FLUENT Corp. (FNTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Cansortium's Second 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 over to Mr. Robert Beasley, the company's CEO. Sir, please go ahead.

Thank you, and good afternoon, everyone. We continue to generate strong revenue growth in the second quarter, stemming from both new store openings in Florida and organic growth while generating positive cash flow for the seventh consecutive quarter. We also recorded our first revenue contributions from our early efforts in Texas, marking a key milestone as we work to establish a strong foundation in this high potential market. Looking at our second quarter and operational highlights. In Florida, we delivered another consecutive quarter of double-digit year-over-year revenue growth, with revenue in the state improving 11%. This was driven primarily by the 6 new store openings compared to the prior year. However, a majority of these stores are still ramping up and are yet to reach their full run rate potential. Last week, we opened our 33rd dispensary in Jacksonville. And we plan to open another 1 to 2 new stores by the end of this year as we seek to gain additional market share in the state. We continue to see improvement in our cultivation in Florida as we focus our efforts on producing more high-quality, high THC products to improve -- include concentrates, which should be rolling out by October. On average, THC percentage is now over 24%, which enables us to stock ourselves with products that command higher prices. Fluent is gaining a reputation for high-quality flower in Florida. Although we are seeing some price compression in the market, our improvement in flower quality and mix has led to an increase in store traffic and in the transaction counts as well as an increase in flower and market share over the second quarter. We just completed a move of our headquarters from Miami to Tampa. We expect this move will create 30 new corporate jobs with an average salary of $100,000 and are excited to join the city's expanding business ecosystem. As many of you know, our manufacturing and production facilities are in Tampa, and this provides for a consolidation of our executive and top level management. Moving to Pennsylvania. We once again generated meaningful organic growth in this state due to our inventory optimization efforts and expanded product assortment. Our efforts are now fully embedded into our Pennsylvania operations and have helped establish a new baseline for gross margins and adjusted EBITDA in the state. These initiatives have helped insulate our business from the ongoing price compression impacting operators in Pennsylvania. We are currently exploring several partnership options to expand our market footprint in Pennsylvania at this time. In Texas, we -- our efforts have begun to bear fruit as we recorded our first B2B sale during the second quarter. We're in the early operations of ramping up in the state. We continue to believe that Texas has the potential to become a top cannabis market in the long term and are pleased to see this progress validate our position as a first mover. Despite the lack of regulatory progress, we remain optimistic about the prospects for positive market developments. In the meantime, we are working on getting our first brick-and-mortar delivery center in Houston open. We expect this to open by the end of '23. This location will be instrumental in serving patients in the Houston area and provide as an education center. And we've now begun delivery progress in San Antonio and Austin. Subsequent to the quarter end, we appointed John Mazarakis to our Board of Directors in July. John brings over 25 years of entrepreneurial and operational and managerial experience to the company, and we look forward to leveraging his diverse background as we grow our footprint. As we progress through the second half of 2023, we'll continue to drive profitable growth in our existing markets and open new stores, improve our cultivation and manufacturing operations and advance our ongoing inventory optimization. We remain optimistic in our approach to M&A, and we'll continue to evaluate new market opportunities. Although the broader landscape for the cannabis industry remains challenging, we are well positioned to deliver another year of revenue growth and cash flow generation as we continue to execute on our objectives. I'll now hand it over to Jeff to go through our financial highlights.

Thank you, Robert, and good afternoon, everyone. As Robert mentioned, we're proud to report another period of revenue growth and our seventh consecutive quarter of generating 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. In Q2, revenue increased 9% to $24.4 million compared to $22.4 million in the second quarter of prior year. The increase was largely driven by organic growth in Pennsylvania and new stores across our Florida operations. Gross profit before fair value adjustment for the quarter increased 5% to $15.8 million or 64.6% of revenue compared to $15 million or 67% of revenue. Operating expenses in the second quarter were $11.3 million compared to $8.2 million, attributable primarily to higher sales and marketing costs for new store openings as well as higher depreciation and amortization expenses arising from capital expenditures for our cultivation and manufacturing facilities as well as for our new store openings. As a percentage of revenue, operating expenses were 46% compared to 37% last year. We expect operating margins to improve as our new stores ramp in the coming months. Adjusted EBITDA for the quarter was $8.6 million compared to $10.2 million, with the decrease primarily attributable to increased SG&A related to the new store openings that are still ramping. Cash generated from operations during the second quarter was $4.8 million. And at June 30, 2023, we had approximately $8.8 million of cash and cash equivalents and $59.3 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.

[Operator Instructions] The first question comes from Russell Stanley with Beacon Securities.

First, just on Florida, wondering if you can provide any update on the cultivation opportunity you spoke to on the May call and what the time lines and updated CapEx forecast might be on that.

I'm sorry. Do you hear me on that one, Russ?

Nope. Just hearing you now, Robert. I didn't hear anything.

Okay. Yes, had a bleak out there. I'll start over on your question. So we have 2 parallel properties going at this time under contract. They both have fairly long due diligence items or tails on them. One is referred to as the Williston Middle School. It is up in Williston, Florida. It's a large campus. It's 20 acres. It's an existing former middle school. The hang up on that currently is it has to undergo with zoning process because it's zoned as a school. That is taking a little bit of time. And we anticipate in the next 30 days going into the hard due diligence aspects of that property. At the same time in a parallel process, we've identified another property in Tampa, Florida, which is adjacent to or catty-cornered to our existing facilities. It is under contract and we're going through due diligence now. The difference between the 2 projects is both size, scale and cost. The Tampa project would be a quicker build out. It would be a smaller initial footprint. An initial footprint would be about 20,000 of cultivation space, but the properties adjacent to the existing facility has an existing infrastructure, it's a much quicker build and a little bit cheaper build. The Williston would be a longer scale project with the initial first phase being about 25,000 of cultivation space over 3 buildings with additional 150,000 square foot of indoor space available and of course, the bulk of the 10 acres to put a greenhouse on. So you could see the differences in size and scope of the projects. At this point, right this minute, I cannot tell you which one is the leading candidate. I suspect it's going to be the Tampa property, smaller, faster, smaller first step and cheaper would be kind of the direction we would head, and we might just continue to work on Williston over time.

That's great color. And maybe just moving on to the OpEx comments you made, and I appreciate the opening of the new stores, I guess, sales and marketing being an [ overwhelm bonus ] there up to, I think, 23% of sales in the quarter. I'm just wondering is all of that recurring, might any of that some or all of it be really launch costs that might prove to be nonrecurring? Or should we look at this line item gearing in Q2 as being representative of what you'd have to spend going forward?

I'd say about 6% to 8% of that increase is onetime cost advances. We have developed some new and purchased some new software systems, some new marketing systems and some new marketing hardware equipment and so forth. So some of the marketing efforts following the hiring of our new Marketing Director, he changed the programs a good bit. He moved a lot of that outsourced work in house and has redesigned the marketing department. That took some initial cost. The remaining of that increase probably becomes a consistent increase in cost because it really relates to staff.

Got it. Maybe 1 more question, and I'll hop back in the queue. Just on Pennsylvania, you noted discussing partnerships, opportunities to expand your footprint there. Just wondering what you're seeing in terms of M&A and specifically given pricing. Just wondering, we are from a range of the large MSOs, some noted signs of price stability and others were a little less bullish. So wondering what you're seeing in this market and if that's kind of contributing to the time being opportunity to look at M&A with price finally flattening out, if that's the case.

I would support the idea that pricing has stabilized in Pennsylvania. There was a tremendous shift last year from what I call the mom-and-pop production facilities as the bigger MSOs brought their facilities online, it really disrupted the wholesale market. And then as the larger MSO started for supplying their own and then created in excess for wholesale, we now see that there's been a shift, but now that the products -- the supply has increased, the pricing has really stabilized. What this has done is created M&A opportunities over in that small venture mom-and-pop scenario. Those facilities that do not have a retail outlet, they are now growing, but they're selling purely wholesale. They're facing fairly steep headwinds in the wholesale market. Their customers, which were the larger MSOs now are growing their own. And some of those facilities, quite frankly, are overbuilt. They're overbuilt for what was the wholesale market that no longer exist. We keep hearing rumors of change. We keep hearing rumors of adult use. And with that adult use, we anticipate additional retail licenses. Every version of the adult use change seems to have some level of additional retail. This should give some relief to those mom-and-pop individuals -- individual facilities that do not have a retail outlet and should basically help pricing and help the consumer in Pennsylvania. But we're not there yet. We're in between those 2 stages. And so our M&A opportunities are still focused on the independents, who do not have a connectivity or a retail outlet.

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.