FLUENT Corp. (FNTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Cansortium's Third Quarter 2020 Financial Results Conference Call. My name is Anastasia, and I will be your conference call operator today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Mr. Marcos Pedreira, the company's Chief Financial Officer. Please go ahead, sir.

Thank you, Anastasia. I appreciate you all joining us for our third quarter conference call. My name is Marcos Pedreira, Chief Financial Officer; and with me on the call this afternoon is Neal Hochberg, Cansortium's Executive Chairman; and Cansortium's CEO, Robert Beasley. In just a moment, we will share our remarks on our third quarter and year-to-date financial results as well as our outlook for the balance of 2020 and initial outlook for 2021 and 2022. We will take questions at the end of our prepared remarks. A webcast replay of this call will also be available on the Investor Relations section on our website at investors.getfluent.com. The earnings press release along with an audited condensed interim financial statements and MD&A for the quarter can be found on the Investor Relations section of our website and also have been filed on sedar.com. And a reminder to our listeners that certain subjects discussed on this call, including some answers we 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, we will refer to supplemental non-IFRS accounting measures, including EBITDA and adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. EBITDA and adjusted EBITDA are defined in our press release as well as in the MD&A as filed on SEDAR. A reconciliation of EBITDA and adjusted EBITDA to consolidated net income reported in accordance with IFRS is included with our financial statements on SEDAR and is also available in the Investors section of our website. 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. Neal Hochberg, Cansortium's Executive Chairman, who will introduce our newly appointed CEO, Robert Beasley. Neal?

Thank you, Marcos, and good afternoon, everyone. We appreciate your interest and support. Since the beginning of 2020, Robert has been a senior adviser to the company and actively involved in all aspects of Cansortium's operations, reporting directly to the Board of Directors. Robert's cannabis industry knowledge, operational expertise, leadership and execution capabilities, augment our strong, experienced and dedicated leadership team that has been instrumental in implementing the company's strategic growth plan. This quarter, Robert has been named our CEO, and it is my pleasure to introduce him to his first earnings call as Cansortium's CEO. Robert?

Thank you, Neal, and thank you, everyone, for joining us here today. It is my pleasure to serve as the Chief Executive Officer of Cansortium, and I am excited about the opportunities that this position provides for me and for the company. We have a strong leadership team in place. I arrived at Cansortium well pleased to find both an eager leadership team and an earnest and eager employee core that's ready to get together and work and to maximize the value of our assets in Florida, Pennsylvania, Michigan and Texas. Today's call, I will cover the third quarter results as well as the full year 2020 outlook and the company's continued progress and long-term growth prospects for 2021 and 2022. First, to look at the quarter -- for the third quarter. Third quarter revenue of $14.3 million was an increased 94% compared to $7.4 million in the third quarter of 2019. Revenue for the 3 months ending September 30, 2020, consisted primarily of revenue generated from the company's 21 Florida dispensaries. Now that's compared to 16 Florida dispensaries during the same period from last year. During the third quarter 2020, the company opened its 21st medical marijuana dispensary in Coral Springs, Florida. And in October and November of 2020, the company opened the 22nd and 23rd dispensaries in Coral Gables and Kendall, respectively. And I'm pleased to announce that the 24th dispensary should be open by December 15 in Fort Pierce, Florida. We will conclude the year with a total footprint of 24 dispensaries for the year 2020. Adjusted gross profit for the 3 months ending September 30, 2020, was $9.5 million or 66.6% of revenue compared with $4.7 million or 63.2% of revenue for the same period last year. The third quarter selling, general and administrative expenses totaled $9.7 million compared with $10.5 million of last year's comparable quarter. Now this decrease was primarily due to cost savings initiatives initiated during the fourth quarter 2019 and again in the second quarter 2020. These included workforce reductions in labor force in certain areas of the company, primarily cultivation; elimination of certain senior management positions; reduction and a commensurate reduction of executive management compensation; and lower depreciation amortization expense. The savings were offset by higher share-based compensation expenses and a slightly higher selling and marketing expenses to support the expanded dispensary platform. We also in third quarter 2020 reduced and -- reviewed and reduced multiple service contracts leading to additional reductions. Selling and marketing expenses as a percentage of revenue was 24.9% for the 3 months ending September 30, 2020, compared to 45.3% the same period last year. As a result, the third quarter operating loss totaled $1.9 million for 2020 compared to $8.1 million for 2019 same period ending. Third quarter net loss totaled $8.9 million or $0.04 per diluted share compared to $11.4 million or $0.06 per diluted share in third quarter 2019. EBITDA loss totaled $1.6 million for third quarter of 2020 compared to $4.5 million in 2019 third quarter, while third quarter adjusted EBITDA totaled $3.6 million compared to adjusted EBITDA loss of $1.1 million in Q3 2019. Based on operating results for the third quarter of 2020 and its projections for the remainder of the year, the company can reaffirm the 2020 anticipated revenue between $55 million and $60 million. Of this revenue, at least $45 million will come from the Florida market with the additional amounts coming from Michigan, Pennsylvania and Texas market. The anticipated adjusted EBITDA will be $14 million. Looking at the long-term growth prospects, we first need to discuss Florida. Florida is accounting for -- will account for 80% of the 2020 revenues and will continue to account for the largest aspect of the 2021 growth. 2021 growth projections are primarily dependent on the focus in cultivation. We have determined that the dispensary footprint of 24 dispensaries is adequate to meet the market demands and that cultivation needs to be the focal point of fourth quarter 2020 and first quarter 2021. The currently -- the company currently operates 1 cultivation center in Tampa, Florida, approximately 22,000 square foot of indoor cultivation, of which 20,000 of that square foot is in a flowering canopy of 6 levels. It is a 6-level vertical grow scenario. The company transitioned entirely to Tampa and away from the Winter Garden facility in July and August 2020 in connection with the termination of the Winter Garden lease. Winter Garden was the original founding cultivation center for Fluent when it originally received its license in 2015. On July 2020, the company secured an additional 26,000 square foot of cultivation space in Zolfo Springs, Florida; and production in those operations is expected to commence in late February of 2021. The current dispensary network in Florida is 23 dispensaries. There are 3 additional dispensaries under permitting. As I indicated, I anticipate we will be at 24 before the end of the year to close out 2020 year. The 2021, '22 expansion anticipates 33 dispensaries in total by the end of 2022. However, as I indicated, the focus in the first quarter of 2021 and possibly second quarter will be in cultivation and not in expensary -- in footprint expansion, which is adequate for our current cultivation. Taking a look at Michigan. The end market partner holds 4 Class C medical cultivation licenses and 2 Class C adult cultivation licenses, which allows for a total cultivation of 10,000 plants. The 2020 year cultivation result was an outdoor cultivation project. The planting occurred in late June and the harvest occurred in late October. It was a one harvest year, outdoor only. The Michigan outdoor facility is approximately 8.5 acres in Arlington Township, and it includes and is supported by a 3,500 square foot drying and packaging facility. Harvest occurred in October. We had a great Indian summer, which allowed for a late development of the crop, emphasized a flowering crop with extensive biomass and was able to harvest and secure an outstanding crop before the weather turned. Michigan is progressing well. We have a standing contract for the biomass purchase. We anticipate contracts for the flower -- resulting flower harvest as we get the testing in. We anticipate having the testing in, in the next 2 weeks, which would allow us then to put the flower product out for bid. Expansion of Michigan includes construction of an indoor or greenhouse grow facility, which would allow our projections to 2021 to be realized. It will also allow us some more level cash flow in Michigan and also harvest at times in which the market supply is down, achieving the highest market price. If we can achieve a harvest in July or August or September prior to the October outdoor harvest, we can bring higher results in the market price. Pennsylvania, we continue to operate currently a single dispensary, however, the company holds permits for a maximum of 3 dispensaries in the south central region of the state. The company started a development plan for 2 new dispensaries that are expected to be operational in early 2021; and I'm pleased to announce that yesterday, we signed a lease for a dispensary, 1 of those 2 in Mechanicsburg. Under the terms of that lease, we anticipate that dispensary being open for business in late March 2021. With that, we're on track to open the second dispensary before the close of 2021. Our fourth market focus is Texas. Of course, Texas is a large state, second most population in the U.S. and Fluent is 1 of 3 license cultivators at this time. The revenues generated from Texas are relatively small. The footprint at this time is a cultivation center in Schulenburg, Texas, and it operates off of a home delivery service pursuant to the regulations and restrictions in the state of Texas. The current cultivation facility is 1,300 square foot with an additional 400,000 of square foot available as demand requires. While Texas is currently a very small portion of the projected 2021 and '22 revenues, we believe it presents a great opportunity for future growth as the market develops, and the conditions are expanded by new legislation. The oddity of Texas as a state is that the legislature only meets every other year. The 2021 year will be an on year for the Texas legislation. We have already secured lobbying resources, and we'll have a proposed expansion of medical conditions available to be more similar to that, which is offered in Florida. Taking into account all the operational timing shift and strategic reprioritizations that I've just described. We project revenues in 2021 to $95 million to $100 million, and $140 million to $145 million for 2022. That would bring an adjusted EBITDA of $30 million in -- $30 million to $35 million in 2021, and $60 million to $65 million in 2022. We remain committed to driving shareholder value by operating a leading-edge facility with on-premises laboratory, on-premises processing. We believe that the addition of the Zolfo Sweetwater facility will bring high-quality Florida market -- flower to the Florida market, that which is not yet seen in the Florida market, and we hope to be setting the edge on flower, providing the best and highest-quality flower available. One comment I forgot to bring is that we were the leader in edibles rollout in Florida. We rolled out edibles as the first company in Florida to offer edibles as an option on October 13. Our only other competitor, True Leaf, which was the market leader in Florida was 2 weeks behind. And all of the other competitors remain behind as far as an edibles offering. We now offer 3 different flavors. We also offer a 1:1, and we're soon to offer a 5 milligram. So one push of leading the market is in leading the market in certain segments in Florida. We now lead the market in edibles. We hope to lead the market in high-quality flower starting March of 2021. I encourage each of you to read our third quarter MD&A that we filed at SEDAR earlier today, and it's also available on our website. There's also a presentation available there, which was -- I had made for the September presentation. In that presentation, you will see certain results of the quality improvements and production improvements in the market in Tampa facility. I direct you to Page 25, which shows the increase in yields as well as comparative samples of plants at the same stage of growth, showing the old versus new techniques. I think a picture tells a thousand words. And if you look at those photos and graphs, you'll see, we truly are changing the cultivation progress in Tampa. With that and the add of the Sweetwater facility, we have absolute confidence of hitting the projected March for 2021 in Florida. With that, I'll turn the call back to the operator, and I thank you for your time and consideration.

[Operator Instructions] The first question comes from William Militello with Militello Capital. The next question comes from Chris Leshock with Ballast Equity.

I was wondering if you could walk through what the CapEx needs are for 4Q and into '21 and from kind of a big picture, how you anticipate meeting those CapEx needs with appropriate sources of capital. Kind of give us the big picture. That'd be appreciated.

Yes, sure. This is Robert Beasley. I think what I'll do is handle the big picture side of it and then ask the CFO, Marcos, to put some numbers into that. First of all -- first and foremost, we have developed a CapEx plan that is derived from revenues. So any of our CapEx expansion that is projected in order to support the revenues we have predicted, we have developed a plan internally to grow that amount organically. Obviously, with an opportunity for additional investment and capital and so forth incoming, we would accelerate some of the CapEx projects. But in general, what you will see for fourth quarter 2020 and first quarter 2021 are the following categories. We will complete Phase 1 of Sweetwater. That project is mostly complete at this time, and very little CapEx will be needed. In fact, the Department of Health conducted inspection today, and we are clear -- I believe we will be clear in 2 weeks to start importing plants into that facility. So the Sweetwater Phase 1 project is pretty much done. We then will also commence at Sweetwater, the same property, a greenhouse facility. The point of the greenhouse facility is it allows us -- it's about $1.2 million, and it allows us to increase our biomass production. The purpose of Sweetwater facility internally inside is that it's discrete growing units, 1,600 square foot growing units to allow 1 strain, to allow the nurturing and the boutique production that you would get -- to get a high-quality flower. In addition to high-quality flower, though, we still need to produce the oils and concentrates and vapes and so forth and the oils to do the edibles. So we decided to allocate $1.2 million to the construction of a greenhouse, which in Florida, you can grow in a greenhouse legally. It does provide challenges because of the humidity and heat. And those challenges allow you to produce a biomass but not necessarily the best quality flower. And so that's $1.2 million. We will need to complete the Sweetwater Phase 1, as I mentioned. We will also have and plan for the expansion of Tampa. Tampa is existing a 20,000 square foot grow facility. There is an adjacent parcel that we are building. The landlord is actually building for us a 20,000 square foot facility. Primarily, the use of that will be for moving our production and packaging processing over from the various places they are throughout the campus at Tampa into one consolidated facility, also allowing us the space to move from a ethanol extraction to complement with a BHO extraction. Many of the derivative products that would be represented by a rec market, you need the BHO extraction to contain -- to produce those products. So when we have booked the $1 million for Tampa expansion, what you're really looking at is that adjacent facility for production, packaging and some cultivation. Then generally speaking, Michigan, as I mentioned, we need to transition Michigan from a outdoor-grow-dependent facility to a facility that has a greenhouse. There's $1.3 million allocated in 2021 CapEx for that expansion. Again, the benefits of this will be to build a greenhouse to start a grow that will work off of a 16-week cycle and allow a more even cash flow as well as market timing of our product. Supporting that, we will need an additional dry facility. We grow more product. We have to have more dry space. So $1.3 million is allocated to that. The final, I think, category, although it's the smallest of the 2 -- of the 3 that we've talked about is the 2021 $450,000 anticipated need for the build-out of the 2 new stores. In the Mechanicsburg build-out, we -- our current arrangement with the landlord that we just signed, the landlord is going to pay the CapEx to get us to white box. We will have about $200,000 of internal improvements, decorations, artwork, so forth, point-of-sale system and so forth. We allocated $200,000 for the existing store and then an additional $250,000 for the same scenario under the expanded store. So I may -- I'll defer now to Marcos to answer and provide any more detail of anything that I missed, but that's the high-level overview of the CapEx we anticipate needing and the methodology that we have. Let me add, actually, before I turn it over. There is a Sweetwater Phase 2 anticipated and the formula for Phase 2. Phase 1 is 4 rooms. Phase 2 is an additional 6 for 10 total rooms. The formula for Phase 2 is, out of the Phase 1 sales, there is a cash reserve allocated to a construction budget. And when that cash reserve reaches a certain number, I think it's about $1 million, $1.2 million, then the Phase 2 construction will commence. And you see the Phase 2 -- in the projection numbers, you'll see the Phase 2 numbers kick in, in the latter part of 2021. We anticipate being at that reserve number somewhere around July -- June or July. And there will not be a lot of construction time line. As with most construction, most of the expense was front-loaded. HVAC, power and so forth, all had to be put in, in the Phase 1 section. So the Phase 2 construction costs are not that great comparatively. Marcos, did you want to add anything to my comments?

Robert, this is Marcos Pedreira. I think you explained in a very detailed fashion all of the details for the CapEx. So just to summarize, our 2021 total CapEx, the expected CapEx currently is a little under $6 million for the whole year. Florida is the main component, so it's about $4 million followed by Michigan and Pennsylvania.

Great. Appreciate all the detail there. Could you just -- additionally, if you wouldn't mind fleshing out what the thoughts -- what the plans are for Texas and knowing that it's in every other year cycle on the legislation. When's the kind of the drop-dead data or the approximate time frame in the year, by which either something is going to likely get in and hopefully get passed or it's likely not going to happen? I was just trying to set up some thoughts around expectations for the Texas legislation.

Sure. And as you see, we do not have any CapEx booked for Texas for 2021 or 2022, nor do we have it booked as being a major contributor to our revenues. And that is because some of the -- the answer to your question, ultimately, at a high level is it's all uncertain because it's depending on politics, and politics are somewhat uncertain. But let me give you the parameters of what I expect to see occur. First of all, Texas comes into their legislative session in January. There is a movement. There are 3 licensees. There are also an assemblage of companies that would like to be licensees. So you have a two-front movement going on to which the parties are aligned to some extent. We are obviously not aligned to those parties seeking new licenses. However, both parties, the current licensees and the expected new licensees, would like to see an expanded medical conditions list. Texas is a medical state. There's no suggestion at this point that there's sufficient support to go recreational in Texas. Most states go from a medical to a rec scenario, although I believe it was South Dakota that jumped over those 2 aspects on this last election. However, Texas, we hope our major push would be 2 points: one, to expand the medical conditions and/or if the list can be expanded and/or to add the other similar conditions language to the Texas legislation. So in Florida, you have a list of known conditions, and then you have a other category. It is in that other category that the physicians have a little more freedom to be doctors, to not be restrained to a list and justify through medical research and evidence that this condition that they are treating is similar to or unknown conditions similar to the listed conditions. What that does is it opens up the conditions list and to be not so strictly construed. Of course, opening up the conditions, you open up the patient population. So first and foremost on our agenda is to deal with the listed conditions. Second point in Texas to be successful is there is a limit on concentrate. They currently have a 5% concentrate limit. This is evidence of a legislative process that just was not aligned with the science or medicine. Of course, in fairness to the Texas legislative process, when they first passed their statute, the medical market was young and the anecdotal evidence was very slight. What we hope to do is prove to the Texas legislative group that you can't have a consistent 5% cap of concentrate because some conditions, for instance, if they allow PTSD, then they need to have a sufficient concentrate to adequately treat that condition. We now have that information and evidence. It's just a matter of getting it in front of the legislature to understand that they really do not need a concentration limit. This was a hedge against abuse and so forth. Finally, the third point that needs to be accomplished is we need to disassociate the retail sites from the cultivation center. As I indicated, we have a cultivation center, but we are strictly delivering home. Delivery via vehicle in a state the size of Texas is just not efficient or cost effective. But that's the current requirement, is that you can only retail sale out of your cultivation center, which means that in order to have multiple storefronts, you'd have to have multiple cultivation centers. Now there's ways around that, but we would hope that the legislature would understand that we cannot service medical population of any size if we had to have a full-scale -- full sale cultivation center in areas where those patients are -- need to access the medicine. For instance, retail would be in an urban area, in a shopping district or somewhere where the patients are circulating, whereas cultivation is an agricultural area. So just the logic behind separating those 2, I think, will be successful. Those 3 changes opens up Texas, and when it opens up Texas, then we need to be prepared to springboard in. We are 1 of 3. We are in the same status as the other 2. There's no company right now that's too much ahead of the others because we're all idling basically. So with that, we would need to address the capital needs at that time and expand our cultivation center. We have the legal ability to do it. We would need to put the physical assets on the ground. Retail gets opened up. Then we'd start searching for retail opportunities. I hope that addresses your question.

Great. No, that does quite well.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

So thank you for joining today. Thank you for your questions. Please look at our materials on the company website as well as the SEDAR publication. Of course, there's an investor contact line there. If anyone after the call has a follow-up question, please reach out and contact us, and we'll be glad to answer your questions and interact with you. And thank you for your time and consideration.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.