Cansortium Inc. (OTCQX:CNTMF) Q1 2022 Earnings Conference Call May 2, 2022 5:00 PM ET
Robert Beasley - CEO
Patricia Fonseca - CFO
Conference Call Participants
Jon DeCourcey - Viridian
Good afternoon, ladies and gentlemen, and welcome to Cansortium 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 Investors 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 and detail within the company’s regulatory filings, which can be found on SEDAR.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 Shariece 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% 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 growth processes and environmental controls and our product quality has consistently improved with higher percentage of [TECs] and significantly better yields per harvest. As highlighted in our press release issued earlier today, our business has ever 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 prospective last year, we would run out of flower at our dispensaries almost every day. And sometimes we would not make it past the midday before running out of flower. We simply did not have enough production capacity to meet the demand at our stores and having flower is a key selling point to attract patients through the door to purchase any other products. Today we have an adequate level of flower and an overall supply for our 27 stores which happens we were running at max production. For those of you who follow the state of Florida OMMU data, the results of these cultivation expansions 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 labeling equipment has resulted in a massive increase in the out the door production of units. By June will 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 of event which occurred in the fall of last year.
I can say the competition continues to pick up in the state 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 it's 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 could 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 will lead to some margin compression going forward. However, we still expect to operate well north of 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 coming 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 order, 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've provided all the required information to the auditors and continue to wait on their final product. I just 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 audit 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 sales for Anvil were tremendous. They were the equivalent of the second or third month sales of our Mechanicsburg store. So Anvil 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 are 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 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 its future expansion plans. But the current asset base and the condition of effluent 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 and Walton 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 in respect to the preliminary unaudited results. Due to the preliminary nature of our results, we are only providing selected metrics. All variants commentaries on a year-over-your bases unless otherwise specified. Expected fourth 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 ago quarter.
We also benefited from heavy two stores in Pennsylvania compared to one in a year ago quarter. Expected operating loss in Q4 improved to $1.6 million compared to $9.7 million in the year ago 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 for our continued focus on profitability, increasing yields, our largest retail footprint in Florida and cost management.
Turning to the balance sheet. At December 31 2021, we expect to have $9 million in cash and $69.2 million total debt. Regarding our outlook for 2022 we expect for the year to range between $90 million and $95 million. This reflects approximately 45 increase from 2021 at the midpoint. In addition, we expect adjusted EBITDA in the range between $25 million and $28 million reflecting approximately 35% increase from 2021. And as mentioned in our press release earlier today we currently expect Q1 ‘22 revenue to be approximately 33% over year 2021 to $20.1 million.
Touching on our recent filing last week we completed a $4.7 million loan broker private placement that includes a $3.5 million 10% on secured convertible [laons] 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 shown on the filings on SEDAR.
Operator we will now open the call for Q&A.
Thank you. We will now begin the question and answer session. [Operator Instructions] First question comes from Jon DeCourcey with Viridian. Please go ahead.
Hey, guys, congratulations on the reporting. And thanks for taking my question. The first question is just looking at the Q1 numbers and kind of the increase in sales you guys have based on the Florida data, can you just give some color on 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, or kind of what, or if you're going to handicap it, what are the most important factors there?
Thanks, Jon, it's good talking to you, again, I enjoyed talking to you [indiscernible] it's kind of a ground up answer. The fact is, is that all the pieces being truly vertical, you have to have all the pieces line up. And so 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 into Q3, start of Q4 last year, we talked about the fact that we were expanding cultivation space in the different components both inside component and an outside components. That construction, which we spoke about all year, last year took an extra two months to get done, but when it caught in late mid December, late November, mid December, you started to seeing us producing 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 those that canopy space into units whether that units a whole flower 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 two in the afternoon, you have no idea what you could have sold between two and 8 pm 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 percentage sales and discount sales. They are 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 of 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 include them into my revised projections only because 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 [indiscernible] 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, we have some friendly investor groups that sometimes go and buy properties and then lease them back to us. We're averaging almost dead on $300,000 of TI. Now usually the landlord will contribute 100,000 or 150,000. But it's taking just under 500 to get one up running decorated point of sale and staffed and ready to go. So we're contributing about 300 a store. We now are cashflow positive. So we have a set aside budget for that. And we have the funding already set aside and scheduled for the construction of those stores I mentioned.
Okay. And then final question from me and I feel like I've asked it probably the last eight quarters, but just a color on Texas and what's happening in there and what you guys are doing there?
Yes. So we have a go for playing 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 of 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 cashflow positive and continuing now to accrue we'll start paying attention to Texas.
Everyone asked me, why don't I just sell Texas and honestly that's not a bad idea either. And so we're going to continue to work Texas and start to make it more active now that we have a pathway forward. The one retail outlet that must be connected to your grow facility was a real restriction for us. Our growers 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.
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.