Q2 2020 Earnings Call
Event any background noise.
After the speaker's remarks, there will be a question and answer session. We ask that you. Please limit yourself to one question and one follow up question you May recall you further questions.
As a reminder, this conference call is being recorded and the replay will be available on organic grams web site. At this time I would like to introduce Amy Schwalm, Vice President Investor Relations Ms. Swamp you may begin.
Thank you operator, joining today, our organic Rems, Chief Executive Officer, Greg Angle, Chief Financial Officer, Garik way, and our Chief strategy Officer collagen Luca.
Please bear with US today as we are all doing this call remotely from our homes.
Before we begin I'd like to remind you that today's call will include estimates and other forward looking information and which are actual results could differ. Please review the cautionary language in today's press release regarding various factors assumptions and risks that could cause our actual results to differ.
Furthermore, during this call weve worker to certain non buyer for us financial measures. These measures you don't have any standardized meaning under I for us and are approaching calculating these measures may differ not of other issuers and so we don't eat directly comparable.
Please see today's earnings report for more information about these measures I will now hand, the call over to Greg.
Thanks, Jamie good morning, and thank you for joining us today.
This morning, we reported results from our second quarter fiscal 2020 ended February 29 2020.
Before I begin I would like to walk him Dare to his first earnings call as our Chief Financial Officer, Apollo as our Chief strategy Officer.
Provide some overall remarks on the quarter as well as on current developments and the Derek will take you through our financials in more detail.
All three of us will be available to answer questions before we close the call by no later than money on eastern time.
First of all stepping back a two important messages I want to come through clearly this morning first we're pleased with our continued execution in the second quarter with demand for new products in the market today, including wrecked 2.0, skews as well as new Korstange being produced across the country.
And secondly, we believe we're well positioned what their plans to manage through these uncertain very uncertain times for a number of reasons, which will go through shortly.
Turning to the quarter.
I will use recreational revenue was up 16% sequentially driven by the launch of our first Frac 2.0 products. Despite total revenue being down on lower wholesale revenue.
I don't use rec market is our core business and represents the most significant growth opportunity for us.
We also continue to introduce these strange after these went exceptionally well as limited time offers in the past.
<unk>, which averages about 20% to 25% teach see what's available in Alberta, B C. Qubec, Nova Scotia, any Brunswick in mid to late February.
I was launched in the remainder of the provinces, including Ontario in Q3.
Eldorado or recent addition to our hybrid try to door category averages about 18% to 20% THC and have distribution tall promises in Q2 with exception of Nova Scotia, NBC, both of which are expected to come in Q3.
We expect to continue to see wholesale market demand for indoor grown product over the next couple of quarters, but is not our primary focus and more of an opportunity for us in the near term.
We have continued to diversify our revenue streams during the quarter wrecked one put no products represented about 52% if not revenue.
You 2.0 products, including chocolates and dates represented 13% of net revenue.
So revenue from other large can eating Lps.
Represented 24% with Canadian medical sales, representing 10% initial international sales represented 1%.
The company continues to actively seek opportunities to expand its product mix and customer base.
Second quarter marked a milestone for us the launch of our initial.
Right 2.0 products.
We began shipping trailblazer torch be cartridges on December 17th 2019, right before the quarter close we meet our first shipments of Edison day pens, and Edison bites are premium Kansas Infuse chocolate.
Powered by Feather technology Edison V pads are ready to use inhalation ought to be depends had resigned to offer a simple and intuitive user experience and.
There's a canada's feet 10 company currently selling products in Colorado and.
We have secured exclusivity with them in the can you give mark.
I just didn't bites are premium troubles in both milk and dark chocolate formulations and available as a single chocolate containing 10 milligrams to teach see each.
And a set of two troubles containing five milligrams of THC each.
They're cartridges are third and final deep offering for the premium segment of the market are expected to launch before the end of calendar Q2 2020.
Notably we've secured lifting did all provinces that allow edibles and dates for our ret 2.0 products.
Along with our license renewal received this month, we also paid licensing approval for the remainder phase fiber facility.
Chose a dedicated edibles and derivative product facility.
The market continued to see price compression for Rec 1.0 products.
Our average net selling price held up well and remained above $5 per gram excluding wholesale.
Our cost of cultivation remain one of the lowest in the industry, which better positions us against pricing headwinds in fact, our cost of cultivation decrease from the previous quarter to point to 53 cents program on a cash basis and to 75 cents per Gram olin's.
Q2 gross margin before fair value changes to biological assets and inventories sold declined somewhat from Q1 as we launched a number of wrecked 2.0 products for the first time.
Importantly, we see opportunity to drive improved gross margin as we continue to scale and optimize right 2.0 products in boxes.
Adjusted EBITDA was negative in Q2, primarily due to a large brand campaign for Edison that ran during the quarter and higher costs related to the launch of 2.0 products.
As I've said before prudent cost management is deeply embedded in our culture again from.
We've seen most of our competitors announced executive turnover indoor come complex cost restructuring plans, where we've been able to stay focused on execution and if not face the same disruptions.
However, we're all season, even more challenging time stay with Covance 19 global pandemic, our priority is to protect the health and wellbeing over place. It was clear many facility stuff, we're not comfortable coming into work, particularly if they weren't able to practice sufficient physical distancing even with the additional matter measures we put in place.
There was no longer possible to continue to operate our facility in a business as usual approach. We know we're not alone and other a piece are also experienced employee absent absences and reduced operational activity for the same reasons as such we developed the plan intended to help protect the health of employees and maintain business continuity to service our medical.
Patients at customers.
We offer temporary voluntary layoffs to facility South and those and accepted made up the majority of those temporarily laid off.
Lump sum payments equating to approximately two weeks worth of work have been paid to the affected employees to help bridge the gap to government programs.
In addition, we will absorb the employee pay portion of health dental and short term disability presenters for all employees during this difficult time.
The impact of these temporary layoffs will result in a onetime charge of approximately point $6 million.
We have maintained an experienced group of employees at the facility was skills flexible enough to work on various production in packaging lines as demand dictates.
There were also a select number of administrative and other employees, who were temporary loss as a result of reduced operations and are deemed non essential in the short term to.
To be clear, we did not meet these changes we because we had any employs a tested positive for the drivers.
Third we need these changes because new Brunswick has any worse off another any other parts of the country.
In fact, even though new Brunswick is reported to conducted a 10% less testing than the national ever to date. The provinces reported to have 78% fewer confirmed cases per capita than the national average.
We applaud the actions the government has taken in an effort to extend the virus New Brunswick.
Were protecting the health employees and be proactive in our containment efforts. We believe this puts us in a better position in the medium to long term, while still being able to manage our operations in the near term.
We continue to closely monitor the evolving situation and prepared to make decisions in the best interest our employees balance with long term sustainability of our business.
We have no current plans to reduce medical production as we intend to continue our service our patients who have come to rely on our products.
In fact, just last week, we expanded our distribution with our first shipment to shoppers drug Mart under distribution <unk> distribution agreement, we previously announced in February.
The reduced capacity, we're focusing on the most automating inefficient lines or production and packaging and are able to supplement with finished goods inventory on hand in an effort to meet demand in the short term.
A good example is our Edison bites chocolate truffles with automated production and packaging equipment also we recently started operating a tiers teaser a term means machines. Since we received licensing approval for the remainder of phase five in mid March.
The T zero does the same work as 12 T force and require significantly less manual labor to clean the multiple p. four machines.
It also means that we have to de prioritize certain products lower margins and are those end or those reliant on more manual processes in this temporary period.
Where possible we also shift our production mix to larger format skews as online purchasers tends to prefer those.
We're also evaluating new branded product launches. During this time, we're no longer providing guidance as to launch timing of our new powdered beverage product and anchor artwork, our recreation organic dried flower product.
Although there was being great interest in our powdered beverage from our potential partners is still estimated comprise a smaller percentage of sales relative to bateson chocolates.
Similarly, despite having anchor product ready to package, we need to assess priorities in light of reduce workforce incurred consumer demand.
Right flower bait pens, and chocolates will be or means days for the foreseeable future.
Now turning to current demand.
We've seen an up tick in March sell through as well as more orders from provinces have happened consumers continue to have access to purchase cannabis across the country with most retail stores remaining open we're offering click and collect or curbside pickup.
In addition online sales run by the provincial canvas bodies and private retailers, where applicable are experiencing surges in sales as purchasers adhere to stay at home directives.
As a company we are actively monitoring these 10 trends, but still need more time in data to evaluate just how much is due to pantry loading versus a study a sustained change to purchasing habits.
Well it remains to be seen there's evidence to support canvas demand is just as inelastic as demand for alcohol.
Certainly have a thousand five U.S. consumers by MKM partners found that media alcohol and cannabis where the categories that showed the high syndications of discretionary spending as a result at the pandemic.
There are factors that tend to support increased consumption, even in light of an economic downturn.
It's consumers pare back spending on higher ticket items, such as dining out and travel cannabis is relatively less expensive than still provides erection recreational experience.
Stay at home in physical distance he directives offer more opportunity consume cannabis in private settings, which is what our own market research indicates is to be expected, particularly for edibles.
I would now like to turn to our ability supply. This demand as we announced last week. We believe we have sufficient inventory levels to supplement reduce harvest plans and enough contingency staff to keep packaging.
Intact to meet anticipated demand in the short term.
We also remain comfortable with our current inventory from external suppliers, such as they product hardware and packaging materials and have not experienced any significant disruptions to date.
We provide some detail on the breakdown of inventory in note seven of our financial statements I'd ask you to please turn to that to review our finished good.
Dried flower inventory is largely comprised of higher T C product in our most popular strains.
Further the majority of upcoming harvests are comprised of streams and higher demand, including limelight and Eldorado.
As we have been saying we can you attribute this to the benefit of our early views on retail sell through allowing us to shift our production mix starting in last year.
With that I will now turn the call over to the arc.
[music].
Thank you Greg.
Since I joined early last month. It has certainly been an eventful time in the industry and globally to say the least in any event I'm very happy to be here and look forward to meeting many of you on the call virtually and eventually in person when it it's safe to do so.
I've been getting up to speed quickly and it has helped to have had the vantage point from previously being on the company's board and chair of the audit Committee.
I will begin with some comments on our financial position.
At quarter end, our remaining estimated capital spend on phase five was 11 million.
Largely related to the installation of certain equipment in edibles and extraction area, we expect to spend at a slower pace to bounce near term priorities with respect to call. Good 19.
I really any estimate to spend on days pork is quite margin at about 2 million. We're pleased to see our capital expansion nearing completion. We believe we have built an impressive indoor facility capable of producing high quality low cost flower as well as premium chocolate and other derivative products.
We ended the quarter with 41 million in cash and short term investments.
As of today, there's 30 million Undrawn on our term loan and a 25 million revolve our available to be drawn against specified receivables.
As a quarter and working capital declined to 97 million from 152 million at fiscal 2019 year end. This was largely due to an IRS requirement to classify the long term portion of the terminal to current liabilities because we were in violation of our fixed charge coverage ratio covenant.
We obtained a waiver from our lenders that we it's compliance until May Thirtyth 2020, we are currently negotiating an amendment to the credit facility agreement in an effort to provide flexibility as a result to cover the impact of coping my team.
We reported approximately 85 million in current and long term debt I was at quarter end, which primarily represents the carrying value of the term loan in our credit facility would be mile and the syndicate of lenders.
In December of 2019, we announced an aftermarket offering or ATM program, which allowed us to issue 55 million warrants U.S. dollar equivalent of common shares from Treasury.
We issued approximately 16.2 million common shares pursuant to the ATM program in Q2 for gross proceeds of approximately 55 million.
A weighted average price of 339 per common share.
Although the price per share I, just quoted was in Canadian dollars approximately two thirds of the shares issued were on the NASDAQ exchange with the remaining on the T. effect.
Net proceeds were 52.9 million after agents commissions regulatory and legal and professional fees.
We have used intend to continue to use the net proceeds to fund capital projects for general corporate purposes, and should we pay indebtedness.
The ATM program was completed before quarter end.
Moving to our quarterly results.
Q2, net revenue of 23.2 million compared to 26.9 million prior year quarter.
The decline from 2019 was largely due to a decrease in adult use recreational sales volumes as a result on the timing of the large pipeline fill orders in Q2, 2019, which was to fulfill supply shortages in Alberta, and Ontario, following the legalization of don't use recruiting.
Okay recreational candace.
A lower average net selling price from increased competition.
A provision for returns and price adjustments largely related to candidates oil, which has seen less than anticipated demand in the industry another slow moving product.
This decline was partially offset by the launch of our initial wrecked 2.0 products and continued wholesale revenue in Q2 2020.
Q2, 2020, net revenue of 23.2 million compared to Q1 2020 net revenue of 25.2 million.
Don't use recreational sales were up approximately 2.1 million or 16% offset by decrease in wholesale Ren.
Q2, 2020 net revenue of 23.2 mine was largely comprised of 15 million in sales to the all adult use recreation market 2.4 million sales to the medical market.
And 5.6 million and point 2 million in wholesale and international sales respectively.
This compared to Q1 2020 is net revenue of 25.2 million, which was largely comprised of 12.9 million in sales to we don't use recreation market 2.7 million in sales to the medical market and 9.2 point 3 million in wholesale and international sales respectively.
As Greg mentioned Q2 cash and all in cost of cultivation were 53 cents and 75 cents per gram, respectively and decreased from 61 cents and 87 cents per Gram Q1, 2020 as more economies of scale were realized with increased cultivation capacity and as our.
Yield per plant increased from 150 grams in Q1 to 155 grams in Q2 2020.
Q2, 2020 cost of sales at 15.8 million compared to Q2 2019 cost of sales of 10 point.
8 million higher cost of sales in Q2, 20 was primarily due to more stopping for increased cultivation and post harvest capacity without the benefit of full economies of scale.
Inventory purchase it provision, but also primarily related to legacy packaging.
And thirdly higher cost associated with the launch of rock 2.0 products as a company scales and optimizes production and packaging.
Q2 gross margin before fair value changes to biological assets and inventory sold was 7.4 million or 32% of net revenue.
As we have said in past, we focused on gross margin before fair value change to biological assets in inventories as one of the key measures to assume underlying performance and generally find this to be wasn't investment can you community tends to track.
The Q2, I FRS gross margin was 11.3 million largely due to a net noncash fair value gain on biological assets and inventory sold of 3.9 million versus a net noncash fair value loss at 8.1 million in Q2 2019.
Q2, 2000, Twentys as DNA, excluding share based compensation was 14 million compared to 5.7 million in Q2 2000 line as a company increased staffing and sales and marketing efforts, including a significant brand marketing campaign and higher costs related to the launch of our new rock to pull.
Oh products.
We reported negative adjusted EBITDA of 1.1 in Q2 versus positive adjusted EBITDA on Q1 due to the combination of higher cost of sales and higher SGN. A has just described.
Our Q2 net loss was 6.8 million or 4.1 cents per share.
Diluted basis compared to our Q2 2019 net loss of 6.4 million for 4.9 cents per share largely due to higher SGN a in Q2 2020.
I'll now turn the call back to Greg for closing remarks.
It's fair to wrap up our formal remarks I'd like to summarize why we believe we're well positioned during this temporary period and beyond.
While we believe we have developed brandloyalty and their strong demand for our wrecked 2.0 products, we're rolling out new hire THC popular strange across the country.
Secondly, we forged excellent partnerships and have strong relationships with suppliers regulators interprovincial and private retail.
Customers third we maintain a lean cost structure and a relentless focus on prudent discretionary spending fourth we further strengthened our executive team with the addition of another experienced finance executive and a chief strategy Officer, who is intimately familiar with the business.
If we can supplement reduced production capacity with existing inventory as well as leverage our investments in automation to meet demand in the short term and lastly, we remain committed to focusing on disciplined capital allocation to generate sustainable value for our shareholders.
I'd like to its personally think to regulators as well as government authorities for including Canada in stimulus packages and subsidies in this challenging period, but also like to thank our customers patients investors for their support and last but not least the entire again, a gram team and our board of directors.
With that concludes my formal remarks, operator, if you could go ahead and open up the line for questions.
Thank you as a reminder to ask a question you when each press star one on your telephone to withdraw your question press the pound or hash key please standby will be compile acuity roster.
And our first question comes from the line of Tami Chen from BMO capital markets. Your line is open.
Yes. Thanks first question is just wanted to understand is it at this point your intention should we hire buck the temporary laid off workers. After the Kobe 19 developments go past us or.
Do you intend to wait and see how quickly but for example stores opened in Ontario, before bringing back those workers.
Yeah ticket, Greg carry me I mean, that's a good question. So so certainly an intent to the we restructured this as a temporary layoff I'm. So you know this restriction that manner that we can bring and plan to bring employees back, but I think the timeframe and the cadence of how we bring employees back is going to be dependent on kind of the growth of the market back into place.
It is our attention to bring them back and that's why we've structured it this way.
Okay. Thanks and on my second question is on so I notice you are back 1.0 sales were flat to slightly down sequentially, but I believe in Ontario. The problems I think almost doubled their store count over this sort of period it into March so I would've thought you with.
Since some shelf filling during this period and increased Youre right, one point or sales sequentially. So just any color there would be helpful. Thank you.
We are in Q2, we were still drawn down on inventory that we had placed in Ontario in Q1 and else well as a move to kind of the more high velocity strains as we said limelight and El Dorado and ensuring we moved inventory there. So it was a bit of a combination of both so we did have sufficient inventory.
So certainly for the majority of follow ups of Q2, Ontario revenue was still taking through inventory from Q1.
Got it thank you.
Our next question comes from the line of Andrew personal from Stifel. GMP. Your line is open.
Hi, Thanks for taking my question.
Just a curious how how's your cost profile now change with with the workforce reduction and especially also the licensing assays fives.
Yeah. So.
Start off and maybe I started some color I mean, so we've had a workforce reduction I think we're still assessing their capabilities and exploring you know what impact that's going to have as we've indicated both in our press release related to the temporary layoffs as well as to current you know information in this press releases.
We are moving as much as possible to automated lines and system and so it to make a comment I think you know we can't give guidance yet in terms of what impact that we'll have but it is a shift too as you know as much automated systems and higher skew higher higher large format skews as well where possible on flower.
[noise] had Derek here I would just add that our largest cost is our labor costs and so.
So we have we will achieve obviously the savings from from the layoffs in terms of our labor costs and we obviously that will reduce our total production announced but we do believe that we're going to get some balance as it relates to.
Skews it will be focusing on the product lines, we focusing on but again, we're not in a position at this time to providing any future guidance on exact amounts.
Okay, Thanks and.
Well I are you able to provide maybe some kind of a or distribution between savings on the SGN a versus versus Cogs.
Well, we're not at this point so we just again, we're still working through kind of as we you know we've only now been running two weeks with kind of the reduce structure. So we're not able to give guidance at this point.
Okay. Thanks.
Our next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.
Good morning, Thanks for taking my questions. So I wanted to ask a little bit more about gross margins. So as we look out to the balance of year. How should we think how should we read thinking about the gross margin should we expect sequential improvement versus what we saw in Q2.
Maybe I'll turn that over to Derek Tancer yeah.
Yeah, I, just I don't want to comment too much about future margins, but I can comment that toward the barge and that we have the adjusted gross margin of 32%.
That was after we did allowances for packaging material on on certain product lines and the impact of that was 1.3 million or 5.5%. So there while there's always going to be these types of adjustments it would probably be a larger than normal.
Adjustment to happen in one quarter and without that adjustment the margin would have been on a pro forma basis.
He 7.5%.
And but I'm not going to you know at this point to provide any kind of teacher guidance in terms of our margins.
Right and then a one well I guess one follow up question just on pricing. So I know, there's some pricing pressures within the marketplace right now I've just got just wanted more color in terms of what you guys are seeing and if there's if there's any Tom Ford commentary in terms of how you're thinking about the pricing pressures on board.
Yeah, maybe so thanks rupesh its Greg Karolinska again, so I think where we've seen I mean, we've still maintained an average selling price of product that we're selling into direct market about $5 anything you know we are seeing pricing pressures and we.
No we have always meet the assumption that the pricing pressures would come you know would come.
Because of large skews that were coming into market and we are seem not and I think it's important I understand that some of this competition. You know is being driven out of you know a short term needs from companies, who have had to move product and you know when you look at the price, they're selling not versus what their production costs are.
You know I'm not sure they're actually even making money on some of these products. So not a sustainable pricing strategy beyond the near term I think where we have an advantage. You know we are looking at larger skew format says that our you know our average costs cultivation and all in costs are quite low compared to many of our competitors. So we've got the best of both worlds I guess when you look at it work.
Producing.
Hi quality product as well as on a very low cost. So I think you know I think that's where we're seeing most of the pricing pressure is really on a large skew formats on the Laurent.
Great. Thank you.
Our next question comes from the line of Graham Kridler from H. Capital. Your line is open.
Hi, Good morning, and thank you for taking my questions here I was wondering if a if you could comment on what the ordering patterns from a provinces are looking like given.
The current environment that were that were in I know historically you know we went from larger ordering patterns to smaller more frequent orders now that we're in a situation where it looks like there's spikes in demand followed by you know a commensurate sort of declining demand.
Just wondering if the ordering pattern behavior from the provinces has changed at all and how your responding to that things [noise].
Yeah, I think certainly we saw as kind of stayed home orders started to come into place a pretty significant shift and.
You know in court of demand and you know provincial returns and private retailers were looking to stock up in advance at where with the demand. They were seen I think one of the challenges that we have seen for those with that operate large warehouses like Ontario, Alberta is that they had staffing reductions within those facility as well so even though they wanted soon.
Can them out to products they ended up having to take them, though for a more pushed out period of time. So you know so while the demand there was a sudden kind of increase in demand that we still see very strong online sales and we are still stews hinge on Canada sales. It it has been pushed out even more so that the demand with there but there.
Getting the shipments and was kinda spaced out a little more so in.
In many ways, it's actually easier to manage for companies like ourselves and others to you know to get sequential product and.
You know, we we continue to see strong demand, especially for as I commented, our leading strains and you know our back 2.0 products.
Okay. Thank you and as a follow up with respect to the wholesale market I was wondering if there's been any increase in demand. There given you know I would assume there's a number of operators who are working on a reduced staffing level, which could impact or harvests and given looking at some of the breakdown of the inventory.
That you that's disclosed on the balance sheet. There is there potential for any more opportunistic sales moving forward on the wholesale channel.
So I guess a comment I would give on that Graham is we've had a deferral in downs, we've expanded who we sell to so I mean, we do you have one additional company that we have been selling wholesale to than previous quarter.
And we've had additional inbounds as well so the answer is yes, there's demand there and I think you know again, having that inventory and having quality inventory, which we comment in past is a big differentiator, so but I can't necessarily you know until you completed an agreement until you've made a sale you know that theres inbound interest, but I can't say more than that.
Okay. Appreciate the color. Thank you.
Our next question comes from the line of Chris carry from Bank of America. Your line is open.
Hi, good morning.
Hey, Chris.
So.
I guess, maybe just one question on on the class Whoa, that's what I've, a follow up but I.
I guess this quarter cash burn represent about a quarter of the cash on hand, and then I guess when you add the term loan and the credit facility, which is another.
$55 million.
Having about two quarters of of liquidity relative to the Kasper this quarter. So I wonder if you can help me just.
Understand indicate into cash flow expectations from here.
And I appreciate you know like Capex, it's likely that down perhaps you can provide some visibility there and maybe how operating cash flow. So just big picture there.
You know how you know this cash used for its cash sources light is likely to move over the next several quarters.
Yes, yes, there yeah go out there that's going to refer to you. Please.
Okay, Yeah, Chris I wouldn't say that over the last for the first six months you know a large amount of the of the reduction in our cash position has that related to the Capex. Then, yes, 30 day, a working capital or cash from operations deficiency of 25 million.
To be into February as a consequence of our working capital build but did occur mostly the consequences of unit train bile acid bill, but I would indicate that as that we'd be end of the second quarter or cash was at 41 million we.
Not required to continue on kind of aggressive Capex program.
To complete foreseen, we're talking about a 2 million war that that could be spent a little over the next day period.
And 11 million as it relates to phase five which relates to equipment for edibles and extraction, but thats not equipment that we'd be looking to put in place right away anyway, and we wouldn't even be able to bring the professionals and to assist to two loan if you come in and they get certified.
Because of the cold with 19 and pack and social dismissing. So we have a modest spend going forward of approximately 13 million and got 13 million spend is going to be done and it's going to slow down dramatically from what we spent in the past. So when you consider that and the fact that we have 41 million cash in the second quarter.
That we do have 25 million remaining on the term loan for the credit facility and while there is no guarantee that will be successful and amending the credit facility. We do we do believe that that we will be a success. We just going again to this time. So the combination of that does provide sufficient.
Liquidity and cash that will that will take us past.
That will take us into the future and we always have whenever the company's I've been in situations, where it's a wanted to access other sources of capital. It's always done so when it's required but we don't believe it's required at this time.
Maybe just clarify dark you were referring to what we had remaining on the on the long term debt. So we have 25 million as revolver and we have $30 million on the debt itself remaining so.
Right right, Okay, all right that's helpful.
And then I guess as a follow up it just feels and anything you can be mentioned it as well is it just feels like the adult use business after kind of stormy out of the kids last year and I fully appreciate that that was a pipeline fill up but it does feel like it just has has struggled through really regained you know that that position.
Market that it had before.
And I appreciate the comments on provinces like Ontario are starting to work down the inventory that they have.
But but it doesn't sound to me from the answer to the prior question that.
You are at the point, where your inventory levels in the channel has now reached kind of a clean level that you can start to refill at an area, where maybe starts or retain some some market share and so I Wonder you know just a high level question. If you think it's you know.
Sorry assessment that the business has stalled a little bit and maybe how how you might see things starting to develop over the next couple of quarters and then if I could just sneak one in here I mean do you think that the industry can even grow in your upcoming quarter.
With so many stores going click and collect or is the click and collect that all mines events such that you know the category the industry at large kids can still grow so thanks, so much for those.
Yeah, So maybe I'll take part of that question, Chris and then I'll turn things over to Pollo. So I think you know when you first of all to answer the second part of your question I mean, there's significant the majority of stores across the country. What takes you know and if you include Ontario are still open I'm you know P. I only has four stores they close their stores.
They are doing you don't click and collect or sorry online and then in Ontario. They made a decision to close the stores as you're aware of and then within a couple of days reverted back to click and collect and local and they are going to have local order. So so demands there and I think you know the comment I made earlier, which is interesting.
Is that you know again consumers and you know the population in general has limited opportunities for spat and we've seen and we look at you know I mentioned some of the survey data from earlier, we've seen in the past for example, if you go back there was a major ice storm in Canada back in the late nineties.
On the east coast and in Qubec alcohol sales for the month of the February where power was out for three weeks was the highest it had been for last couple of years at that point, So with limited available use for spending kind of their entertainment dollars. I think certainly did make for cannabis continues to be strong back to your.
First question I think when you look at it you know I think look there was a lot of excitement to rent 2.0 products and you know that has brought an expanded consumer base into the legal market I think one of the challenges has still Dan I'm on the 2.0 products is product availability as we saw one one point a lunch.
And secondly is that the provinces in some cases didnt expect the demand to be as high as possible. So they were you know they wanted to keep their inventory levels down and then make decisions on reorders.
For one of the large provinces. For example, we had reorders happened on our Trailblazer bait pens before that even hit the store shelves because the still demand from the stores was very very high. So so I think the you know there's there has been a lot of excitement and brought new consumers in through the 2.0 products and maybe let.
Pollo out a little bit I know he's he's just wanted to hear as he focuses on.
Hey can you give me okay, yes.
Sure.
Hey, Chris So look this quarter that we're in it is is a you know obviously I'm kind of a one once in a lifetime quarter in terms of the me uncertainty around coded and you know we're just learning right now what's happening in terms of consumer behavior.
You know both you know kind of into pantry loading that we saw you know last month when people were worried that the stores would close down and subsequently.
That hasn't been the case for the most part as Greg alluded to a new we do have a little bit of a different you know world right now, where you click and collect and the province for example, like like Ontario or online ordering so we're monitoring that we're trying to see what's happening there, but we do see some positive anecdotes where for example people are actually show.
The into the legal back and now because they don't want to interact with their black market view, though they don't want to meet the person physically they don't want to change cash which is a concern for people in terms of the virus Friday.
So that's that's all you know to be determined and we know we're going to obviously respond.
Whichever way, we think is best to take advantage of of the opportunity presents itself as a result of that and in terms of that would just the the logistics of the entire market. You know we are depending obviously on the.
The consumer behavior, we're dependent on the ability of the provinces to how do you have logistics in place and not to have disruptions. There in terms of their ability to stock at the distribution centers and so forth. Our view is that this quarter is is.
Difficult to forecast to be you know there could be opportunities for us to the to do well and sort of products and take advantage of opportunities, but we just don't know it's a very unknown corridor, where we are focused as longer term on our core strengths, which as you know to become a leader in the chocolate segment.
Become a leader obviously with some of our new streams, like limelight, and El Dorado, which which we mentioned in the past.
I think one of the things to look out in the in the way the direct market has developed over the last call. It six to nine month, we've seen some of our competitors adopt pretty aggressive pricing strategies and moved to larger skew formats, there's nothing proprietary and what they've done in those segments and then.
We are I should the well the best position to take advantage of some of those opportunities. So we need to toggle our.
You know our SKU mix in our product offering to to participate in that market. We can do so we're going to do so cautiously and with a lot of thought.
But right now we're really our focus this quarter on our best performing products and to use our reduced fourth workforce in a matter which can.
Drive the most revenue for the the least them on cost.
Okay. Thanks, so much.
Our next question comes from the line of John Sam Peril from C.I.B.C. Your line is open.
Thanks, Good morning, I want to go back to the questions would sell through Greg maybe you could talk about your market share in the quarter versus the prior quarter, particularly in larger provinces were there any notable changes among your different cat a different categories and how would your 2.0 products versus one point them.
So I guess, we we don't typically share market share information in part because some of the agreements with the provinces me to prohibit you from doing that so some of the some of the data you see up there's actually a bit of retreat somebody agreements I mean, there as public information on a few of them and and I know, many dallas or kind of access.
Intermediates accessing some to publish but you know I think two comments I would make as I think you know in and certainly with our 2.0 products launch you know RV portfolio, starting out with a trailblazer and then adding in the feather pen has had a strong position. There was one company certainly that has went with the price.
Try to Jon Bates and they have it very they which you know in Ontario for example, they would be the leader you know when one of the other Keith comments I would make on vape says.
You know we've seen challenges from other companies right with leakage and with product returns and that's not an issue. We face then I think it's important to contemplate that that we've really focused on very high quality suppliers, we've added our suppliers.
We know that there's not performance issues or leakage issues or have you know leaching and those are critical for us.
On our chocolates you know still early days, we only shipped at the ended the quarter. Our first couple of shipments I'm you know into this quarter, we've been getting significantly more product out, but I mean, there were a provinces like Ontario that when a few weeks without our chocolates available.
So demands in there and I think you know we're seeing a shift as we alluded to and then we've allowed.
Our production capability and capacity will you know we've we've we've really shifted our you know production to our core strains and we you know who is one of the advantages of being a leader last year in kind of in the first couple of quarters as we got information about what those course screens are so our real Bravo.
And our let's try to our strong strange for us, but then subsequently we did these onetime offers with limelight in El Dorado, and we've had really strong response them. So we've got additional strains that we're going to do onetime offers with as well that are you know high T.H.C., we believe will be somewhat unique in the market and you know again.
The ability to shift again to those products I think is going to continue to provide assistance for us.
Okay. That's helpful. Thanks, particularly on the LTL and seems like that's kind of an untapped part of its market.
My follow up is going back to the balance sheet.
And a cash burn what do you expect in terms of investments in working capital over the next couple of quarters and generally newer fast forwarding to next 12 months, what do you view as a normalized maintenance capex number.
Yeah, I mean first I mean, it's important to kind of.
Maybe answer the first part of it like from a from a cash flow perspective, I mean, you know we ended the quarter was 41 million as Derek outlined earlier, we have limited capex remain need to spend and you know that 2 million on foresee to get it up to fully functional and not all at the gross operating but is it like saw occupying the space and then 11 million on.
Phase five which you know as noted the spend on that will be a delayed because of you know some of the Oems and working with them to get kind of equipment certified to be operating it. So so we've got really at the end of our Capex spend which is one of the most important things. So you know I think it's you know we feel we have a strong.
Balance sheets at this point in the market relative to peers is personally with having $30 million undrawn debt capacity with with BMO and the and the syndicate I mean, there's still no guarantee we can draw that 30 million, but we're certainly working closely with them to be able to do that but Derrick I don't know if you want to add.
Any any commentary.
Yeah. Thanks, Greg I just wanted to add this is an ugly as it relates to the working capital even in our receivables 'em, we have a government HST refunds from the prior Capex spend that we've already done that's being realized during the third quarter and also with working capital our earnings.
Dorian bio assets are already fairly significant on or balance sheet, and we would not.
Where we have gotten the reduction to our workforce and we are emphasizing focus on moving the inventory that's there and producing.
Near term saleable product, we're not anticipating there'd be a cash stream as it relates to further investment into our working capital She's hasn't general comment based upon.
The the reductions for the stock and production levels combined with the some of the near term realization on the working capital.
And John maybe just add to the earlier question part of your question about maintenance Capex. So we don't have a general rule of thumb because you know well. This is primarily a new facility. That's been really built over the last couple of years, we expected to be low single digits percentages against the total Capex right you know where we live.
George equipment is new and other than kind of standard maintenance I mean, we're not in replacement bode I think you know even on our irrigation systems in the last two years, we've had to replace one pump.
And we have redundancies and ever so so again I think just based on the age of it you typically might see a maintenance.
Capex, that's you know into 4% to 5%, but we significantly less cannot based on what were seen to date and based on the age of equipment.
One thing I didn't comment on earlier and I think you know it was in the school you know it was in the kind of prepared primark remarks that we made but you know we have not tapped into any government opportunities and you know I'd say one of the things that you know now that with weights on Steve's and not being offered and candidates industry being included in that and that was a big.
Win for our Association and I know Cameron Bishop who is our VP of government relations worked really closely with government or not.
I think there's also opportunities for for us and for the cannabis industry, both federally and even provincially to to look for.
Some assistance during this period if needed and I think you know I think that's kind of be taken into consideration as well I mean I'm. You know there are significant funds available and I think you know there there it's definitely not pertain to access some of those.
Okay. Thank you very much.
Our next question comes from the line of Matt Bottomley from Canaccord Genuity. Your line is open.
Yes, good morning, everyone.
Provides us a little more color on the nature of the fixed charge covenant and is.
The plan right now right just to negotiate with the lender or is there anything that's remedial in the interim that can be done independently.
Yeah, Eric here, its just standard cash flow covenant in a sense that you get a certain amount of EBITDA to cover the future debt service on the on the term loan on getting 5 million.
And we did not meet our Q2 covenant just looking at the trailing 12 month as a consequence of.
I haven't done metric not achieving the standard that had been set on their words reasons for that as we've already outlined doing not in our presentation of the information during the call I would indicate that we've already been had been in discussions with the lender and since it came to our attention that this.
What is going to be an issue for you to filing.
And then they very quickly move forward and obtain the approval of all the lenders in the simply can't to provide the covenant waiver.
And Jeff for our celebrity time anyway, and that was part of our disclosures.
Going forward, we're still midway through on these negotiation they provided the forgiveness, which until we file our Q3.
The lucky to balance sheet and so until then they can be first period and as mentioned we're in discussions with them now and while I cannot provide any guarantees are based on are working assumption. We don't believe this would be and issue based on those discussions we've had with them today.
Great. That's helpful and there's been a lot of good color on this call as well with respect to some of the the assumptions and inputs year on.
Various parts of your your income statement the follow up I had it is more on the S. DNA part. So I know you touched on this briefly already but just with respect to you know paring back to the only or you're up operational.
Planting and et cetera, with your existing facility.
But also with some of the pair back as it relates to coded what's the best way for us to look at that DNA line. Obviously, there was a ramp up this quarter in relation to the launch of 2.0 and all the things you've been doing with your vacations et cetera, maybe the next six months, what's the best way to look at this from a volatility standpoint, given that it seems your existing.
Operations, now or right around that that breakeven on adjusted EBITDA. So just looking for what might make it plus or minus on that breakeven in the next couple of quarters with respect to your estimate a plant.
Yes, I guess I alluded to this earlier, Matt is that you know it's still its still early in challenging to give a prediction I mean, yes. We you know we've had to put a reduction in our workforce and certainly there's savings associated with that.
It does impact our operational efficiency, which is why we've moved too you know the most automated systems and lines and.
Focused on those as a way to you know best utilize the staff and personnel we have.
And I think that.
That is way for us to optimize both the inventory we already have in existence, and then going for continue to get products that give us.
Really the greatest return for the amount of labor hours that we have available and that's how we're now happy that but as you know as I said earlier, we're only at a couple of weeks into this adaptive workforce I think you know the one thing we are planning.
You know again is because again as I commented we have.
Flexibility based on our production costs is to bring a larger skew product into the marketplace and not spend in the plan for soon if amount of time it would've been on the market already had we not hit.
You know some of the challenges around Cove, it 19, but so I guess I I not fully answered your question here, because it's very challenging for us to predict that may not.
And in many ways, we've we've taken savings and we've also looked at where our spends are and.
You know relative to for example, marketing programs and you know, we're focusing very much more on kind of digital programs, that's online increases and less on some of the other programs. We've done historically so you know it wasn't just temporary layoffs for health and safety. We also in conjunction with that looked at our production output.
And what we can actually get up to market, although we do have significant inventory so.
Great very helpful. Thank you.
And our next question comes from the line of debt Meetme from RBC capital markets. Your line is open.
Good morning.
I just wanted to follow up it's yeah, yeah, right with respect to something you just said a minute or to go.
And that is there's no guarantee that we can draw down on the 30 million did I hear that correctly.
Well, there's no guarantee because it's a future event I'm, just stating a a factual comment we are in discussions with them. However, we have had very positive discussions with our lender group has led by has led by depot and they are responded very quickly when we did to provide the way.
Hi, Covenant waiver letter when we had asked for and they have indicated a.
The willingness to hear from us on what on what the renegotiated kind of Saudi would look like and clearly as we do this negotiation.
We're going to bear in mind or what we believe the EBITDA would be on a go forward basis based upon the cobot 19 and back to our business to the industry and and I'll be factored in but I, just indicating the obvious that until we've done the renegotiation.
I cannot guarantee it, but where it's reasonable for us to assume that there's not going to become an issue based and all the indications they provided to us.
Okay perfect.
And then.
When you think about the in my own a product that you or harvested in this leaders quadrant almost 14000 kilos.
I believe you sold about 4000, the that just over 4000.
Is the remainder going for extraction, and maybe you could tell us weight.
Your extraction not keep adobes, but the deals you have with your partners.
Are those fixed in stone do you have to continue that and extract from large part of.
Where your harvesting and where it could be the impact of costs there.
Yes, so it's a good question Doug Greg here. So the you know so our agreement with Allen's who is our contract extraction facility doesn't have any minimums or requirements. So we have use them and and have plans to continue to use them in the future for.
Ken.
But you know at some point in the future we won't do all of our extraction in house when the phase five extraction is fully operational and certified.
For the time being we've got you know months worth of many months worth of extract concentrate built up.
We are simply just storing the extractable material before we.
And we don't need to send it to balance because it certainly will be more cost effective to.
To your extracted in house, but you know so to answer the question I can't give you an exact number on the inventory.
You know that we had a available beyond the quarter in terms of what will go but I mean part of our right.
What supported our decision making around doing temporary layoffs for health and safety reasons was we knew had we had sufficient tried flower inventory that we could you know package and get out into the market and we could reduce kind of our cultivation footprint.
Temporarily because we had that inventory in a lot of that is in you know I teach see in high volume demand strains limelight and Rio Bravo and Eldorado Stroud. So so we're in a good position in terms of converting a significant portion or parts of that inventory into sellable product.
Okay perfect. Thanks very much.
[noise] and we have time for one more question today from the line TV to decoupled from Altacorp capital. Please limit to one question. Your line is open.
Hi, good morning, everybody congratulations on the quarter and thanks for taking my question I just wanted to circle back to one of the points in ground made regarding wholesale revenue just not even necessarily specific to organic growth, but as the industry as a whole I'm just wondering given given your remarks, Greg, but you know consumer our loyalty and Brad.
They're going to scepter and how they are loyal to organic or Oh for your products in particular.
What are your thoughts about different LPG selling to different LP is through the wholesale revenue metric and at the consumer is actually purchasing a product like anagram, but it's actually coming from a different LP or vice versa. How relevant do you think that is for the general branding and consumer loyalty across the board.
Yeah no. Thanks for the question, David So I think when we look back and we had not historically before Q1 sold product wholesale and we looked at a very opportunistically. We started to get information back in Q2 of last year regarding which of our strains were in higher demand and which ones weren't but as you know it takes many many months to change.
In cycles. So we ended up still having production of some of the lower selling just skews right in terms of those flowers and what was available. So we we had been getting inbounds from companies that we're not satisfied with the product that was available for wholesale out in the market. So we made a decision to take those products sell them to another LP and.
As to the couple of comments that were made earlier about.
That not meet as well, though kind of onetime offers we do see that's still the can you know there's there's consumers. The same way that you know if people if your wind drinker. If your beer drinker you know there's your kind of winds that you by consistently but everybody will try different ones that I think during the Canada space, There's a lot of kind of interest and demand and onetime or whats new.
So it's a combination of brand loyalty, but also testing much news. So so there have been some opportunities where companies can take product that.
It was not in high demand under our brand they've taken it and put it out and it comes out as a new product under their brand and I think that's where you know.
Some of those products been used and that is why as I said earlier, our plan to kind of introduce new genetic cycle them through under onetime offers to see what the demanded responses and if it's really strong like on our limelight to increase it into moving into a core offerings. So that's how wholesale really has been structure and government government is that it was going to other Lps.
And they're putting their own brand, but it goes in is kind of a bit of a new products. So.
Ladies and gentlemen, this will conclude today's call. We thank you for your participation you may now disconnect.
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