Cansortium Inc. (OTCQB:CNTMF) Q3 2020 Results Conference Call November 24, 2020 5:00 PM ET
Marcos Pedreira – CFO
Neal Hochberg – Chairman
Robert Beasley – CEO
Conference Call Participants
Chris Leshock – Ballast Equity
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. At this time, all participants are in listen-only mode. After the Company’s prepared remarks, the management team will conduct a question and answer session and conference call participants will be given instructions at that time. 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 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 unaudited convince entering financial statements and MD&A for the quarter can be found on the Investor Relations section of our website and also been filed on SEDAR.com.
A reminder to our listeners that certain subjects discussed in this call, including some answers we may provide to questions may included 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 defer materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the Company’s regulatory filing, which can be found on SEDAR.com.
The Company does not undertake to update or revise any forward statements accept for the extend 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 releases, as well as in the MD&A as filed SEDAR.
Our 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 investor 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 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 advisor 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.
Thank you, Neal, and thank 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 a 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 three months ending September 30, 2020, consisted primarily of revenue generated from the Company’s 21 Florida dispensaries that as compared to 16 of Florida dispensaries during the same period from last year.
During the third quarter of 2020, the Company opened its 21st medical marijuana dispensary in Coral Springs, Florida, and then October and November of 2020, the Company opened the 22nd and 23rd dispensary’s in Coral Gables and Kendall respectably. And I’m pleased to announce that the 24th dispensary should be open by December 15 in Pierce, Florida. We will conclude the year with a total footprint of 24 dispensaries for the year 2020.
Adjusted gross profit for the three 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 total $9.7 million compared with $10.5 million of last year’s comparable quarter.
This decrease was primarily due to cost savings initiated during the fourth quarter of 2019 and again in the second quarter of 2020. These included workforce reductions in labor force in certain areas of the Company, primarily cultivation, elimination of certain senior management positions, reduction in 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 three months ending September 30, 2020 compared to 45.3% the same period last year. As a result, the third quarter operating loss total $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 total $1.6 million for third quarter of 2020 compared to $4.5 million in 2019 third quarter, while third quarter adjusted EBITDA total $3.6 million compared to adjusted EBITDA loss of $1.1 million in Q3, 2019.
Based on operating results in 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 of 2020 and first quarter of 2021. The Company currently operates one cultivation center in Tampa, Florida, with approximately 22,000 square foot of indoor cultivation, of which 20,000 of that square foot is in a flowering canopy of six levels. It is a six 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 this license in 2015.
On July 20, 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 three 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 dispensary and footprint expansion, which is adequate for our current cultivation.
Taking a look at Michigan, the end market partner holds four Class C Medical Cultivation Licenses and two 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 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 the next two 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 a more level cash flow in Michigan and also harvest at times in which the market supply is down achieving the highest market price. 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 single dispensary. However, the Company holds permits for a maximum of three dispensaries in the south central region of the state. The Company started a development plan for two 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, one of those two 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 populous in the U.S. and Fluent is one of three licensed 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 it 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 of the operational timing shift and strategic reprioritization that I’ve just described, we project revenues in 2021 at $95 to $100 million and $140 to $145 million for 2022, that would bring an adjusted EBITDA of $30 to $35 million in 2021 and $60 to $65 million in 2022.
We remain committed to driving shareholder value by operating a leading edge facility with on-premise laboratory, on premises processing. We believe that, the addition of the Zolfo Sweetwater facility will bring high quality 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 13th. Our only other competitor Trulieve which was the market leader in Florida, was two weeks behind, and all of the other competitors remain behind as far as an edibles offering.
We now offer three different flavors. We also offer a one-to-one and we’re soon to offer a 5 mg. So, one push of leading the market is 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 have 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 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 graphs, you’ll see, we truly are changing the cultivation progress in Tampa. With that in the ad of the Sweetwater facility, we have absolute confidence of hitting the projected mark for 2021 in Florida.
With that, I’ll turn the call back to the operator and I thank you for your time and consideration.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from William Militello with Militello Capital. William, your line is live. The next question comes from Chris Leshock with Ballast Equity. Please go ahead.
I was wondering if you could walk through what the CapEx needs are for 4Q and then to ’21? And some 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 would be appreciated? Thank you.
Yes, sure. This is Robert Beasley, I think what I’ll do is as handle the big picture side of it, and then ask the CFO, Marcos, to put some numbers in to 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’ve 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 completed 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 two 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 facilities that 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 one string 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 a 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 a 1.2 million.
We will need to complete the Sweetwater Phase 1, as I mentioned, we will also have an implant the expansion of, of Tampa. Tampa is existing 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’s into one consolidated facility, also allowing us the space to move from ethanol extraction to compliment 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 as 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’ll work off of a 16 week cycle and allow them or 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 a $1.3 million is allocated to that.
The final, I think, category, although it’s the smallest of the two of the three that we’ve talked about is the 2021 $450,000 anticipated need for the build out of the two new stores. In the Mechanicsburg build out, 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 are worked so forth, point of sale system and so forth. We allocated 200 for the existing store and then an additional 250 for the same scenario under the expanded store.
So I may, I’ll defer now to Marcos to answer and providing more details, 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 four 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 a $1 million, $1.2 million then the phase two construction will commence. And you see the phase two in the projection numbers. You’ll see the phase two numbers kick 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 timeline. 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 Phase 2 construction costs are not that great comparatively.
Marcos, did you want to add anything to my comments?
Hi, Robert, this is Marcos Pedreira. I think you explain in a very detailed fashion 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, flushing out what the thoughts what the plans are for Texas, and knowing that in every other year cycle on the legislation? When the kind of the drop dead data or approximate timeframe in the year by which either something’s 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 three 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’re 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 as 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 wreck scenario, although I believe it was South Dakota that jumped over those two aspects on this last election.
However, Texas, we hope our major push would be two 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 condition 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 it 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 legislature 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, 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 cultivation center in areas where those patients 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 in an agricultural area. So, just the logic behind separating those two, I think we’ll be successful.
Those three changes opens up Texas, and when it opens up Texas, then we need to be prepared to springboard in. We are one of 3. We’re in the same status as the other two. There is 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. Hope that addresses your question.
Great, that does quite well. Thank you very much. I appreciate the time today.
[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 is where 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.