Cansortium Inc

Product quality has enabled us to sustain higher pricing across virtually all product categories, including flour and vape cartridges. During 2023, we also released our first line of concentrates. Cured sugar was the product of our first choice in our first rollout. And in 2024, we're looking forward to releasing additional concentrate lines and dab-able products. We've also made considerable improvements to our delivery devices, our product components, and packaging that will help improve the patient experience. We saw some strength in the average basket size during Q4, which is partially driven by the higher average pricing, and encouraging signs we move into 2024. It does appear that the pricing decline has arrested and is now starting to incline. I want to acknowledge the recent Supreme Court ruling, which allows the possibility of adult use on the ballot in the fall. We remain focused on operating our business under the current regulatory framework, and we look forward to doing our part to help this measure pass the referendum. In the Pennsylvania market, we are rapidly expanding our preferential partnerships with wholesale suppliers, which has helped us remain price competitive in this market. During 2024, we look forward to expanding these relationships to further increase our local dispensary market share. We'll also expand our flagship dispensary at Hanover, which should go to its final inspection this week. This expansion will more than double the patient access area, the point-of-sale calendars, and the storage space, while improving the overall customer experience. At the market level, price trends in Pennsylvania have remained generally stable. Growth within the Pennsylvania market is largely coming from expanded profit rate product offerings, enhanced dispensary facilities, and these additional wholesale partnerships previously described. Moving on to Texas, while this state remains in its infancy, we are continuing to see patient growth and increasing retail volume, albeit over a small base. This is a positive market signal ahead of our planned opening of the Brick and Mortar Center here in Houston, which will also serve as an education center for doctors and patients in the area. We currently expect this education center to open by the first quarter of 2025. As a reminder, we are one of only three license holders in the state of Texas, and we're actively working to grow our presence in what we view as a market with significant potential, although a small nascent market today. In 2024, we continue to implement and execute the objectives laid out in 2023 to improve our operations and drive profitable growth across our footprint. We will remain opportunistic in our approach to expanding our footprint and are poised to deliver another year of revenue growth and cash flow generation. On that front, our Ruskin facility in Florida is in full production with the first harvest expected in July. The new Rosa facility is under construction of what will be a high-quality flower facility. This is adjacent to our existing Tampa facility, and we expect the first harvest to come in Q4 from Rosa facilities. I'll now hand it over to the CFO, Jeff, to walk through the financial highlights. Jeff, back to you.

Thank you, Robert, and good afternoon, everyone. As Robert mentioned, we're proud to report another period of revenue growth and our ninth consecutive quarter of positive cash flow from operations. Please note, all figures are in U.S. dollars and all variance commentary is on a year-over-year basis, unless otherwise indicated. Revenue increased 9% in the fourth quarter to $25.5 million compared to $23.4 million in the original quarter. The increase is primarily related to additional dispensaries opened in Florida and higher patient counts. Operating expenses in the fourth quarter were $9.3 million compared to $7.8 million. This was attributable primarily to higher salaries and wages as well as increased sales and marketing costs related to our new dispensaries in Florida. As a percentage of revenue, operating expenses were 37 percent in the fourth quarter compared to 33 percent last year. Adjusted gross profit for the quarter was 12.6 million or 49.4 percent of revenue compared to 0.7 million or 3.1 percent of revenue. The change in gross margin was primarily related to the IAS 41 addendum adjustment made in 22, as well as operational efficiencies in cultivation and production in the fourth quarter of 2023. Adjusted EBITDA for the quarter was $6.9 million compared to $7.9 million, with the decrease primarily attributable to additional salaries and wages. The additional salaries and wages were driven by additional employees to support our dispensary growth. Cash from operations during the fourth quarter was $1.4 million compared to $3.6 million in the prior period. For the full year, revenue increased 11% to $97.3 million compared to $87.7 million in 2022. The increase is primarily related to additional dispensaries opened in Florida and higher patient counts. Operating expenses for 2023 were $38.3 million compared to $33.1 million, with the increase primarily attributable to increased headcount to support our new store growth. Adjusted gross profit for the full year was $49.5 million or 50.9% of revenue compared to $44 million or 50.1% of revenue in the prior year. The increase in gross margin was primarily related to improved cultivation and production efficiencies as the company increases output. Adjusted EBITDA for 2023 was $27.2 million compared to $25 million with the increase primarily attributable to higher revenue on increased customer transactions, slightly offset by higher SG&A due to the additional dispensary locations. Cash from operations during 2023 was $18.5 million compared to $19.1 million in the prior year. On December 31st of 2023, we had approximately $10.5 million of cash and cash equivalents, 61.4 million of total debt, with approximately 300 million shares outstanding. We also announced today that our year-end audit revealed the need for us to make adjustments to our earnings, and the magnitude of those adjustments were such that required the restatement to spread the impact across the first three quarters of 2023. These items are broken down in the following three buckets. The first is related to our biological asset model, where we found process errors around beginning balances, which resulted in a misclassification of expenses between COGS and realized fair value of inventory. This does not impact net income, but it does impact adjusted EBITDA. The total impact is $6.7 million, and the quarters impacted are the first three quarters of 2023. The second item is a misclassification of depreciation which resulted in $2.4 million of depreciation booked to SG&A rather than to COGS during the second and third quarters of 2023. There is no impact in net income or adjusted EBITDA for this item. The last item is related to our ERTC claim, and this is generally unrelated to the classification of the transaction where we previously monetized our outstanding ERTC claim with a third party. However, given the uncertainty around the ERTC program in general and what the actions of the IRS ultimately will be regarding this program, we have removed $3.4 million of income for the third quarter. This impacts our net income, but not our adjusted EBITDA, as this was a non-recurring item that was excluded from the adjusted EBITDA calculation. This concludes our financial highlights. 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 one on your telephone keypad. You'll hear a tone acknowledging your request. If you're 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 Russell Stanley of Beacon Securities. Please go ahead.

Good afternoon. Thank you for taking my question. My first relates to your retail expansion plans in Florida. You're now at 35 stores, part of me, and I think you were in balance pre-Ruskin, pre the additional capacity there. So just wondering how many additional stores you expect to support with Ruskin and Rosa and how you're thinking about the timing of the associated store openings. given the potential for adult use legalization.

Thank you, Alson. It was good chatting with you at Benzinga recently. We are in balance. We calculated 35 to 37 stores would be our carrying capacity at the then current rate of sales. I chose 35 of that range, and we are at 35. A good problem to have is that our sales rate has exceeded those calculations done last year or a year and a half ago. And so we're in balance now at 35 stores, what I would call over the period of the year. Of course, everyone who grows cannabis knows that the cultivation output is fluctuating throughout the year. And so we do have those summer periods which impact our facilities. we're not putting on additional stores until Ruskin comes full online because we need the buffer. Now once Ruskin comes online, which is its first crop, as I said, will be out midsummer, that will give us a good solid buffer so that we keep a good solid inventory matrix going. At that time, then ROSA should follow by the end of Q4, by the end of this period of time in 24. And at that time, we're going to start putting on additional stores. I calculate, to answer your question, between Ruskin, which gives us the additional buffer we need, and Rosa. We will provide for an additional four to six stores. Given my recent experience with increased sales, I'm gonna pick four of that number. And then, of course, your second part of your question was the location of those stores. If you follow that time period and follow what may or may not happen with the petition and the vote come in November, we may very well be looking at a scenario where that ballot initiative passes. And so those next four to six stores will be located with an adult use parameter in mind. This is a different location criteria than we've previously been using. We've previously been covering the map, if you would. We have now entered a period where we're going back into those A markets. Our product quality exceeds that of our competitors at this point, so we're able to stand toe-to-toe with anyone in the market. And so I don't mind locating a block and a half down the road from Trulieve or anyone else because I think our product will stand up to it. And so we're going to go back and look at those A markets. We're going to look at where we anticipate adult use to bring the drive to sales. And that's the location of those next four to six stores.

That's great, Keller. And just on the cultivation projects, both the one expected first harvest July and Rosa later in the year, I guess, can you talk to what your CapEx expectations are in 24 and how you envision funding them?

Sure. Ruskin's paid for. It's in production. Obviously, these facilities always need a small stream of CapEx continuously. Rosa, we're expecting about $6 million to get us into phase one. We've secured that funding. and we're ready to go and deploy. The thing holding us up on Rosa right now is the power. Working with a municipal power company there, we need to move the power situation so we can pull the permits. We should have that moved any day now. The building's been completed, re-roofed, ready to go, but we can't start forward construction on the elements which require these power needs until we get the power provided to the building. But we're funded, plans are set, ready to go. We just need to get cleared with the power company.

That's great. And if I could, one question around the restatement and specifically the bio-acid impact to adjusted EBITDA, I think it was $6.7 million in total. Can you provide any color as to how that breaks down by those three quarters?

Jeff's going to have those by the quarters. Let me give you an overview. If you recall, and I know you do because you've covered us for a while, we did an adjustment in Q4 of 22 related to this exact same issue. And then that adjustment following into Q1 of this year resulted in a continuing stream of adjustments. I've been told we're one of the last cannabis companies still reporting under IFRS and we need to convert to GAAP. And I think this drives the message home more than anything that we need to get away from this reporting issue. scenario and get into a gap reporting. But Jeff, can you give you the layout of how the 6.7 has broke down?

Sure. Russ, it was 3.8 million in the first quarter, 1.8 million in the second quarter, and 1.1 billion in the third quarter.

That's great. And maybe one last question and I'll get back in the queue. Just wondering what your latest thoughts are outside of your existing three markets. You've talked about some other markets in the Southeast in the past, but given the renewed or I'd say improved odds for adult use in Florida, as well as what you've got going on in PA and Texas at this point. I'm wondering if you plan to focus on your current three for now or if you're still evaluating opportunities outside of them. Thank you.

We're still evaluating. You know, where we are in PA, we're very happy with the performance of those stores. As I've noted, those stores have continued to increase revenue and margins. But they're just three stores. And we're looking for a breakout opportunity in Pennsylvania. We're looking for an opportunity to go vertical, hoping that the transition to adult use in Pennsylvania gives more opportunities. There's one license here, one license there. We've got to figure out a way to make a substantial growth step. And so continuing to look for opportunities in Pennsylvania. Also looking for other complementary footprints in the northeast and in the central part of the states. We're ready to expand. We have the bandwidth and the ability. Our team is nimble and efficient and are really good operators, and so we're ready to go into another market. Florida going to adult use does cause us a little bit more work in Florida now. As everyone has heard previously, we have another facility kind of in the works, if you would, and it's a much bigger facility, and it's kind of been holding for the adult use transition. So that's the Williston, Florida opportunity. I've talked about it before. So we will have to put some effort towards starting another facility, probably right on the heels of ROSA, because we'll know by then whether the petition passed. But other than that, we have plenty of bandwidth. We're looking for that opportunity. We've just got to find that right combination and grow smartly. And so we continue to look.

That's great. Thanks for the call, and I'll get back in the queue.

Thank you, Russ. Thank you. 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.