figures are in U.S. dollars and all variance commentary is on a year-over-year basis unless otherwise specified. Revenue increased 12% in Q1 to $22.1 million compared to $19.7 million in Q1 of 2022. The increase was largely driven by growth in Florida with three additional stores compared to the prior year, as well as a new store in Pennsylvania. The growth was also driven by improved store-level economics. Adjusted gross profit for the quarter increased 22% to $14.1 million or 63.9% of revenue, compared to $11.5 million or 58.6% of revenue, with the increase in adjusted gross profit due not only to higher revenues, but also to efficiency gains in our cultivation and production operations. Improved processes have lowered costs. Operating expenses in the first quarter decreased 3% to $8.4 million compared to $8.7 million. with the decrease primarily due to lower general and administrative expenses. As a percentage of revenue, operating expenses improved significantly to 38% compared to 44% of revenue last year. Adjusted EBITDA for the quarter increased 56% to $9.7 million compared to $6.2 million, with the increase primarily driven by revenue growth, gross margin expansion, and lower OPEX. Cash from operations improved 20% to $5.1 million compared to $4.3 million in Q1 of 2022. And at March 31, 2023, the company had approximately $9.5 million of cash and cash equivalents and $57.9 million of total debt, with approximately 296 million shares outstanding. That concludes our financial highlights. Operator, we'll 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. To join the question queue, please press star then 1 now. Our first question comes from Russell Stanley of Beacon Securities. Please go ahead.

Good afternoon and congrats for small and excellent quarters. Just wondering your thoughts on margins for the rest of the year, given the bounce back we saw this quarter.

I'm sorry, Rush, the middle part of your question kind of faded on me. What was the middle part?

Apologies. I was asking what your thoughts are on margins are for the rest of the year. We saw a great bounce back in this quarter from Q4, some anomalies in Q4, and again, strong improvement this quarter. So just wondering, How you're thinking about margins for the rest of 23? You've got efficiency improvements planned, but pricing pressure in Florida. Just wondering if you expect any major changes on the margin front throughout the rest of 23.

Thank you for the question. We do not expect major change. We expect continual increase in the competition, and we're trying to match that price compression by continuing efficiencies. We're now addressing some of the efficiencies in the cultivation side as we speak. We're working to continue to increase margin to offset the price compression we expect to see, although we believe that some of the competitors have stalled. If you look at the sales in Florida, a lot of the growth has completely stalled out with many of the up-and-coming companies for various reasons, most all related to capital. So I do expect maybe Q2 to be a little flat. Q2 is always a little flat for us. And then we have the summer, of course, and then we'll expect a strong Q3, Q4 finish. So I think the pattern of our development and revenue generation will follow last year's pattern without much interruption. We may be a little lower in Q2 or a little flatter due to some of the market changes that have occurred in Q1 and rolling into the first this year. I also note that There was a drop in from Q4 to Q1, but really if you look at the adjustments that were taken on the biologicals and so forth and those financials, that application of those adjustments solely to Q4 caused the numbers to look a little bit different and a little bit tilted from what they actually were. But in all in all, I think we're going to follow the same ebb and flow pattern of the year that we did last year.

That's great. Thank you for that call. And maybe if I could ask around the property purchase you mentioned in the press release in Florida, just wondering if you can elaborate on some of the details around the purchase cost and the associated capex and what the timelines might be to first harvest.

Sure. You know, I've preached from the beginning that remaining in balance is the key to a vertical operator. And as you've noted in the last four or five quarters, our expansion has been in the storefront, in the store footprint area. And now we're reaching a point where we have adequate inventory and inventory compression to be competitive in sales. But as we add the next four or five stores, we need to pay attention to the production side. And so it's time now to develop out a project which will serve production and input to feed out to the expanded storage we have now and then allow us to grow again on the storefront. The cost, the acquisition cost is $2.5 million. The first phase development cost is about another $12.5 million and so you're looking at about a $15 million build out for phase one of the project. The neat thing about this property is it allows for incremental construction and build out. It's a campus with a series of existing buildings and so rather than trying to do what is now traditional in cannabis and maybe a mistake which is plop down a 300,000 square foot square building and try to build it out internally, this allows us to be incremental and adjust the output with the demand. The projected timeline It's going to be about 10 months to 12 months to get the facility in production. Again, I'm trying to land that with about the time that our 35 and 36 store comes online. We are adequate in production all the way up to 35, 36. Right around there, we need to make sure that the next thing that happens is increased production so that a store also takes about eight months to build out. so that we can continue the flow and development of stores. So this is really just a balancing step, and it's time to pay attention to the feed material.

That's excellent color. And maybe if I could just on phase one, I guess how many additional stores would you be able to support over the 36 you can currently handle?

And, you know, there's an interesting ratio relationship there of, How many stores versus increased sales per store? So the best way I could say it is that at the current rate of sales, the increased production would take us to 42 stores. Now, you know, the marketing team is always working to increase the rate of sales. We do have the concentrate products coming online this quarter. We expect that to be a skew segment serving a population that we haven't yet served. So we could see a pretty significant rate of sales The problem with concentrate, of course, is they're concentrated. So it takes more biomass to feed concentrates as a product. So that may cause us to more rapidly consume our in-feed. But it will increase sales. Short answer, under current rate of sales, about 42.

That's great. Maybe if I could lob in one more and get back in the queue. On Pennsylvania, you talked about moving towards more targeted inventory management strategies. Just wondering if you can I guess elaborate on what that means and how that's helped drive organic growth.

Sure. I can put it in the simple terms that I know how to explain it, which is if you think about our three stores and particularly two of them that were older and their inventories being a gas tank, we were only selling and resupplying the top quarter of the tank. We had about three quarters of our inventory that was kind of stale, stuck, and represented trapped capital dollars in inventory in the system. The products just weren't good sellers or trending wise, they were no longer new. And so what we did was the inventory specialist came on board, dug into that tank, that three-quarter tank of older products and created incentives, sales, discounts, gave it away if they had to, to get it out, to recover those dollars, which then allowed us more inventory purchasing power. And using the same analogy, We are now sitting in a scenario where we're using three-quarters of our tank. So the balance, if you would, of inventory is using a full three-quarters of our ability of purchasing power, with now only a quarter of the tank sitting in kind of inventory that's not moving as fast. So just restructuring how we bought, what we did, and first starting with flushing out the old was a key critical step.

That's great. I'll get back in the queue, but congrats on the quarter again.

Thank you.

This concludes the question and answer session as well as today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.