CNTMF - Cansortium Inc. (CNTMF) Q2 2022 Earnings Call Transcript
Cansortium Inc. (CNTMF)
Q2 2022 Earnings Conference Call
August 29, 2022 16:30 PM ET
Company Participants
Robert Beasley - CEO
Patricia Fonseca - CFO
Conference Call Participants
Jon DeCourcey - Viridian Capital Advisors
Phill Larson - Millstreet Capital Management
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to Cansortium's Second Quarter 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 conference call over to Mr. Robert Beasley, the company’s CEO. Sir, please go ahead.
Robert Beasley
Thank you, Sharice, and good afternoon, everyone. We generated exceptional results during the second quarter across all key financial metrics, including double-digit revenue growth, gross margin expansion and near double in adjusted EBITDA and material increase in cash flow generation. The investments we 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 grow processes and environmental controls, and our product quality has consistently improved with higher THC flour 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 5000 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 Anville, which brings us to three -- 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 believed 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 $0.5 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’ve 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.
Patricia Fonseca
Thank you, Robert, and good afternoon, everyone. Please note that all figures are in U.S dollars and all various commentary is on a year-over-year basis unless otherwise specified. So I will jump right into results.
Second quarter revenue increased 36% to $22.4 million compared to $16.5 million. The increase was largely driven by greater revenue from our 27 Florida dispensaries. Florida revenue increased 33% to $18.8 million compared to $14.2 million in the year completed.
Adjusted gross profit in Q2 increased 40% to $15 million, or 67% of revenue, compared to $10.7 million or 65.1% of revenue in the year-ago period. The increase was primarily driven by higher revenue for the quarter compared to the prior year.
Second quarter operating expenses remain 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 $0.05 per share compared to net loss of $25 million, or $0.11 per share in 2021 the same quarter.
Adjusted EBITDA increased 95% in the second quarter of 2022 to $10.2 million, or45.4% of revenue compared to $5.2 million or 31.7% of revenue in Q2 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.
Turning to the balance sheet, at June 30, 2022, we had $8.9 million cash and a total debt of $69.3 million, that includes 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 revenue to range between $90 million, $95 million. This reflects approximately 42% increase from 2021 at the midpoint. In addition, we continue to expect adjusted EBITDA to range between $25 million and $20 million, reflecting approximately 35% increase from 2021.
Operator, we will now open the call for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Jon DeCourcey with Viridian Capital Advisors. Please go ahead.
Jon DeCourcey
Hey, guys, congratulations on the quarter, the continued strong progression, and also say thank you for the abbreviated earnings call as we get to the end of the cycle here. Just a couple of questions out of me. So first off, everybody else is talking about the inflationary pressures and the macro headwinds impacting the business. You guys alluded to it, but didn't really give any color or stand behind that in any way. So I just wanted to kind of see how are you seeing those pressures play out in Florida and what are -- what kind of hindrance to results was it?
Robert Beasley
Thanks, Jon. 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, most of what we are seeing are very episodic, very gimmick like sales showings, big roll outs, but nothing that's stable or is consistent. While you note that 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 are 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.
Jon DeCourcey
Okay. No, that makes sense, and that's a good answer. So another question is regarding manufacturing capabilities that you guys are bringing online here in the near-term in Florida. What -- can you kind of discuss what that does for the top line? What that does for margins, et cetera?
Robert Beasley
Sure. 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 midyear 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 is 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 wand and roll machine, and new logistic 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.
Jon DeCourcey
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?
Robert Beasley
So we're waiting to absorb the 5,000 square foot that I mentioned. First harvest on that should be in about 2 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 3 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 will 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 is going to take the lead. But we're working on three projects to increase cultivation square footage yet again within the system.
Jon DeCourcey
Okay, great. And then that kind of answers the question on what I was going to ask about Florida expansion. But particularly with the decision to exit Michigan, do you see yourselves expanding in the near-term, possibly more than you'd necessarily plan, kind of upon last reporting?
Robert Beasley
Yes. I mean, we're still looking for a cultivation partner in Pennsylvania. I think that's our next step. 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 if I -- 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 focusing on Texas. I'm proud to say we have a go-forward a 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. We didn't get all that we wanted, of course, but we got enough to make the go-forward plan. The patient counts 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.
Jon DeCourcey
Interesting. All right, that's exciting and thanks for taking the questions. I'll hop back in the queue.
Robert Beasley
Thanks, Jon.
Operator
The next question comes from Phill Larson with Millstreet Capital Management. Please go ahead.
Phill Larson
Hey, Rob and Patricia. Obviously fantastic quarter here. Nice to see 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?
Patricia Fonseca
Larson, the remaining of the year, or what we spend so far? I'm sorry if you [indiscernible] that.
Phill Larson
Yes, for the remainder of the year.
Patricia Fonseca
I think at this point, Robert, I want to go over that, but it depends on which cultivation facilities we are pursuing and which ones and the timing of them. Like Robert said, we had three projects that are growing and we probably execute on them. We just don't know which ones are going to fall this year or which one is going to fall this following year. So I don't know, Rob, have anything to add there?
Robert Beasley
Yes, I mean, the one thing I can tell you, Phill, is we are 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 $1 million, roughly a little under, and I couldn't tell you right now how much of that million has 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 C1 D1 certified and that equipment purchased. So probably another 250,000, 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 this 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 2 weeks.
Phill Larson
My second one on kind of the housekeeping type stuff was the guidance for the year is $25 million 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?
Robert Beasley
Yes, exactly. And as you know, Phill, this is our first year of 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.
Phill Larson
Okay. Understandable. And then the larger kind of strategy question I wanted to ask was, Rob, you did an interview at the end of June with I think was New Cannabis Ventures and you were talking about potentially partnering with some of the social equity applicants in New Jersey and may be looking for another operator with a similar size footprint as a potential merger partner. I just wonder if you had anything further you could share on kind of some of those points.
Robert Beasley
Sure. It's funny. First of all, Phill, let me just thank you for being such a great lender partner. Millstreet 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 turn them into these revenues, and without you and your loan and such, we could have never made it here. And I think people overlooked the role of a lender as a partner. And I just appreciate your involvement at 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. 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 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. They do include some of those states you mentioned. And hopefully we'll find a good fit because 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.
Phill Larson
Okay, great. Well, I appreciate the clarity and the kind words. Robin, Best of luck on Q3 and going forward.
Robert Beasley
Thank you.
Operator
The next question comes from Adam Wilk with Greystone Capital Management. Please go ahead.
Adam Wilk
Hi, 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?
Robert Beasley
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 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 states -- into the state, they're pretty well funded and they're grabbing a footprint. And so while we do not need more stores to grow our revenues, we do need more stores for that next stage, 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 at 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.
Adam Wilk
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 shelves should be fully stocked, inventory shouldn't be an issue, et cetera.
Robert Beasley
That's correct. And that's a tremendous aspect of 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 when you do not have enough product to sell, first of all, and secondly, you don't have that product long enough to do roll outs 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 involved 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 is -- as they're out basically, we then come back and continue our steady state towards the top.
Adam Wilk
Okay, great. And then I'd love to just get maybe a quick briefing on your thoughts around gross margins. Obviously, you guys are up there with some of the largest cannabis businesses and some that have pretty extreme scale, and it's really impressive to kind of see that. Is there -- can we maybe [indiscernible] 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 that to share.
Robert Beasley
Patricia, you want to talk on margins a minute, and then I'll take part of that question.
Patricia Fonseca
Yes, and it's something that we've been talking about for a while. All the improvements that we made on the facilities that we currently have would help a 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 much larger, so that increases the margin. I can point to one specific item that made this maybe improving the margins, but I can tell it's all across equipment rental, labor, depreciation, you name it. That helps with increasing our margin progress of putting together and putting operations and making it more efficient. There's still some capacity and some additional efficiency that [indiscernible] but we're talking about this since I was first started this project, and we see that now reflected in the margins.
Robert Beasley
Yes. Adam, I mean it's a classic big ship, little rudder scenario. We -- I became involved the CEO in September of 20. That year was almost gone, so '21 was spent cutting $2.5 million, $3 million out of operations. We took. Tampa's facility was producing 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 to 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, producing more. So produce more, sell more, spend less was kind of the strategy. And we've reached this point now. We have work to do. It's not done. It's just it allowed us to catch the wins right at the right moment and move up.
Q - Adam Wilk
Okay, great. That's phenomenal color. Thank you. And then maybe just one or two more quick ones for me. And while I have Patricia's attention, I think the GNA leverage has been pretty impressive over the last couple of quarters as well, 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 that something we can kind of expect to continue, like flattish growth in 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 cost hiring, I guess, on that line item.
Patricia Fonseca
Yes, on G&A, our costs will increase as we add a new dispensary there. As you know, under 20, we have to add most of those costs into G&A. So any retail costs, like rent, payroll, so that's mostly what impacts [indiscernible] think it's going to affect our G&A. So it's going to go up as we increase our footprint. So we won't see that flat, as we see, because we've been in 27 store 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 a month, but not at the percentage of revenues, we think we can keep that percent of revenues pretty contained and even lower than what we have now.
Adam Wilk
Okay, great to hear. Last question, obviously, really strong cash generation during the quarter, which is phenomenal to see, given your -- 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 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.
Robert Beasley
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 million, 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 light solution.
As far as refinance, as you probably know better than I, the rates are not that great. The -- 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 is 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 complementary 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. 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.
Adam Wilk
Okay, great. Also very helpful. Yes, that's it for me. Thank you very much again for answering my questions and keep up the great work.
Robert Beasley
Thank you.
Operator
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.
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Cansortium Inc. (CNTMF) Q2 2022 Earnings Call Transcript