FLUENT Corp. (FNTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Cansortium's First Quarter 2021 Conference Call. Joining us today are the company's CEO, Robert Beasley; and the company's CFO, Patricia Fonseca. [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 gross profit and adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. These non-IFRS measures are defined in the company's press release as well as in the MD&A as filed on SEDAR. 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.

Thank you, Therese, and good afternoon to everyone. We appreciate you joining us on this call, especially being on a Friday afternoon, heading into a holiday weekend. I want to personally apologize for the timing of the call, which I understand is both very inconvenient and also seems to be the source of some level of unwarranted suspicion about our motives. We'll keep our comments relatively brief today since we recently had a conference call just a few weeks ago. Our first quarter results demonstrate our continued growth and profitability. Since being appointed as CEO in late September 2020, we have continued to generate consecutive quarters of revenue growth and adjusted EBITDA margin expansion while tightly managing our overhead. Our management team has illustrated what I would call complete buy-in to the change initiatives that I was pushing forward and have worked tirelessly to get this company to the point we are now. I want to express my deepest gratitude to the commitment and -- from the entire group of employees that I have experienced in the short period of time as CEO. I outlined several first quarter highlights on our last conference call. So instead of repeating those updates, I'm going to stick with our most recent developments subsequent to quarter end, beginning with our debt and equity financing. In April, we closed on a combined nearly $90 million, which was used to pay down our near-term debt obligations and fund our expansion initiatives in both Florida and Pennsylvania. We now have the capital we need to capitalize on our asset base and proceed with the phase construction plans already contemplated, while driving additional growth of our footprint through new retail locations and expanded cultivation capacity. In Florida, in April, we generated record sales, due in large part to the record volumes during the 420 cannabis holiday, which is becoming ever more popular. The first flower products from Sweetwater cultivation facility hit the shelves in early April, so it was perfect timing for the 420 celebrations. We've rolled out 21 new flower strains as well as sell our new products, and the initial customer feedback has been excellent. That said, we still have some work to do in Sweetwater as we've been operating without some of the key environmental control elements needed to dehumidify the facility effectively. Like every other industry, we're experiencing some construction delays related to labor shortages and material availability with many of our key cultivation components and controller aspects coming from China. We recently received the equipment we need and began installation last week on the final dehumidification components needed for Phase I. We've also commenced in full aspect -- in all aspects, the Phase II construction. I'm continuing to watch the long lead items and get daily and weekly updates from the construction company on the project and so far, it remains on track. Despite the delays in Sweetwater, we have hit several key milestones in Florida, including additional 40,000 square foot greenhouse expansion at Sweetwater, and we should have a first harvest in mid-August with products hitting the shelves in the beginning of Q4. We're also in the final approval stages of the new Miramar dispensary expected to open in the next couple of weeks, while the Deerfield location should also be approved soon in up and running in late June as anticipated. In Pennsylvania, we continue to expect our second dispensary to open first of July. Final inspections are scheduled for the mid-next month. We've also identified in the process of negotiating the third retail location. This would complete the 3 allowed locations under our permit in Pennsylvania. The wholesale market in Pennsylvania remains at elevated levels due to supply and demand imbalance, especially with respect to flower. However, we do anticipate more cultivation coming online in the state later this year as many of our peers in discussions have outlined their expansion plans. We have been in the process of negotiating buy schedules with each of our suppliers to receive better pricing and inform them of our expansion of retail footprint. As well as our ability to house and store more inventory related to our Mechanicsburg vault expansion. In Michigan, we continue to hold the pattern with our 2,600 pounds of biomass and 900 pounds of flower that are prep for sale. We continue to expect selling all of this product in the next 30 to 60 days, and we expect to generate in excess of $3 million of revenue. The market is returning in Michigan, pricing is continuing to climb in both biomass and flower, and we are reaching the end of our hold point on those products. We are also preparing for the next outdoor planting season in Michigan. We have approximately 5,500 seedlings growing at this point and ready to begin the installation towards the vegetative phase. This will put us about 1.5 months earlier than we started last year. This should enable us to capitalize on the peak of the growing cycle, which are the mid-summer months and improve yields and enhance margins during harvest. Lastly, Texas, as many of you have probably noticed and been keeping track, the Senate improved a moderate expansion of the state's medical cannabis program. We were in daily contact with our lobbyist efforts and many of those sessions went to the middle of the night. It was not the outcome we had expected or hoped for, but it was a movement in the slight -- in the right direction. They did expand the list of qualifying conditions to include PTSD, which is key because that is a soft diagnosis. And they slightly increased the THC limit to 1%, which is well below industry standard but is a tremendous movement from the 0.05% that was current. The Senate also added an important provision that allowed the Department of Public Safety to expand the future medical conditions and study of requiring to go back to the legislative process in another 2 years. This means DPS is now in charge of expansion of eligible conditions, which is going to help expedite the program. Now -- the bill now goes back to Texas House could either agree to the Senate revisions to the bill or send it to a conference committee made up of members of both chambers to work out the differences. Regardless of the outcome, we will continue to actively participate in the lobbying efforts and remain only 1 of 3 medical cannabis holders in the entire state. As the legislative process concludes, we will then focus our efforts with DPS directly to work on some of the other market inhibitors such as the connectivity of the retail and cultivation centers that is currently required. As we look ahead, we plan to continue executing our growth initiatives in Florida and Pennsylvania, which will have us nearly doubling revenue in 2021 and nearly tripling adjusted EBITDA with a stronger portion of that coming in the back half of the year as new retail and cultivation comes online. Although this is a very noteworthy accomplishment for the year, we don't plan on stopping at that point. With the assets initiatives we currently have in place and the expansion plans that are currently on schedule, we are well positioned for another year of robust growth and profitability in 2022. We're just now catching our stride and starting to deploy the benefit of the cash resulting from the refinance. With that, I'll pass the call to Patricia so she can walk you through some of the details and financial results from the quarter. Patricia?

Thank you, Robert, and good afternoon, everyone. Jumping right into our results. First quarter revenue increased 49% to $15.1 million compared to $10.2 million in Q1 2020. The increase was largely driven by increased retail footprint in Florida, which went from 19% in the year ago quarter to 24 dispensaries in the fourth quarter -- in the first quarter of 2021 as well as improved throughput as a result of better production yields. This led to a 41% increase in Florida revenue to $13.1 million compared to $9.3 million in the year ago quarter. Adjusted gross profit in Q1 increased 49% to $9.7 million, or 64.2% of revenue, compared to $6.5 million, or 64% of revenue, in the first quarter of 2020. It's [ allowing ] here that this reflects some of the highest margins in the cannabis industry. First quarter selling, general and admin expenses totaled $11.6 million compared to $8.6 million in the year ago quarter. Now as a percentage of revenue, however, SG&A decreased significantly to 76.7% compared to 85.1%, with the improvement driven primarily by prudent cost management. Our first quarter net loss totaled $5.1 million, or $0.03 per share, compared with a net loss of $13.9 million, or $0.07 per share, in the first quarter of 2020. Adjusted EBITDA increased significantly in the first quarter to $4.4 million compared to $0.7 million in Q1 2020, with the increase resulting from strong revenue growth and diligent cost management that I just highlighted. Turning to the balance sheet. At March 31, 2021, we had $3.1 million in cash and $52.9 million of debt, reflecting a net debt position of $49.8 million. However, as Robert mentioned earlier, and as we highlighted in our last call, we shored up the balance sheet in April by closing the $72 million private placement and $71 million secured term loan and in May, we satisfied and canceled approximately $43 million of debt and redeemed $5 million of convertible notes. As of May 28, 2021, we had approximately $30 million in cash, $71 million in debt and a $5 million convertible note outstanding with approximately 267 million fully diluted shares outstanding. We're deeply grateful for the support we have received from both new and existing investors. This renewal access to capital is a reflection of the material improvements in our business, and that means on both an expansion opportunities ahead. This fully funded initiatives enabling us to reiterate our strong 2021 growth outlook, which has as generated approximately $90 million to $100 million of revenue in the year, or approximately $30 million to $35 million of adjusted EBITDA. We also continue to expect approximately $7 million to $8 million of our 2021 revenue to come from Florida operations. Operator, we'll now open the call for Q&A. Thank you.

[Operator Instructions] The first question comes from Bobby Burleson with Canaccord.

So I guess the first one is just understanding that kind of balance between Michigan, caution on Michigan and conservative guidance on Florida. Given Sweetwater, do you still feel like you've built cushion in on the Florida outlook just in case something goes south in Michigan and those trends of price recoveries don't hold?

Bobby. Yes, thanks for the question. I still feel like the cushion is there. One of the things that I didn't do is contemplate what we're seeing with some of the construction issues. And the cushion is still there, as you know, from -- and you've trailed with me this whole time and followed me through this whole process, I took basically the whole entire Michigan amount of projection for 2021, which was a [ 15.6 ] something. And I took it off of Florida almost entirely so that I could completely miss in Michigan because I was so disappointed in the price manipulation that we experienced last year. And so taking that off of Florida, I have that cushion. Now we're not going to completely miss in Michigan. We're ahead of the crop schedule, as I indicated to you, which should give us a much bigger yield next year. Although I have no idea if the Michigan regulators are going to do their job and keep the outbound products from coming into the state illegally. I can't control that. So if Michigan misses slightly, I still should have a good bit of buffer in there for the Florida construction issues, which, again, they're present. I do not see anything in the long lead items that concerns me. We have, for Phase II build-out for Sweetwater. We have all of the long lead items ordered, and we're in process with those. Of course, if you go back to the way this went down is I had built up this construction schedule for production before we had the funding. And so I did it in a multiphase approach. When we got -- when we received the funding, I was then able to go turn on the -- push the green light, if you would, and start the process of putting the phases altogether into sequence. But when we did that, we, of course, had to go back in, call for new estimates on certain materials and products and so forth. And that's when we ran into some longer-than-expected lead items. So over the past few weeks, and I've only had the additional capital for a few weeks now. We reevaluated, reestimated, relooked at the plans and identified those long items and went ahead and had them ordered. As of right now, I still feel good about holding to the schedule, maybe a little bit of slippage in the end of Q2. But right now, I feel like we're on track. The answer -- the ultimate answer to your question is, I still feel like I have adequate buffer.

Okay. Great. And then, I guess, just with the EBITDA guidance, curious if you were to back into kind of a cash balance by the end of the year. Is there anything changing there in terms of unapproved or unplanned change orders in terms of costs that your contractors are giving you, your builders are giving you, that might impact cash flow a little differently than you were thinking at the onset of the year? I know you held your EBITDA guidance, but just kind of curious what -- what's happening with cash, in your opinion, as we exit 2021.

Yes. And of course, we're -- this call is just about Q1, but I can tell you that we are -- I feel real good about our guidance. Our cash accrual and cash management is better than expected as of now, and we're right on track. We have not seen any major -- in the requoting and reexamination of it -- of the construction projects that we have going. We've seen a few time slips, but I have not seen any major cost overruns. We're still pretty much projected on budget on a lot of the projects. One of the projects, which is the completion of Deerfield Beach, it's a smaller CapEx item, but that project is still running under budget by several hundred thousand dollars or about $200,000. The big money is in the major systems. That are in the cultivation centers. Like, for instance, the chiller system, we've ordered it. We locked in that price. It was about $2.5 million, and it was still locked in at the same pricing. It was just the time schedule that's concerning. And everyone's telling me the same thing. I mean I was on most of these big vendor calls and shipping from China, labor, tariffs. It's the same thing everyone's hearing.

There are currently no more questions on the phone lines. This now concludes the question-and-answer session and also today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.