FLUENT Corp. (FNTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Cansortium's Fourth Quarter and Year-end 2020 Financial Results Conference Call. My name is Shawna, 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 call -- conference call over to Mr. Robert Beasley, the company's CEO. Please go ahead, sir.

Thank you, Shawna. I appreciate all of you joining us for our fourth quarter conference call. As indicated, my name is Robert Beasley. I'm the CEO. And with me on this call this afternoon is Cansortium's new Chief Financial Officer, Patricia Fonseca. In just a moment, we will share our remarks on the fourth quarter of 2020 and the full year financial results as well as I'll share with you our outlook for 2021. As indicated, we will take questions at the end of the prepared remarks. A replay of this call will be available through the next week accessible per the details providing on the earnings release, which was issued earlier yesterday evening. A webcast replay of this call will also be available on the Investor Relations section of our website at investors.getfluent.com. The earnings press release, along with the audited financial statements and MD&A for the year and quarter ending December 31, 2020, can all be found on the Investor Relations section of our website and also have been filed on sedar.com. As a reminder to our listeners that certain subjects discussed on this call, including some of the answers myself or Patricia may provide to the questions include content that is forward-looking in nature and, therefore, subject to risks and uncertainties and other factors, which could cause actual failure -- future results or performance to differ materially from an 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 the applicable security 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 within 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 over the call to CFO, Patricia Fonseca, to discuss the financial aspects of fourth quarter 2020 and year-end 2020.

Thank you, Robert. Good afternoon, everyone, and thank you all for joining us. It has been a pleasure to serve as CFO for the past few months. And today, I'm even more excited to be part of Cansortium's team given the many growth opportunities ahead of us. We have a strong leadership team in place, and we'll continue to work tirelessly to maximize the value of our assets and capitalize on the tailwinds in Florida, Pennsylvania, Michigan and Texas. On today's call, we walk through our fourth quarter results and, more importantly our company's continued progress and long-term growth prospects for 2021 and beyond. Turning now to Q4 results. Fourth quarter revenue of $14.7 million increased 54% compared to $9.5 million in the fourth quarter of 2019. Revenue for the month -- for the 3 months ended December 31, 2020, consisted primarily of revenue generated from our 24 Florida dispensaries versus 18 Florida dispensaries during the same period last year as we continue to execute on our strategy to expand our footprint in Florida. Adjusted gross profit for the 3 months ended December 31, 2020, was $6.6 million or 45.3% of revenue. Excluding the impact of noncash inventory reserve, adjusted gross profit for the 3 months ended December 31, 2020, was $8.5 million or 58.4% of revenue compared to an adjusted gross profit of $5.7 million or 60.3% of revenue for the same period last year. Total operating expense in the fourth quarter were $9.5 million compared with operating expenses of $15.2 million last year's comparable quarter. This decrease was primarily due to cost saving initiatives implemented during fourth quarter of 2019 and throughout 2020, which included reductions in the force, elimination of senior management positions and reductions in executive management compensation which were partially offset by slightly higher selling and marketing expenses to support the company's expanded Florida dispensary platform and higher sales volume. As a percentage of revenue, selling and marketing expenses decreased to 25.2% for the 3 months ended December 31, 2020, versus 33.6% for the same period last year. Fourth quarter net loss totaled $8.4 million or $0.04 per share compared with net loss of $32.8 million or $0.18 per share in the fourth quarter of 2019. Fourth quarter adjusted EBITDA increased significantly to $3.3 million compared to adjusted EBITDA of $0.1 million in Q4 2019. The increase reflects our strong revenue growth and diligent cost management during the quarter. Moving on to recent highlights. As many of you have seen over the past month, we have completed multiple key equity and debt financing to shore up the balance sheet and fully fund our organic growth initiatives. On April 9, the company announced final closing of its private placement at a purchase price of $0.70 per unit. The first closing on April 5 was approximately $12 million, and the second closing was approximately $5.2 million, bringing the total private placement investment to $17.1 million. On April 30, the company closed on a $71 million senior secured term loan. The term loan will bear interest of 13% annually with a 4-year maturity and 18 months of call protection. Subject to certain conditions, the company can still increase the term loan by up to an additional $20 million. This finance represent our new access to capital given the marked improvements in our business and restore faith with the institutional investment community. We're very thankful to the support of our shareholders over the past year and welcome many new investors to Cansortium through our recent financing. We look forward to delivering on our expectations ahead. I would now like to turn the call back to our CEO, Robert Beasley, for additional color on our operations and growth initiatives for 2021. Robert?

Thank you, Patricia. So turning to our long-term growth aspects for '21 and '22. I want to first look at Florida and discuss Florida since it accounted for more than 80% of our 2020 revenues and should continue to account for an equally high percentage in 2021. The company currently operates a cultivation and production facility in Tampa, Florida, which includes approximately 22,000 square foot of indoor cultivation and flowering canopy over 6 levels. This cultivation center is complemented by a production and packaging facility, and it is from this facility where all of our packaged products to include the edible [ products ] come from. We have commenced construction on a new adjacent facility of 20,000 square foot, which will mostly be production packaging but also adding additional processing using BHO and 5,000 square foot of additional grow. We anticipate -- while construction has just commenced, we anticipate construction to be completed by the end of 2021 and hopefully, move into the new space first quarter of 2022. Also, on July 20, the company secured an additional 26,000 square foot of indoor cultivation with production in Zolfo Springs, Florida. This facility is now online with 6 of the 11 grow rooms in operation and the first flower products from this facility hit the shelves on April 8, 2021. We have built an entirely new “Sweetwater” brand. As we're calling it, there’s a Sweetwater road and Sweetwater river facility nearby, and so we've adopted that name as the brand to identify the brands and the flower coming from this facility and establish a reputation for high-quality flower in Florida. Construction is now ongoing at the Sweetwater facility to complete the remaining indoor grow rooms, and they’re expected to be completed and fully operational by the start of Q4 2021. In addition, on the facility property, there is being constructed now a 40,000 square foot greenhouse, which is -- should be completed with first harvest being by the end of August 2021. The purpose of this greenhouse is to produce biomass quality products to go to process for oil, which would complement the high-quality product -- flower products coming out of the interior and the indoor space, keeping a balance of both oil and flower is essential for continuing forward in this market. Once the Sweetwater facility is -- facilities buildout complete to include the greenhouse, the combined production capacity of both Sweetwater and Tampa at the end of 2021 will be 200,000 grams of production per week. This surpasses the estimated 154,000 grams needed to exceed the $100 million annualized revenue for just Florida. Turning to our dispensary network. Today, we operate 24 dispensaries in the state, 3 additional locations are currently under construction and seeking regulatory approval. We expect these -- all 3 of these locations to be open by the end of 2021 with the first one being our Miramar location should be opened by the end of May. We're now also citing for additional locations that would be opened by Q2 2022. Our plan is to continue and resume retail footprint expansion in Florida to coincide with an increase as production capacity comes online. Again, the idea of keeping balance is essential to balance the retail footprint with the production capacity. This would lead us to a total of 33 dispensaries operational by the end of 2022. Florida sales remained strong with this April 20, or 04/20, being the best single day ever in company history. Looking at Michigan. Our end market partners currently holds and we will renew one Class C medical cultivation license and 2 Class C adult cultivation licenses, which in total allows for outdoor cultivation of 5,500 plants. We have renewed these licenses for 2021. We have provided for seed production and [ clone ] development in Michigan at this time, and we are on track and on time for planting for the 2021 season. The Michigan facility is an outdoor grow facility on 8.5 acres in Arlington Township. It is a company with 3,500 square foot of drying and packaging. We have purchased the adjacent property to the Michigan facility and in the process of evaluating the construction of a greenhouse to bring the production indoors to allow an indoor complement to the outdoor production for 2021, 2022. The 2020 harvest in Michigan was a success, but the market price for both biomass and flower fell dramatically in December of '20. As Michigan is an outdoor grow state, some price drop was expected following what is known as in the industry Croptober, which is where all outdoor crops typically come out of the fields in October and the volumes are evaluated and price drops commensurately. But in 2020, the price drop was significant and well beyond the expectations given the volume of crops harvested. It was later determined that this was a result of massive illegal imports, which have been investigated and now hopefully prevented by the Michigan department. With this scenario now remedied, prices are now slowly recovering. I made the decision to hold the 2020 crop, which was ready for sale by the end of December 2020 and ready for sale also in January 2021 and held this crop until prices return. Prices are slowly climbing in return. And if they resume a normal pattern, then they should return and be at their height around June or July. We anticipate to begin selling this crop now with sales to be commenced in the next couple of weeks. The miss in our 2020 projections was entirely the result of not selling the 2020 Michigan crop as Florida actually overperformed and outperformed our expectations. In Pennsylvania, the company continues to operate its Hanover location. We have now secured a second location in Mechanicsburg. This property is under lease and under construction. We anticipate inspections to be completed in a store opening on July 1. I have personally met with all of our suppliers in Pennsylvania over the -- yesterday and Friday and to -- in order to secure better supply at better pricing to become instead of a 1 store buyer, a 2 and ultimately 3 store buyer. We have also identified now a third location. Lease negotiations are currently underway. These 2 new stores will complement the store in Hanover which is witnessing a dramatic increase in sales due to the development of an online presence and the focus on physician outreach, which started occurring in September or October of 2020. The fourth market is -- focus for us is Texas, the second most populous state in the U.S. and where we are only 1 of 3 of only 3 -- 1 of only 3 licensed cultivators. We've been generating a small amount of revenue in Texas through the state-wide home delivery service and the operations in Schulenburg, Texas continue. The facility is currently a small format with the potential to expand up to 400,000 additional square feet as demand requires. While no Texas revenue is included in our 2021 projections, we believe it represents a great opportunity for growth as the market develops and the medical conditions are expanded by the new legislation. We are tracking and actively participating in the lobbying efforts for the new legislation, which has passed the House and is now in the Texas Senate. Hopefully, the new -- the expansion of the certain aspects of the legislation will benefit our business model and open the market up for Texas. If that occurs and the regulations that follow, we anticipate expanding our development in Texas by late 2021, early 2022. Taking into consideration the expansion of cultivation that was just discussed, the expansion of the footprint in Florida for sales and store location, this company can reaffirm in full the 2021 revenue to be approximately between $90 million and $100 million with revenue out of Florida being at least $70 million and the additional EBITDA -- revenue from Michigan, Pennsylvania and Texas markets. We anticipate the adjusted EBITDA of approximately $30 million to $35 million. We remain firmly committed to driving shareholder value by operating a leading-edge cultivation facility. We have on-premises laboratories, expanding our processing as indicated to allow new and innovative products to bring to market. We look forward to continuing to execute our strategies and appreciate your support and confidence as investors. I encourage you to read the fourth quarter MD&A that we filed with SEDAR earlier and that is also available on our websites. And if you have any questions, I'd be glad to answer them at this time.

[Operator Instructions] Our first question comes from Bobby Burleson from Canaccord Genuity.

Just a couple of questions here. As we look at the non-Florida revenue in '21, are there any changes to the kind of mix expectations you had for the non-Florida states, maybe ex Texas.

The only change I can anticipate is with Michigan. What we did is, maybe we've discussed with you before is I cut -- the production capacity in Florida exceeds the 70 million generated in -- that we projected in Florida for 2021. And I cut it back to 70 million to account for maybe a possible miss again in Michigan. Michigan is a difficult state to factor in pricing. It's one of those states where cultivation is now rapidly increasing. There should be a greater harvest this next year than there was the year before, causing prices to continue to kind of wildly fluctuate. We hope not to see what happened this year with the illegal product -- processed product coming in. The department there has investigated that and those who were doing have been stopped. And so what concerns me, I don't have any concern about our ability to grow the Michigan crop and to produce a similar and even better crop this year. You may recall we got started a little late last year in Michigan, and so the crop, while it was a great crop, it could have been better. I anticipate a better crop. I'm just really concerned about the market forces and the market fluctuation and, of course, as I stated, it's a Croptober state. And so while we’re harvesting, we know what we have, but we don't really have a feel for what everyone else has until probably closer to November, December when we’re ready to sell.

Sure. It seems like the spot market prices at least tracked by cannabis benchmark and folks like that weren't down a ton. So it sounds like maybe other guys were holding back products.

There is a tremendous amount of manipulation. We had -- going into the harvest time, we had secured a purchase contract of just a biomass at 7.50 a pound for biomass pricing, and that buyer walked out of that contract because biomass went immediately to 200 a pound following harvest. And so with that kind of drop, now it's bounced back up, it's closer to 350 to 400. I expect to get to 500, 550 here pretty soon. The material is being used up at a great rate. Michigan is a great state, a lot of big sales. Sales are increasing daily up there. And so the demand is there. It's just -- we just need to figure out or wait for the supply to stabilize and, of course, not be impacted by imports that should not have been allowed.

Sure. And then on the Florida outlook, it sounds like you guys have really sandbag things there to address the potential volatility on Michigan [ in part ]. What are some of the variables that could swing things either way for you in Florida at this point? Is it getting stores open on time now that it feels like your production is going to be manageable and on time? Is it really just permitting and getting stores open in a timely manner?

No, it would not be stores. The -- I think the swing for us is going to be pure construction scheduling. As I indicated, we have 6 rooms working, operating and approved in site of Sweetwater out of 11. Those 11 are under construction. Construction is construction. And we've tried to identify the long lead items like some of the AC systems and so forth. A lot of the light systems and everything come from overseas. So we're little worried about making sure we get -- we [ make ] shipping dates on some of the critical dates. So really what would impact us is the calendar shifting towards the right -- towards the latter part of the year. I have no problem representing. I'm confident that we will have the production capacity to produce the grams that I stated by the end of the year. The question is in order to turn those into revenues, how quickly we can get it up and running? For instance, the greenhouse. The greenhouse is slated to turn a crop by mid to late August. I was just down there. It looks great. Everything looks great, but they could call me tomorrow and tell me some panel or whatever didn't come in. So it's really just construction-related delays that are my risk point at this point. The stores are...

It sounds like they’re all over which is good.

Yes, and the stores are adequate. The 3 stores we're bringing on are going to be online. And so that's 3 more mouths to feed. And that's going to be adequate to meet our sales goals without a doubt. It's just getting that production into the store.

Sure. And then just one last one, I guess, this one's for you, Patricia or Rob, and welcome aboard, Patricia. So my question is just thinking about the cap table and kind of the balance sheet. I know that you guys just released Q4, but if we wanted to have an updated kind of enterprise value for you guys. What's the share count and cash and debt at this point that we should be looking at.

Patricia, you're probably able to give -- go ahead.

Yes, I don't have an updated cap table that I can provide right now, but if you email us on investors@cansortium, I can help with that. On the cash balance, we are not only seeing the funds coming from the 2 transactions that we recently had with the private placement and debt raise. We're also seeing trend increase in cash from operations. So even if you look at 2020, we generated $8.8 million in cash. So we've seen that ramp up throughout Q1 and April with the increase in sales. So we're in a very good capital and working capital position, and we're seeing cash accumulating and with new investments that should ramp up even more in the next few months.

[Operator Instructions] This concludes the question-and-answer session. So our next question comes from Jon DeCourcey from Viridian.

Just one more question, I need to follow up on the questions Bobby asked. With Texas legislation progressing, just had -- wanted to know, any color on kind of how quickly you'd expect that maybe increased sales could occur there? And then how expensive would it be to expand capacity for the Schulenburg facility? Is there something where, with the current capital, you could put something together pretty quickly? Or is this more of a longer-term opportunity that you need to go back to the capital markets for?

So the bill, as I indicated, is in the Senate now. The big political push and pull on this bill is really not matters, which we're pertaining -- which we're concerned with and what -- really what's going on politically is the fight over new entry, Curaleaf and some others and are pushing hard to get an additional licenses. It looks like that is not going to occur. And so we're going to allow -- remain as 1 of the 3. The -- couple of components with regard to [ TC ] potency and also this detachment from the grow facility that is a little bit frustrating. How those come out are really going to kind of predict the answer to your question a little bit better, and I'm not sure yet because it's a political process. But if it proceeds as anticipated, then it will come out in the next 30, 45 days, then there will be a regulatory period. And so I do not anticipate that we would have the regulatory guidance we would need until Q4 2021. At that time -- and coming into, of course, we could maybe see it a little bit better developing down the line. At that time, we’d kind of figure out how and where we would expand. The problem with is if the component of the legislation now which attaches a physical grow to the retail center, right now, that's the biggest obstacle is in order to sell retail to have a store, you have to have a greenhouse attached growing your product, which means if I wanted to be in downtown Austin, I'd have to have a greenhouse attached, which I can't do. And so if that persists as part of the legislation, then we're going to have to get creative. And so what we might see then is a pivot where we don't expand Schulenburg because we really need a multiple of grows throughout the Texas landscape, because we would have to continue to expand grows with our retail, and we can't expand retail without putting essentially mini grows together. And I've looked at a few models of this out in Colorado, where they have a small grow and it's almost like a demonstrative type grow scenario where you're growing a few plants out back and processing, but you’re -- in addition to that, you are producing at a main facility. So it's kind of a vague answer to your question because who knows what's going to come out of legislation. But the answer is, it may not be that we expand a huge footprint in Schulenburg. So if we went to expand to 400,000 square foot in Schulenburg, the answer your question is, we do not have the capital at this time out of this raise and would have to raise additional capital. If we go into this multiple small grows format, we would have the capital to commence and secure some of those smaller locations and start that process. So I hate to give you, it depends, but the answer is, it depends on what comes out of Texas.

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

Thanks to everyone who joined today. I see the list and a lot of familiar names and friends on this list, and I appreciate you guys coming out to listen to our out -- report, and I look forward to talking to all of you in the future.

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