CNTMF - Cansortium Inc. (CNTMF) Q3 2023 Earnings Call Transcript

2023-11-29 19:29:09 ET

Cansortium Inc. (CNTMF)

Q3 2023 Earnings Call Transcript

November 29, 2023 04:30 PM ET

Company Participants

Robert Beasley - CEO

Jeffrey Batliner - CFO

Conference Call Participants

Tony Kamin - Eastwood Partners

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Cansortium's Third Quarter 2023 Conference Call. Joining us today are the company's CEO, Robert Beasley; and the company's CFO, Jeff Batliner. [Operator Instructions].

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 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 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, Gaily, and good afternoon, everyone, and greetings from sunny Las Vegas. Well, we reached several key milestones in the third quarter, not only by generating record revenue and cash flow generation but by posting our eighth consecutive quarter of positive cash flow from operations. These metrics underscore both the consistency of our business and the execution of our strategic initiatives as we lay the foundation for Cansortium's future growth.

Jumping into our third quarter and recent highlights. In Florida, we grew revenue 17% in the state while continuing to ramp the four stores we opened in 2023. The additional headcount and marketing costs associated with these new stores has partially impacted our bottom line as they ramp. However, the investment in our team and overall infrastructure are necessary to support continued growth.

We plan to open one additional store in Florida by the end of the year and another one will follow in early February of 2024. On the cultivation side, we continue to realize the benefit of investments we made across 2023 with our flower quality seeing further and further improvement in our average THC percentage now being above 26% and a recent harvest of 36%, which will be on the stores soon this week.

Third quarter generally presents a challenge in all of Florida due to both the heat of the summer impacting cultivation facilities as well as many of our residents and [indiscernible] leaving the state before returning in the winter, leading to lower seasonal demand at our dispensaries. That said, our improved product quality has enabled us to sustain higher pricing, which has helped offset some of the volume decline during the summer months.

All things considered in the third quarter in 2023 held up relatively well compared to the second quarter, and we have seen pricing pressure in the market began to stabilize. In Pennsylvania, we dedicated most of 2023 to fine-tuning and optimizing inventory management, and I'm pleased to report that our current inventory reflects a sustainable and normalized rate.

Operational improvements have now taken hold. And as I mentioned last quarter, we've established a normalized gross margin and EBITDA level for Pennsylvania. The next step in the Pennsylvania development is to continue our search for high-quality partnership to grow our operation vertically and add depth in the state to supplement the three existing medical stores.

Moving to Texas. While the state remains in its infancy, we are seeing a high rate of growth in the retail volume, albeit small base numbers, the rate of growth is significant. This is a positive market signal ahead of our planned opening of our first brick-and-mortar location in Houston in the first half of 2024. This location will also serve as an education center and a telemedicine center for patients in the area.

As a reminder of Texas, we are one of only three license holders in the state and we're actively working to grow our presence in what we view as a market with significant potential and an absence of competition. As we close out the year and look ahead to 2024, we'll continue to implement and execute the objectives laid out throughout the year to improve our operations and drive profitable growth across our footprint.

We will remain opportunistic in our approach to expanding our footprint geographically and are poised to deliver another year of revenue growth and cash flow generation in 2023.

I'll now hand it over to Jeff Batliner to walk through the financial highlights. Jeff?

Jeffrey Batliner

Thank you, Robert, and good afternoon, everyone. As Robert mentioned, we're proud to report another period of revenue growth and our eighth consecutive quarter of positive cash flow from operations. Please note all figures are in U.S. dollars and all variance commentaries on a year-over-year basis, unless otherwise indicated.

Revenue increased 14% in the third quarter to $25.3 million compared to $22.1 million in the year-ago quarter. The increase is primarily related to additional dispensaries opened in Florida and higher patient counts. Operating expenses in the third quarter were $11.7 million compared to $8.5 million attributable primarily to higher salaries and wages as well as increased sales and marketing costs related to our new stores in Florida.

As a percentage of revenue, operating expenses were 46% compared to 38% last year. Adjusted gross profit for the quarter was $16.1 million or 63.9% of revenue compared to $16.7 million or 75.5% of revenue last year. The change in gross margin was primarily related to a lower average ticket per transaction.

Adjusted EBITDA for the quarter was $8.8 million compared to $11.7 million, with the decrease primarily attributable to additional salaries and wages as well as lower average ticket per transaction. The additional salaries and wages were driven by two items: additional employees to support our store growth and by a wage increase for our entry-level retail staff to aid recruitment and employee retention.

These were partially offset by a positive impact of increased patient transactions. Cash from operations during the third quarter increased 32% to a record $7.1 million compared to $5.4 million in the prior year period. At September 30, 2023, we had approximately $12.1 million of cash and cash equivalents and $60.3 million of total debt, with approximately 298 million shares outstanding.

This concludes our financial highlights. Operator, we'll now open the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from [Donangelo Volpe] with Beacon Securities. Please go ahead.

Unidentified Analyst

Good afternoon. Thank you for taking my call. Just regarding Florida cultivation. Can you update us on your expansion plans here? On the late August call, you seem to be leaning towards a smaller build-out in Tampa while perhaps working on a larger expansion of Williston over time. What's the latest on your thinking here? And assuming that decisions have been made, when do you envision producing a first harvest from this expansion? Thank you.

Robert Beasley

Yes, sure. Thanks, Don, and good to hear from you. We're still on those plans. We have two -- we actually have three parallel paths going right now. And really, it's kind of what brings in first to market. We have still the Williston property in Williston, Florida under contract. That's the middle school, as you may recall, it's a 20-acre site.

First phase on it would bring in about 25,000 square foot to 26,000 square foot of cultivation. But it has future phases that could bring in up to about 70,000 indoor additional, and then it has 10 acres outback, so we could put 8 acres of greenhouse. That process has been a little slow. The county did not have a zoning was appropriate. So, we've filed a petition to be annexed in the city. And that petition has been filed because I think it will all go smoothly. It's kind of worked out with the city staff. They're supportive of it.

So, we're moving that forward. Jumping over to the adjacent Tampa property. We anticipate closing on that property here in the 1st of December. First phase of it will generate about a pretty immediate turn-on by probably mid-March of about 12,000 square foot of cultivation space and then we'll commence at the same time, construction of another 24,000 square foot, 25,000 square foot cultivation space.

These are not gross square footage. These are cultivation square footage, which is really kind of our lingua franca. So that project will come online. We anticipate crops from it coming out by May -- 1st of May. And so, we'll have a nice first step coming out of the adjacent Tampa property. And then as we arrange our construction financing and so forth, we hope that the ultimate final build-out of the adjacent Tampa property, which we call the ROSA property would be about 26,000 square foot, 27,000 square foot of cultivation.

So if you compare these two parallel concepts, one is a quicker to market, which is adjacent to Tampa, but it maxes out at about 26,000, 27,000, whereas Williston a little bit longer to bring clients to market, but the growth potential is really kind of held in reserve and it allows for incremental growth, which we continue to keep an eye on AU developments, and what the Supreme Court is going to do there. So, we'd like to be in a position to where we're growing at about 25,000, 26,000 additional with the potential expansion available.

Unidentified Analyst

Okay. Perfect. Thank you for the clarification. And then since you did speak of the Supreme Court -- or a potential Supreme Court decision, maybe just a follow-up question. So, with regards to the oral arguments heard earlier this month, the consensus kind of seemed to be that the court's posture seems supportive to allowing the question go to the ballot. What are your thoughts on that? And how does your level of optimism change in terms of Florida AU?

Robert Beasley

My level of optimism remains mildly to less than mildly optimistic. I -- in my former life, you may recall, I was a trial lawyer and I did somewhere around 30 arguments in front of higher courts. And I was never able to extrapolate the questions or the tone of the judiciary to the result.

Many times, I would leave there and think, oh, those questions were perfect. They're going to rule my way and they wouldn't. And then sometimes I would leave there having been handed my hat and they rule my way. And so, it's an unfair guess for us. And maybe the justices intended that way for us to guess tone and nature of the questions and try to extrapolate results. I think that's a hazardous game to play, and I wouldn't want to play it. I had not changed my estimation that it's got a fairly mediocre chance of being successful in this round.

Unidentified Analyst

Okay. Thank you. And then one last question, if I may. Just in regards to Pennsylvania. For Pennsylvania pricing, what are you guys seeing there? On the August call, you guys did note that there was stabilization in the marketplace. Has the stabilization continued? Or are you guys starting to see renewed pressure on pricing?

Robert Beasley

Stabilization has continued in both Pennsylvania and Florida. I'm happy to say -- and I know you asked about Pennsylvania, the Florida data is that over 24 months, we saw about 38%. But in the last 12 months, we've only seen 12%. And in the last two months, we've seen less than 3%. So, it really has hit a floor out. Pennsylvania, the rate of drop was in the 25% and has now started to slope out also. So, in both states, we believe we're seeing the floor of price compression.

Operator

The next question is from Tony Kamin with Eastwood Partners. Please go ahead.

Tony Kamin

Good quarter. Question, now that you've sort of added G&A. I guess I'm trying to understand, do you think you have sort of capacity there from a management standpoint to take on new geographic territories? And if so, do you still see opportunities for acquisitions or mergers that are potentially distressed financially but not operationally, which would give you an opportunity to go in and acquire some things that are good metrics for you to look at?

Robert Beasley

Yes, great question, Tony. Thank you. Yes, on all accounts. We would need to staff up. Obviously, if we start extending in a larger geographic footprint, particularly in the Northeast or north, which is what I would like to see in order to offset kind of what I call our Florida dependence.

We got here on Florida, but we need to diversify. So, if we extend it, I would hope that our target, which would exactly be what you described, which is a distressed company operationally, which results in being financially distressed, but one that has great hope and promise. And we're probably going to be working with both the company owners and their lender at that point.

I've kind of described it as a freelance REO department. And so, what we're looking for is companies that need the help, they need the operational help. We do not instantly have the bandwidth to plug in a team. We're not sitting on a reserve team. But what we are sitting on is operational know-how and efficiencies and the ability to come in, in a small force scenario and train their team.

And hopefully, we'll find plenty of good players that are looking for guidance and direction that we can turn on into a winning team. That's the concept. We're not traveling with a big, robust team that could cover that area of geography at this point.

Tony Kamin

Got it. Thank you, so much.

Operator

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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