Earnings Transcript for CNTMF - Q4 Fiscal Year 2022

Operator: Good afternoon, ladies and gentlemen. And welcome to Cansortium’s Fourth Quarter and Full Year 2022 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 [Operator Instructions]. 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, the conference call is being recorded and will be available for replay in the Investors section of the company’s Web site 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 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 US dollars. I would now like to turn the conference call over to Mr. Robert Beasley, the company CEO. Sir, please go ahead.

Robert Beasley: Thank you, Brenda, and good afternoon, everyone. We delivered 34% revenue growth and strong cash flow generation in 2022 despite the challenging backdrop for the cannabis industry, as well as the temporary Florida store and cultivation facility closures we suffered as a result of Hurricane Ian. Our ability to capture meaningful market share in Florida, as well as our exit from Michigan has enabled us to sharpen focus on our core markets. We also laid the groundwork to expand our operational capabilities in both Pennsylvania and Texas while opening new stores in Florida in 2023. Looking at our fourth quarter and recent operational highlights. In Florida, we delivered 26% year over year revenue growth in Q4. The strong results were driven by improved production capacity, improved store productivity, as well as opening new store locations, which more than offset the margin compression witnessed by increasing competition in the state. Our new customer acquisition rates continue to rise and the number of transactions per day at each store has witnessed exceptional growth. We have bounced back from Hurricane Ian with our stores and cultivation facilities now operating ahead of pre hurricane levels today. Notably, the Sweetwater facility is fully operational after sustaining considerable damage. I'm proud of our team for working relentlessly to get this facility back up inline. The last few harvest have had 30% plus THC flower potencies, which is the highest that we have ever seen come out of that facility, illustrating that the facility is truly back in full function capacity. Regarding new store openings in Florida. We recently cut the ribbon at three locations

Jeff Batliner: Thank you, Robert, and good afternoon, everyone. I'm excited about the opportunities that lie ahead for Cansortium and I look forward to spending more time with the broader investment community over the coming weeks and months. Turning to our fourth quarter results. Please note all figures are in US dollars and all variance commentary is on a year-over-year basis unless otherwise specified. Revenue increased 28% in Q4 to $23.5 million compared to $18.3 million in Q4 of 2021. The increase was largely driven by growth in Florida as we ended 2022 with 29 stores open compared to 27 at the end of 2021. This was partially offset by impacts from Hurricane Ian, and in Pennsylvania revenue growth was also driven by a new store and improved same store productivity. Adjusted gross profit for the quarter was $0.7 million compared to $11.8 million in the prior year with the decrease driven by the IAS 41 Addendum, which caused us to catch up and recognize income tax on biologicals that was not accounted for in the first three quarters of 2022. Excluding this 1 time impact, adjusted gross profit in Q4 2022 was $11.7 million. Operating expenses in the fourth quarter were $7.8 million compared to $8.1 million in the prior year with the decreased primarily driven by lowered legal and professional fees, partially offset by increased sales and marketing spend along with increased salaries expense. Adjusted EBITDA for the quarter increased 54% to $7.9 million compared to $5.1 million with the increase primarily driven by improved productivity across our cultivation, more stores and better operational efficiencies. Quickly reviewing our full year 2022 financial results. Revenue increased 34% to $87.7 million compared to $65.4 million in the prior year with Florida revenue up 31% to $73.2 million compared to $55.7 million. In Florida, we achieved same store year over year growth of 24% and the remaining 7% of the growth came from the addition of the new stores. And in Pennsylvania, revenue grew 52% to $14.7 million compared to $9.7 million with 26% same store year over year growth. Adjusted gross profit increased 5% to $44 million compared to $41.9 million with the adjusted gross margin of 50.1% compared to 64.1% in the prior year. The decrease in the gross margin was primarily attributable to the adoption of IAS 41, which moved expenses previously shown in operating expense or taxes into cost of goods sold. Operating expenses decreased 10% to $33.1 million compared to $36.4 million in 2021 with the decrease coming from many areas, both operational and administrative. One item of note was that we had significant decrease in stock-based compensation. Adjusted EBITDA for 2022 increased 28% to $25.1 million compared to $19.6 million in the prior year with the increase primarily driven by improved productivity across our cultivation, more stores and better operational efficiencies. Cash from operations improved significantly to $19.1 million in 2022 compared to cash used of $5 million in 2021. This improvement speaks to the focus of this management team over the past year to scrutinize spend, to improve operational efficiencies. At December 31, 2022, the company had approximately $8.4 million of cash and cash equivalents and $5.7 million of total debt with approximately $314 million fully diluted shares outstanding. That concludes our highlights. Operator, we’ll now open the call for Q&A.

Operator: [Operator Instructions]

Robert Beasley: And operator, this is Robert Beasley. During the pause, may I make an additional comment?

Operator: Sure.

Robert Beasley: Mr. Batliner in his last statement provided that the debt was $5.7 million at least the way I heard it, I believe it is $57.7 million, which is the difference, and I think you just misspoke on that. So I wanted to make that clear.

Operator: The first question comes from Russell Stanley from Beacon Securities.

Russell Stanley: Good afternoon, and thank you for taking my question. Congrats on the on the results and congrats on getting the hurricane related damage facility up and running. Just wondering if you can quantify, I guess, the impact of that hurricane on the results, just wondering what we could have seen in 2022 absent that understanding hurricanes are a fact of life?

Robert Beasley: So the hurricane impacted the greatest. We had two stores that were down for several days, that revenue diminishment was fairly negligible. We are probably a couple of hundred thousand off of those losses of those stores. And fortunately, the stores even though they received some flood waters were able to dry out and the power came back on. And so we call that -- we consider that a de minimis impact. We also noted a increase in demand in the following days. There was, what I would call, pent-up demand in the storm struck area. And so we are not sure that the actual store impact created much of an impact on bottom line or top line. The facility though at Sweetwater was significantly impacted. And I say that it could have been a lot worse, the eye of that hurricane and the eye wall was 114 plus mile an hour winds actually set on that facility site for over an hour and we watched it in horror on the weather radar. I was one of the first people in and it took a while to get in there, because the flood waters around the facility were significant. That area has a good bit of the Peace River flood basin in there. Surprisingly, the greenhouse was intact, even though it's only 65 mile an hour wind rated. I'm not actually sure how that happened. But one wall, the eastern wall of the facility, the roof had peeled back and the rooms, the grow rooms along that wall were severely impacted, that would be five out of the 11 grow rooms. So we had to vacate those grow rooms entirely. We also lost the moms and clones, which were in that area. So out of 11 rooms with the mom and clones, we lost five plus moms and clones. We did not lose the post harvest rooms, which would be your dry and trimming, packaging and so forth, because they were on the other side of the building. So considering the designation of the storm right over the site and they passed away, we got off pretty lucky. So what happens then is we had to of course get the roof integrity back. We lost the fertigation skid and the pump room, which was the primary feed cycle originator. So we had to end up going on a manual feed, get the roof security back on. We then cleaned out the rooms and we destroyed those five rooms. We then started a cycle of trying to, as you know, a production cycle as facility within full cycle is kind of like an engine cylinder with -- if there is a timing to it. So then we were off timing. So it took us supplanting those rooms with auto flowers, which have a much shorter cycle to get those rooms back into sequencing. So we went all the way through the end of December and in mid part of January and almost of February befor each room started producing diurnal period flower, which would be suitable for the type of high quality flower. And so we believe that, that impact is primarily seen in the first quarter results. And it was because of that, that I initially did not do projections, because we just could not tell when we were going to get that back online. When it came back online, thankfully, the room started performing very well. In fact, we are now, as I said, pumping out, we've had three or four strains, the last couple of cycles we’ve 30% plus THC. And so as far as the impact goes, total impact, I would say, between around $5 million of revenues.

Russell Stanley: And around your notes around looking at two expansion options for cultivation capacity. Just wondering if you can remind us, I guess, what scale of expansion you're contemplating if possible couching in terms of the number of dispensaries, incremental dispensaries it could support?

Robert Beasley: When I first got into cannabis, I heard the phrase start low and go slow and it applies to expansion as well. I've watched some of our competitors violate that rule at their own peril. And so we're looking for a facility and I have located one, which has the ability to grow incrementally. The facility we're looking at now is a campus that has about 100,000 square foot of enclosed space that could be grow space. But because the campus has segregated buildings, it allow us to bring them up 10 at a time or 20 at a time. It also has enough real estate of good solid land to put a greenhouse property outback or facility outback. If we were to talk for, my philosophy of Florida is a diversity of cultivation and facilities that are aligned with the end product in line. For instance, you throw high quality flower indoor but you do not throw all the utilities you need to grow an oil-based product for your other derivatives. And so you have to align the output and the cost of the output with the end product. So I like this campus because it allows us a diversity of production, which is in one scale similar to what we have going on the ground now. We have multiple different facilities with multiple different output levels and multiple different cost of production. So as we're looking through this now, we look like we're going to be able to get the facility and then start with probably about 24,000 square foot of indoor production. We're still needing indoor high quality flower, it's still in high demand, it's 42% of our sales. And it's almost as though we can't have enough of it. So the more high quality flower, the better, it doesn't sit on the shelves. As far as stores, we have calculated that currently with our production about 36 stores is where we need to hold up. And with that we'll have adequate inventory compression to be competitive in the market to race with the big guys as far as the sales and so forth, and so forth, and keep our stores adequately supplied. We are in queue now too for those 36 stores. As I've said earlier, we have three more under construction, we have two more under contract. So we are done as it relates to the acquisition of new store sites until we put on more production. If we put on this additional production, our goal point is to shoot for about 35 million milligrams a week from where we are now. That would need us -- we would need to do that to get up to somewhere around 47 to 52 stores. That additional production would allow us to get up there. Ultimately, we'd need about 70,000 square foot canopy to do that. The facility I'm looking at has about a 100,000 square foot of available canopy. Now the trick here is not to over [Technical Difficulty] right now, because the market's changing and the competition's coming. And if we've learned anything from Pennsylvania and Michigan and those other places is if you overbuild now they may not come. So the trick is to build it in sequence with the growing demand.

Russell Stanley: Maybe if I could, just Rob one more, and I'll get back into the queue. Moving over to Texas, I think, you've alluded to it. But there's a medical bill to clear the house there, and I guess is now awaiting or hoping on senate action. Just wondering where your thoughts are on that bill's probability just given that it would help support expansion of the medical program?

Robert Beasley: I think it has a fairly high probability. There was a real big effort to trim it down and make sure it didn't push things too far. Texas is typical of a southern state. It started with CBD in limited conditions and then grew. There's still a decent amount of resistance in Texas as there is in most of the southern states to opening it up. But this next incremental move with the 10 milligram dosage so forth, their dosage scenario in their legislation was miscalculated. It came out of the 2010 hemp bill. Hemp moves at such a higher volume than does THC, cannabis. And so using that 1% by weight was just the wrong answer. And so correcting that all by itself if the bill did nothing else, correcting that makes us -- puts us in a situation where we can be competitive, we can have products that are standardized. I think the 10 milligram dose with the hundred milligram capacity is becoming kind of the standard dose that you see throughout all the states. So just that move alone allows for a good bit of stabilization in the Texas market. We're already excited about Texas. I have gone from being neutral in Texas. I've gone from calling it a good long term asset but not much of a revenue producer to now in full gear. Texas has woke up and we are right there at the forefront of it, we're right there at the tip of the spear, we're now selling to patients. We anticipate our demand is already going to exceed our capacity production. So we're looking at production. Texas is moving. I gladly report after three years of watching it sit.

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