Q3 2020 OrganiGram Holdings Inc Earnings Call
At this time I would like to welcome everyone to the organic Graham Holdings Inc.'s third quarter 2020 earnings conference call. All lines have been placed on mute to prevent 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 if you have for their questions. As a reminder, this conference call is being recorded and a replay will be available on organic grams web site. At this time I would like to introduce Amy Schwalm, Vice President Investor Relations Maam. Please go ahead.
Thank you Lisa joining me today, our organic grants Chief Executive Officer, Greg Angle, Chief Financial Officer aircraft, and our Chief strategy Officer, probably couldn't.
Before we begin I would like to remind you that today's call will include estimates and other forward looking information from which our actual results could differ.
His review the cautionary language in today's press release regarding various factors assumptions and risks that could cause our actual results to differ.
The more during this call we will refer to certain non IRS financial measures. These measures do not have any standardized meaning under I afrezza and our approach in calculating these measures may differ from that of other issuers and so we don't be directly comparable.
Please see todays earnings report 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 for our third quarter, which ended may 31st 2020.
I'll provide some overall remarks on the quarter and discuss some recent product launches and then Derek will take you through our financials in more detail.
All three of us will be available to answer questions. Following our prepared remarks.
For Q3 fiscal 2020 results reflected some challenges that we've had and that the industry is raised as well those that were exacerbated by corporate 19th.
Some of these headwinds are temporary.
We've taken several key actions as an organization, which we believe will lead to improved results moving forward.
As we've continued to see progress in the efforts to contain cobot 19 in Atlanta, Canada. It's important to keep in mind that Brunswick, where facility is located took early and decisive action in the battle against called it.
Since the start of our Q3 align closely with the actions taken the province as well the action taken by our organization to protect the health and safety ever employees and their families our ability to launch new products. According to our original plan into supply existing product lines was hindered.
For example, we needed to pause pre roll production or product line, which comprised 14% of our revenue in our Q2 2020.
Recall that for most of Q3 the company was working with a substantially reduce workforce as a result at a global pandemic, we announced in early April that about 45% of our workforce were temporarily laid off in an effort to protect the health and safety of our employees.
Well for physical distancing, what's in the facility.
We began recalling some of the temporarily laid off employees in mid May ultimately, we laid off approximately 25% of our workforce in order to better align with prevailing market conditions.
Unlike many of our peers, we had overbuilt and we're we're producing for the current market demand, which resulted in the asset impairment and somebody inventory write offs, we faced this quarter.
However, we have a strong track record and proven history of managing our costs compared to our peers.
Notwithstanding the write offs many them non cash to the quarter.
We were able to generate positive operating cash flow in Q3.
We were able to do this even before we right sized our labor force and despite softer revenue in the third quarter.
Now we are moving forward with a liter workforce and only modest capital investments remaining to complete the plans for our facility.
To drive the troubling.
We have a very focused strategy one that prioritizes competing successfully the drugs watermark in Canada, which is the largest product segment in Canada.
And the strategy that ensures a continued focus on rec 2.0 products as that market evolves.
We are in the middle of a revitalization of our product portfolio and have launched a number of new products with more to come in the near term.
Which we believe have the ability to compete with the mark with the market leaders in their respective categories.
We estimate 18 additional skews will be launched in the next six to eight weeks alone.
Now I'll provide a little more context on revenues and gross margins for this past quarter.
As we disclosed in our press release earlier. This month net revenue declined sequentially from Q2, largely do significantly less wholesale revenue as order slope.
To date in Q4, we have already.
See reorders for wholesale revenue and recorded also revenue.
In Q4 fiscal 2020.
We also expect to start shipping to Canada subject to the receipt of an export license.
And dock is one of the Israel's largest medical Canada's producers.
In terms of the agreement with them, we will provide a guarantee 3000 kilos by December 31st 2021 for processing in distribution into the Israeli medical market.
We may provide an additional 3000 kilos during the same time period at their option.
Q3, I don't recreational revenue was up slightly from Q2, excluding provisions Q3 RAC revenue increased.
14% from Q2 2020.
We've conducted consumer research and leverage the detailed analysis consumer purchasing behaviors in an effort to better align or products with evolving consumer preferences.
Although we launched a number of new products in Q3 fiscal 2020 as previously noted some product introductions were delayed from the original expectations did the impact of cobot 19 on commissioning equipment indoor due to our reduced workforce.
We have noted the significant growth and to drive flower value segment of the adult use recreational market, including including the larger skew format offerings competition continues to intensify and new entries have caused substantial market share shifts within that segment as well as an overall shift from the mainstream devalue segments within the dry flower category.
Value priced products in larger format sizes became increasingly popular during the pandemic as consumers look to pantry loading the early stage and later became more comfortable with ordering online.
We expect this trend to continue during the pandemic. Unfortunately, our increased offerings in the value segment and in the largest Q formats, where later to launch than we had expected.
This was primary primarily attributable to reduced workforce and delays on packaging equipment and some new packaging materials do the cobot 19 disruptions impacting the global supply chain in late winter to early spring.
Notwithstanding these comments, we have and continue to roll out value enlarged Q offerings.
During the last week of April we launched trailer park, but our first value price product in a large format size of 28 grams.
We believe we're offering a differentiated product, which doesn't just compete solely on price.
Trailer park budgets, so strange specific dry hole flour and as indoor grow unlike much of the greenhouse competition.
It'd be very well received since its launch and sold out in many of the early entry provinces.
After discussion with health, Canada phone to lunch, we decided to make changes to the brand in the Logan.
There was about a month of supply disruption, we change the interim branding from trailer park buds to simply buds.
In Q3, we had listings in Alberta, and five other small provinces.
And launched in Ontario last week, where do you will see the interim buds brand until we have the new permanent brand name in market.
But should be available on the associates website, you know and on in Ontario retail stores later this week.
For come back our value line in large format offering is expected to be ended the trailblazer brand and anticipated to launch in Q1 of fiscal 2021.
The trailblazer brand, whether only value priced offering until now in the one gram 3.5, Gram and pre roll format.
We recently launched trailblazer dried flower in larger formats sizes of seven Gram at 15 Grant.
The brand offers hard to you'd see potency from when we originally lunch trailblazer, just stop directly utilization I competitive price point.
Subsequent to quarter and we also began rolling out further line extensions on her Edison brand strange specifically in June of 2020, we extended our most popular stream such as Edison Limelight has the blue belt, but blue dolphin to offer new size formats, and three talked pretty roles.
Lastly, we anticipate launching nucor strains with higher potency THC in Q4 2020.
These new strange will be sold under the Essam brand it won't butanol, Peter the brand.
Turning to the rack 2.0 market.
Sure enough fiscal Q3, we launched our premium be product Edison plus packs air cartridges, the last of RV products to launch and rounding out or be portfolio, which addresses the value mainstream and premium segments of the market.
We're excited about the upcoming launch of our high quality value chocolate bar under the Trailblazer brand. This will be our second second product offering in the chocolate category. After the introduction of our premium Edison bites earlier this year.
We believe the trailblazer chocolate bar superior quality to the currently value brands and will be available at a competitive price point.
The bar will be available in two flavors first moca chocolate and soon thereafter mint chocolate and both expected to launch in Q4 fiscal 2020.
We now expect to launch our powdered beverage product in Q1 fiscal 2021 after facing delays in part due to cope.
As we've said there has been a lot of interest from potential category buyers in this product, we acknowledge that beverage category still relatively small, but it's been fast growing this dissolvable potter can be attitude beverage or the consumer choice in is anticipated to provide an initial absorption of cannabinoids within as few as 10 to 15 minutes.
In summary.
We have a lot of new entries in tables that drive flower market and the rest 2.0 market in Canada, we look forward to them getting traction over the coming months.
The consumer walking into a retail store or visiting online web site in August this year should see an improved and expanded product offerings organic Graham compared to earlier in calendar 2020.
I'll now turn the call over to Dare to go through more details on our financials.
Thanks, Craig.
I will go a little deeper into our quarterly results and just I start financial position.
Third quarter net revenue was 18 million compared to 24.8 million in Q3 2019.
Merely due to an hour flower sales volumes and a lower average net selling price as well of the net provision for sales returns and price adjustments of three month.
Sequentially Q3, net revenue decrease from Q2, largely due to less wholesale revenue as Greg mentioned.
Q3, it don't use recreational net revenue of 15.3 million was up slightly from Q2 rack not ready with 15 Tony.
Excluding provisions Q3, net revenue increased 14% sequentially to 18.3 million from 16 million in Q2.
Q3, 2020 cost of sales was 44.4 million compared to 12.5 million insane prior year quarter, primarily Judy noncash inventory provisions and Colgate 19 related charges.
We wrote off 19.3 million and executing on Sellable inventory, which 11.9 million consist of a provision related to access trend and concentrate.
We haven't destroyed the inventory provided for we have determined and inventory could not be sold within a reasonable amount.
The other 2.87 million related inventory write downs to an estimate of net realizable value on account of declining market prices.
Lastly, 7.9 million of charges related to a reduced workforce due to cold at night cheap.
This amount was comprised of 5 million per plant, calling due to insufficient workforce to manage ranch in various stages of their growth cycle.
2 million and Unabsorbed fixed overhead as a result of lower production volumes and point 9 million, mostly for lump sum payments to temporarily laid off workers to bridge them until they could receive their certain benefits.
Gross margin before fair value changes to biological assets and inventory sold was negative 26.4 million compared to a positive 12.3 million in Q3 2019.
Due to lower net revenue and higher cost to sales as I just described.
Q4, 2020, we do expect an improvement to gross margin before fair value changes to biological assets and inventory sold as we anticipate there will be fewer inventory provision then as compared to Q3 2020.
As indicated in prior quarters, we do expect some production inefficiencies to persist and impact gross margins in the near term, while we continue to launch new wrecked 2.0 products and optimize production.
Our ports real revamped was only partially complete and we expect to gain efficiencies when the product launch schedule normalizes.
A negative noncash adjustment to cost of sales for Unabsorbed fixed overhead cost is also anticipated to persist since we intend to cultivate left and the target capacity of our facilities for the foreseeable future.
In Q3, we decided to indefinitely deferred the completion of foresee as originally designed.
Based foresee has been partially completed without any foreseeable near trying to use for the space. We recognized an impairment charge of 37.7 million in the third quarter.
As we previewed in our July 3rd Press release, Q3, 2020, SGN expenses of 10.3 million decreased approximately 26% sequentially from the 14 million in Q2 2020.
Our Q2 included marketing and other cost related to the initial launch of our wrecked 2.0 products.
SGN Inc. Q3 2020.
Crease from 9.1 million in prior years quarter as we continue to scale operations for ongoing wrecked 2.0 launches as well as do do some charges related to code did my team.
Unique to this past quarter, we recognize government subsidy income of 3.2 million, which related to the candidate emergency waste subsidy hate to eligible employees, whose business has been impacted by coated MACI.
For Q3, 2020, we're reporting a negative adjusted EBITDA of 24.7 million compared to Q3 2019, adjusted EBITDA of 7.7 million.
The current periods negative gross margin before fair value changes was primarily due to the aforementioned inventory provisions and adjustment in the cumulative amount of 22 million.
For Q3, 2020, we're reporting a net loss of 89.9 million compared to a net loss at 10.2 million in Q3 2019.
This was primarily due to the negative gross margin combined with the noncash impairment charge for property plant and equipment.
As Greg mentioned, we generated positive cash flow from operating activities of 8.5 million in Q3 2020.
This was accomplished through the monetization of receivables and inventories and a deliberate decision to calibrate our investment in cultivation and inventories to a level that better matches, our near and medium term needs.
We ended the quarter, but 44.8 million in cash and short term investments and have continued to strengthen our balance sheet subsequent to quarter and.
Also also worth noting.
Only had 4 million in remaining capex at the quarter and needed to complete our existing plans for phase four and five of our Monkton campus facility.
During Q3, we successfully amended our credit facility agreements such that we could access of 30 million in available capacity on our terminal.
We raise money under our aftermarket or ATM equity program announced in April of 2020.
Q3 under the ATM program, we issued about 14 million common shares for gross proceeds of 31.1 million again on a weighted average price of 221 per common share.
The net proceeds.
Were 29.8 million after agent commissions and other fees.
Subsequent to the quarter and the ATM was completed with the final raised 17.9 million in gross proceeds on the issuance of 7 million common shares. We also drew down the remaining 30 million available under the credit facilities term loan.
That July 17th 2020.
Excluding the 8 million G. I see that it's a restricted investments the company had approximately 78 million in cash and short term investments.
We feel very good about the strength of our balance sheet, which is critical in this volatile industry and during the uncertain times of this global pandemic.
That concludes my formal remarks, so I'll turn the call back over to Greg for closing comments.
Thanks, Doug.
There's no question, it's been a challenging time for the Canadian cannabis industry and the pandemic certainly exacerbated some of our own challenges in Q3.
Again some of these heads headwind should only be temporary in nature. For example, we did miss out on some opportunities to capture revenue in Q3 as I've discussed.
But we believe our new products up the to pet potential to put our revenue growth back on track.
We expect it takes some time as the new product launches are fairly recent and some are still to come.
We encourage interested observers to regularly does it online web sites were stores to see our progress in rolling out new products and extensions.
We anticipate it will take until Q1 fiscal 21 before there is the potential for again are going to reflect any meaningful incremental sales from the idle use recreational market.
We're excited about these significant rate of Vitalization is to our product portfolio and we believe we've made necessary changes to rightsize. The company as we continue to relentlessly focus on building a business that generates attractive return on investment for our shareholders.
That ends my prepared remarks, operator, operator, if you could go ahead and open up the line for questions.
Thank you as a reminder, chaska question you will need to press star one on your telephone keypad. Please limit questions to one question and one follow up please standby, what we compile acumen a roster.
And our first question comes from the line of Aaron Grain from Alliance Global Partners. Your line is open.
Hi, good morning, and thanks for the question.
No first one for me is around gross margin. Thanks for the color that you offer there just wanted to dig a little bit deeper in terms of you know how to think about the gross margin in the near term I know you said.
There was still gonna be some inefficiencies you know kind of going forward near term and then you kind of game more over time as it normalize. It. So just how best to think about gross margin profile because they are what it was a lot of kind of one off puts and takes during this quarter. Thank you.
Sure and and so it's a good question I'll take that and minister cause any color you can add so I mean.
Certainly is your Atlanta be we we don't give guidance necessarily in gross margin, but we do expect to an improvement from Q3 due to fewer immaterial provisions you know for Q4 net revenue. If he could you know as I mentioned is going to take time for new products to really getting some traction as as many of these launches are recent and we did have supply disruptions during the.
Quarter related to rebranding buds for it for about a month.
Any potential meaningful incremental revenue will not occur until Q1 or more than likely as outlined earlier and we will see continued pressure on as p. due to value offerings increased competition in the space. We do expect though for increased pre roll sales with a returned to production of that line because again in Q.
Three we are temporary halted production and we have recorded wholesale revenue in Q4 to date, but don't expect it to be at the same magnitude that we've had in Q2.
And as noted we expect to start shipping it can dock so.
You know certainly in Q4 on the cost of sales you know, we do expect some negative charges for unabsorbed fixed overhead cost to persist as we continue to produce below our target capacity.
And there will be a higher cost of cultivation as we're no longer harvesting trim I'm, so that higher cost of inventory flowing through into Q4.
We do expect some production efficiencies to persist as we continue to launch new products and we've given guidance on this before as there is always a learning curve to optimize the production process. Although you know again as we've outlined previously to larger format skews will lead to better cost efficiencies when it comes down to packaging of things like 20, Graham and three.
Back pretty rules so.
Yeah, I would add to watch and Gregg said and again, we're not in a position we're going to provide forward guidance, but when you look at Q3.
There are approximately 22 million in adjustments to inventory values from an obsolescence or a net realizable value that would be considered normal and unique in this quarter due to a combination of events and in addition to the 22 million there were 7.9 million.
In direct costs related to the corporate 19, which was made up of the plant, calling and other associated costs. Some cumulatively those two numbers are over $29 million and.
When you adjust out against the margin that's otherwise reported.
You can get a better indication of the corners of the Q3 quarters merger.
Okay. Thanks for that that's a that's really helpful. And then just one follow up for me would be mostly around your baseline I'm. You know took it had a little bit of an uptick there.
Great color that you gave on edible side, but just as we look at phase, which has certainly been the biggest category you know for 2.0 products I in the Canadian market any color you can offer in terms of the competitive landscape you're seeing there I'm you know how your offerings are faring in terms of sell through and we are great. Thank you.
Yeah, No certainly you don't get some general commentary around that you know again as we'd expect it and we timed and staggered our launches accordingly so.
Our value line with our Trailblazer mine is the first bomb one 510 cartridges came to market and then we launched with follow on with our.
You know Edison feather disposable and then more recently or our Edison packs premium line and and we did that because of the size of the category. So the larger categories to 510, the disposables would be next and then that premium kind of ultra premium line would be the falling. So good response to date I think we know the only comment I would make overall is that.
No.
With that.
Offering for the packs platform and more recently some of the other companies that were making packs air as I have I have come to market. So now there's a a more broader offering in the stores. So I think I think that was hindering pacsun jarno little bit only having you know initially one company and then we were one of the first three tenants product and market and we're seeing packs.
Now it really kind of key up their efforts on digital marketing and now that in reps can visit stores again and doing that and that should help the packs line kind of grow and evolve. So you know overall were.
With where we are I think I think we're still continue see that this is a market that is you know growing in evolving and consumers. One thing that's interesting as consumers have come to the legal market because of the value skews.
They're looking at the high quality hardware, that's being provided in you know in the legal marketplace and potentially choosing those auctions were hearing not anecdotally from many other retailers that people are coming in for though the large volume value you don't flower product, but the now they're looking at the a debate pens that are available because the quality of that.
Hardware in a in a legal market.
Right. Thanks for that color I appreciate it.
Our next question comes from the line of Andrew It's hard to now from Stifel. JMP. Your line is open.
Thanks for taking my questions.
Hoping or we could I get sense of my questions around a your production and inventory.
Now you have about $100 million and inventory biological assets and I'm. Just wondering if you can give a breakdown of.
How much is that as you know you're you're all constraints versus the new strains that you've already launched like limelight that those that you have yet to launch and also.
You mentioned that you guys are going to launch due to new skews very shortly how much of those 18 skews, our or new strange you know just trying to get a sense of the magnitude of the new experienced coming online and if side you guys are gonna being capacity constrained at all.
I mean, the band with those new streams going forward.
And there maybe I'll start off finance the question relative to the second part and then turn it back to Derek to kind of comment on that kind of overall mix of Oh, you know our inventory so.
So we have three new streams coming to market in the near term. So these have been strains we've been working on for a while so those screens. In addition to you know as I mentioned during the call kind of additional offerings of both limelight in Blue belt live kind of expanding on those have been top sellers for us expanding our screen offering you know in terms of the SKU mix you know there's a combination of.
Of new products and there are other value products coming to market as well as these core Edison strain. So it's it's across each of our kind of offerings as we look to bring new product. So then you know the the terabytes of ours has said is to those coming in the not too distant future. Derek I don't know if you want to add any additional color on them you know there.
Relative inventory levels overall across what we have available we may not be quite full details on that but.
Maybe there could you.
Yeah, I don't have all the exact.
Breakdown by the by the different strains I would say it is it isn't that.
Any of the inventory values that would have related to I'm struck strangely into products that are I've been de listed and or.
Became more scale data, we have provided full allowances for and so they have been Virgin out of our inventory values and sell it would consist mainly of relatively current production levels, and which again would have a mix between the new strains and some of the old.
Sorry, I was on mute there. Thanks.
Thanks for the additional color and maybe as my follow up [noise].
To talk a little bit about your phase five.
You know you guys don't have that much less time for that and they could.
Give you maybe some.
Greater ability to create new types of products, maybe into concentrates area I, if I'm not mistaken.
I'm wondering when that could come online and.
If you guys need that phase five in order to create products like like Hasz for example.
Yeah. It's a good question Andrew the exercise as you noted we've only got a couple million dollars left and that really is just final equipment going in so I mean, we've already pre paid and already have on site. You know expanded extraction for both hydrocarbon and see are too and I think as you alluded to I think hydrocarbon extraction is the one area.
To allow us to bring many of these new products right I mean, I'm not hash in particular, but you know some of the other.
Types of products, where you're looking to take you know flash frozen material and produce potentially like resin things like that so we were looking to kind of build up capacity to have those future offerings and hydrocarbon extraction is necessary for that so one of the challenges.
During co bid has really been and you know Atlantic Canada is you now and within a bubble and is allowing kind of movement between the four provinces, but to get final commissioning of equipment and I'll give an example for our Trailblazer launch I mean, we you know we worked with the Danish company ousted we had to do virtual commissioning.
The kind of change over to produce trailblazer.
Chocolate bars, or maybe it was more much more challenging because were weren't in a position to bring over kind of the you know that people from the OEM.
You know with the hydrocarbon extraction, we've got in terminal experience and expertise, but ideally we'd love to be able to brings people into the facility. So it. It just it drags out so I don't want to give a directionally to say here is when it will be up are running because it does take longer having to do things through kind of video conferencing with Oh, we have been just making sure but I mean certainly.
That is our plan those you know the investment in the expanded you know extraction methodology, especially with hydrocarbon to bring out some of these new products in the future.
Okay. Thanks, Congrats and any color on on behalf.
Is currently not in our plan at this point [noise].
Okay. Thanks.
Our next question comes from the line of Tami Chen from BMO capital markets. Your line is open.
Hi, Thanks, a question has first housekeeping one just wondering act Eric if you're able to provide at all figures for net selling price and the overall medical market as well as the net selling price for flower in Nebraska marketer and also if you have any pricing for it yet.
2.0 products as well.
I don't titles that are Pablo do you happen to have that.
Average selling price on the medical versus.
I mean, there has been a decrease over over the last quarter as it relates to the average selling price.
The flower, but the breakdown between the two I don't have that certain trying to me, but I can circle that back Archie roster.
Okay. Sure. So first question is wanted to just asking specifically about the store rollout in Ontario, I know you talked about that in terms of key product launches because it's not it'll take a bit more time to see meaningful incremental revenues, but.
<unk> store rollout perspective that was one thing that I think you mentioned as a key bottleneck in rolling out a more revenues for the industry as a whole and now we are seeing Ontario increased stores I think there's just over 100 now and the province. So I'm just wondering from your vantage point me is this something that you're starting.
You have an incremental benefits for revenue trajectory.
Ah Yes, Tim it's a great question you know we are seeing you know for the industry as a whole I mean, Ontario for the last few months as you know and you see the reporting I mean has surpassed Alberta in terms of revenue I mean, that's a combination of online in stores and you know as new stores come online and digital consumers have access to purchase and store in with you know the restrictions lifted related.
Store visits uncoated, we certainly expect that to continue to kind of you know driving increased you know market potential in the province of Ontario.
You know, we've seen kind of mixed communication in the media at different times about what Agee Seo is going to do and not going to do I did see yesterday, another notification that they're going to limit store. One report that they're going to limit the store opens to five per week, but certainly that's still keeps them on a 20 per month, which you know puts us on a good run rate to be well over 200.
You know before the end of the year. So yeah. So we definitely are seeing kind of an increase across the board with new stores coming online.
Okay and my second question is on with this whole shifts towards value. So I guess, it's bit of a two part question as my follow up is one is this your view of where this industry is going in that it's going to be predominantly essentially a battle in the value.
Segment or can you see there is opportunity.
To create brand outside of the hard valleys segment, how in the second part of the question is if we do continue to shift both flour and as well as some of the 2.0 category into much more value.
On your cost perspective, I mean, it flexible enough to participate.
<unk> additional pricing competition or is there certain level, where from a cost structure perspective for you.
It would become incredibly on economical thank you.
No. It's a great question. So I mean, you know I think as I said earlier that part of the shift in value has been exhaust or exacerbated by cold right. We had you know more more people by mail order when you're going to purchase mail order your typically buy more volume or even when you're like we've seen in people buying groceries say do less frequent trips they're more.
Likely get go when they do go to a store buying buying more protocol. Once so kind of that value growth has I think that's been increased because of cobot in part.
But it certainly you know our understanding from everything we're hearing is expanding the base of consumers and its drawing consumers from the current illicit marketplace and I think.
You know values here to stay there is no question, but we do continue to see.
Demand for high quality products in every category right. It's a mix of kind of consumers as you would see.
Whether or not it's in you know craft beers versus value beer in mainstream or its different winds at different levels. I mean, you know this is a market well value has grown I think there is still an opportunity to you know to build brands and kind of built brand residents. I mean, we know again, we talked earlier about limelight bluebell that two of our leaving stay.
Rains you know those products when they go up in are available for sale. They move pretty quickly in general and so there is a demand there for products and the higher end I think when you. When you talk about cost structure. I think you know we've always been accompany that's focused on operational efficiency. We're continuing to do that I think one of the things that covanta.
It allowed us to do is you know because of reductions and staff with our 45% temporary layoffs, we were forced into a position where we had two.
Do more with less and really focus on automation and focused on areas, we could get higher throughput with fewer people.
It has led to some efficiencies that are sustainable in certain areas, where you know the methodology if the way we do certain things does require.
Less labor fewer people.
We are also looking at continuing to look at how do we improve our packaging efficiency and you know while we have no plans for significant Capex I.
I think there's some add on equipment of 100000 here or 200000, there that could.
Have a positive impact on the just improving our current packaging and we're evaluating that as a company right. Now. So so I think you've got always be continue to focus on other way is to continue due to improved cost as an organization, but back to your first part of your question I think there is still very strong demand and we've seen.
The high end of it you still continue to see kind of more boutique kind of craft growth like you know, whether its cana farms or broken co sustain a very very high priced right. So there are there are consumers across each category no question.
Okay. That's helpful. Thank you.
And our next question comes from the line of Adam but come from Scotiabank. Your line is open.
Good morning, and thanks for taking my question so.
Could you just touched on it but I wanted to maybe get some color on your higher THQ skews within the flower segment. It seems as though heikki product is seeing strong demand in the market with Yos, yes, highly not products north of 20% kitschy, where some of the highs philosophy skews.
Back to that can you maybe provide some comments on the velocity in the skews within your current portfolios, having maybe trending and what percent of volumes or sales they make up.
Yeah, maybe I'll turn over to Derek but I would just you know give caution that we don't necessarily give a breakdown by product type or give feedback because as you know you know we there is market data available from provinces. So we get sell in data, but not from every probably you know.
Selling data for everybody, but we only get kind of market data from five provinces in terms of sell through so we don't have that necessarily and we haven't given color on it in the past, but I mean, I would agree with your comment that.
You know, we we have seen in limelight wanted the reasons. It's for example, then a strong seller for US as you know in most cases, its averaging between 20 and 27% teach seat right. So it's been in high demand because of that so Derrick I don't know if you could point out anymore commentary.
Yeah, I would echo Greg's comments, and we don't provide that type of a detailed disclosure.
Really the market has pivoted more towards higher THC and larger format and and were aware of that and agile higher Tc products will will move faster, but in terms of a a granular disclosure on these levels.
It's not something we provide.
And maybe maybe I was just said sorry, just add some color to like I mean, the reason when I was saying earlier, we're kind of optimistic on a go forward basis as we've looked at new products and kind of expanded strain offerings. I mean, we do look into portfolio that we haven't kind of how do we supplemented and bring these new strains. This goes back to Andy's question as well where.
You know it is important to bring those higher tsetse products into market and certainly in expanding the offering and availability of those so this has not been done in isolation. That's been done both through looking at market data, but also through doing market research with consumers to understand what what the trend of you know the marketplaces, so anyway, sorry to interrupt but.
Yeah, No I was just going to maybe asking a different way and in terms of your production capabilities to meet that demand and not higher THC segment like.
Are you able to quantify on a quarterly basis, you know given your restructuring like how much you guys thinking can produce that's above that.
The Oneq I guess, the only guidance I could give is that we have shifted you know in the current production cycle right now roughly 35, 40% of our production is you know kind of these new strains.
Because as they come to market and we expect them to do well, we definitely have put a big focused on them, but I can't give anything beyond directionally or not.
Okay. No that's great. So just wanted to touch on 2.0, secondly, particularly within days segment.
It seems as other brands the cabinet or category, particularly within the five times segment has expanded rapidly over the last couple of months I'm just wondering how the team to use the evolution of that category do you think that's going to be so much without a flower with the value segment eventually being a large driver volumes or do you think products are able to differentiate it based on their internal qualities.
I I think there is a combination of differentiation I mean, we get data from the U.S. and we work closely with you know the green solution in Colorado and understand kind of what's happening in that market very intimately and I mean, you know part of what we're seeing right now some of the pricing approaches that some companies have taken on their 510 cartridges.
In part a dating issue is our understanding when we speak to the provinces you know they've got limited amount of time left.
On those cartridges. So there you know they're trying to move them.
Quickly so it's been from that side, it's been a bit more aggressive with a with a few companies taking that approach, but I think you know you we will see an evolution.
This is the California market for example, like suits today. The predominant product is distillate you know if we look into 2021 and beyond we will start to see.
You know more whole resin kind of life resin type products in the future, which or more of a premium end and I think you know there's always a place for distillate products and they continue to do well in U.S. States, where we've had you know years of experience, but I think the market will evolve and that ultra premium.
You know platform will be also additive in the future.
Great. Thanks.
And our next question comes from the line of Johnson Powell from Sea IVC. Your line is open.
Thanks, Good morning, the minimum EBITDA covenants in the amendment to the credit facility seem to suggest that fiscal Q1, and even Q2 or more challenging than in fiscal Q4 is there any particular reason for that other than maybe seasonality of consumption or is it that new product launch costs.
Costs are expected to fall into Q1, rather than than Q or maybe if you want to Q2, rather than Q4, just any commentary there would be helpful.
Yeah, I'll, let Darrell cat.
Yeah, I wouldn't read too much into the you know the exact covenant by quarter or were in discussions with.
The lender.
We discussed day robust review of the various scenarios and it ended up by.
Settling on a certain amount per quarter, but there is based upon production timing and product launches and even overhead expenses I'm a bit of fluctuations and so I just wouldn't read too much into the quarter over quarter change to the covenant and.
It was.
It was just what ended up after the discussions with the lender.
Maybe important to add to John that you know in our credit facility EBITDA. It does allow for more add backs into the calculation on things like you know noncash areas like inventory provisions or certain returns provision. So you know it's not as straight up calculation. It does it does have more flexibility from that.
Effective.
Okay. That's helpful. Thanks, and then on on the trailer part buds you have the way you can keep communicate some elements of this brands with consumers given the truncated name.
There was a comment in a press release about competing not just on price and emphasizing indoor grown how do you plan to market. This brand given your recent discussions with health, Canada, and how do you communicate the overall brands to consumers.
Yeah, you know as as noted I mean, we work closely with health, Canada kind of on amending the brand to buds and we continue to see whether or not it's under the trailer park buds name or buds alone strong demand for the product I think what consumers are seeing and hearing is that you know it is an indoor grown product that is strain specific and I mean.
You know now that you know, Ontario in particular uneven in Alberta, where you know a number of stores were closed and you know cannot be for example at some of the is some of their stores close I think one of the key things as you know our reps in our sales team and spending time with the but tenders or the staff in the store to make sure they understand that differentiation because ultimately they do help.
Consumers and that decision, making and so certainly you know that the feedback we're getting on it the posts on areas like read it have been extremely positive about that differentiation. So whatever brand we end up choosing kind of in the future. You know it's going to be the same product that's going to be a single strain indoor grown and I think you know that's ready.
Maybe well with people.
You know, where we're not we're not promoting the brand itself for promoting the content of the product at the end of the day sale.
Okay. That's helpful. Thank you.
Our next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.
Good morning, Thanks for taking my questions I guess I guess it started off with an industry question. So if you look as you look at the current lives pandemic <unk> in the retail footprint or we thought your normal or where do you guys I guess being on the ground Rod right now in terms of throws reopening et cetera.
Yeah as far as we I mean, we're back to normal I'm really across the country I mean, there were still if.
Small number of stores now or did that we're cool and we've seen some alberta stores close permanently I mean, maybe they were.
They were in areas that were there was too high to many stores for the area and things like that so we've seen a small number of stores close their doors I mean, the area I live in Toronto, and there's five stores within walking distance for me that are going to open within the next few.
Weeks, so I mean definitely there's there's a lot and happening but yeah. So in general the stores are open I think you know like any environment.
They are still limiting the number of people at any one time, but I I think you know Canadians have done a very good job that whether it's at grocery or liquor or drug stores. I mean, you know people are patient they'll wait in line and even a limited staff in the store. There. That's that you know one of the things with Canada stores. That's always been the case rate limited number of people in the store.
Sure.
Kind of.
Having by tenders working with them. So people are used to that when they go into stores with the positive thing.
Okay. Okay. That's that's helpful. And then as you as you look at your I guess your evolving product mix, what's what portion or mix today is value in you know how do you see that trending over time.
I don't.
Have a specific breakdown rupesh in terms of like what portion is value, but I think you know we've always wanted to play and we always have played and you know in value mainstream and premium and look to clean each category I think where we are under index. Today is on value. We were late as I mentioned in launching buds and.
Although we do have trailblazer out there were many not and bringing new products under both banners and they'll be a rebranding under buds as well. So we're not we don't have the same mix of.
Value today that we expect to have going forward and at that we see in the market, but even in categories like chocolates I mean, our trailblazer bar will snacks will be will compete in that value line and you know as I mentioned earlier, we we see it as a very good quality chocolate at a very competitive price that.
Hello.
Very strong potential in the marketplace relative to what's available today so.
So so the market is shifting in part to value, but I think at the end today, we want to play in every category and be diversified.
Great. Thank you.
And our next question comes from the line of Matt Bottomley from Canaccord. Your line is open.
Good morning, everyone. Thanks for taking all the questions I just wanted to go back to one of the earlier questions on trying to.
Normalized some noise that was in this quarter with a lot of the noncash charges and other and other provisions just wondering Greg as you can comment on one of the silver linings here is in the quarter do more cash flow positive from operations, but I guess, what I would.
Like a little more color on is how much of that is tight and I know you've touched on the snippet timing differences of some of these positive working capital adjustment given that for the nine month period, obviously, it's still not a profitable enterprise.
Just from operations alone. So how much of that can we expect going forward without trying to see guidance that a view.
But just given the fact that you're expecting you know more of a flat contribution from your recreational penetration or sales rather in the near term here is this something that's sustainable going forward or are there other timing differences in your working capital or other other factors that we consider.
Maybe I'll then I'll, let their cancer that question.
Sure I would say that you know that we're not providing guidance there's too many moving parts. Some certainty. However, we have right size the business.
We have as noted before laid up 25% of the workforce and we do have a strong track record of managing costs.
Generally speaking, we get a thorough review.
The inventory as mentioned in the quarter, whereby we did take these allowances Oh, we have near term visibility and have matched production to sales demand at this time and so given that.
Our expectation would be that we would not see significant movements in working capital and one way or another but a I'm still could not get granular and provide anything was that in terms of that future guidance.
<unk>.
Okay appreciate that and just a follow up on one of the sort of leverage for increased.
Revenue in the Israel exports can you give any color on the 6000 kilogram.
And commitment to orders year, what the actual time period is that I believe more that more than a year and if there are certain.
Quantities within that.
We can expect it even licensing and everything else up to that that we can expect in the near term and without giving pricing information.
Able to can you give a magnitude perspective, what you think that maybe the margin profile in those exports.
In Canada.
No. It's a good question, Matt. So I think we you know in it and in the press release on this we did outline at 3000 kilos was really kind of a committed a number and then the additional three to bring the total the six by the end to 2021 is the target timeline. So.
That being said as I mentioned earlier.
Pending.
You know receipt of an exports certificate from health, Canada, we expect to be in a position to ship a pretty significant portion of that initial 3000, so I can't necessarily give any any guidance, so and kind of pricing relative to but again I mean, the the strong part relative to sell.
Lane bulk wholesale product at the end the day is there's a there's no packaging is very little bit labor associated with it. So so again I think itself you know, it's it's a great deal for us working for to working with can dog, they've proven subsets to be a leader and they're also looking at it not only the Israeli market, but how do they.
Continue to expand into other parts of Europe, and possibly that could be.
Use for some of the product going forward.
Perfect and is it fair to assume that those 3000 kilogram, if we sold and shipped over would that be accretive to the existing margin profile or can you not comment on that.
Again, I wouldn't necessarily give we don't disclose pricing on agreements I think what's I mean, certainly you can always when we've done wholesale sales or other sales you can back out pricing, but.
That's proprietary to the agreement Unfortunately.
Okay. Thanks, guys.
Our next question comes from the line of Pablo Jonas from Cantor Fitzgerald. Your line is open.
Good morning, Thank you.
No just a housekeeping question first so you talked about 14% growth.
In the rig business into into sort of quarter.
Writing for flat for the all this quarter. So just strengthens done based on my numbers that would mean that into sort of quarters, you were pretty much in line with them articles you maintain share.
I'm not if I'm wrong.
Then what are you do get into in the oldest cohorts, but he said that you're losing share to more so than in the third quarter or is there that you're predicting you know it's not going in the month, just some more [noise].
So with that.
Yes penalties, we just wanted to be cautious in terms of I mean, we we historically do not give guidance right in terms of as an organization and I think one of things you know we are signaling that we have we have launched in Argentina launch in number of new products, but as we're already more than halfway through the current.
Quarter.
We did not want OSAT unrealistic expectations from people that those those new launches would have.
Really huge true you know impact on revenue in the quarter, we expect them to have a significant impact in Q1 as uptake kind of or optimistic based on consumer.
Feedback so far from the products, we've launched but we just wanted to be you know again, we don't give guidance, but we want to be cautious. So that people did not expect you know all of these new products now the huge impact in the current quarter.
Right, but from a market perspective, you know when we look at the March bump in retail sales and then April stable.
Correct.
Sales in June July compared we'd say that they make work that for the industry and if you can give the new ones. There in terms of any variance between the actual retail sales and how the boards that order routing and shipments from abused towards I'm talking more you know brothers markedly we've begun.
Thanks.
Yeah again, I again, we don't we don't get guidance necessarily I I will say, we are seeing increasing demand.
Ontario in particular.
You know and certainly when you look month over month since January in particular, I mean, there has been really strong growth seen in Ontario, and as these new stores come online, but again I I can't comment specifically on on you know on different markets are kind of our position in the market. So we don't give guidance.
And just trying to follow up maybe if we you know for us looking from outside rising we obviously some some companies are gaining share some are losing share.
Obviously that on many factors, but if you guys would your finger on one of them.
Just having the right booked availability I mean from outside it seems that sometimes so its scale from people cannot getting the door to help to sell wholesale boat also finished product to others to rebrand.
Well the relationship with the boards.
If you can just talk about that enjoy having like segments. I mean, what are the key factors because somebody gaining a somewhat loosing and it seems that right. Now you have lagged recently would just if you're going to spend I think there's what is the key each.
Yeah, I mean, I will say, there's no question part of why we.
We have lagged recently to some degree not in every province, and certainly not in all categories, but I mean is you know we didnt have a fulsome offering we didn't have enough to the value category and we're looking we've addressed it and we're looking to further address that.
You know so we you know I think I think thats part is having the right mix I think we've always shown an ability to get product to market. We were impacted by co bid I think one of things I mentioned this early in the call.
The promise of New Brunswick, where facility is more aggressive than most parts of the country.
BC and Alberta, and New Brunswick, all declared a state of emergency early but you know the schools were already close it in New Brunswick. So could you know kids were at home and people couldn't come to work. So we were already even before we announced our temporary layoffs, we're being impacted and so you know that the quarter lined up unfortunately for us perfectly with with Covance.
So that's kind of where the overall it.
I guess, one last one huge when we hear about them there potentially mergers with little piece I mean, how would you characterize your scale I mean do you always scale disadvantage would even in your size you can still pretty well that's not an issue.
Do you think or that especially for the industry begins to win so anyway.
Yes. It you know, it's one of our Keith assets and Derek alluded to it earlier I mean, we've always been one of the most efficient operators in the space right between how we produce how we package how we process. So you know.
It's been one of our core focuses and I think one of the challenges sometimes with consolidation is you're consolidating multiple facilities right. So having one single facility for us I mean, not to see there aren't values and consolidation, but you know for us we've always been able to be very efficient from scale perspective, and we're not producing.
Reduced part of our production current and we haven't ability scale that up if necessary. So.
Yes, so I would just answered that way so.
Thanks.
And our next question comes from the line of David could that go from ATP capital markets. Please limit to one question.
Your line is open.
Hi, Good morning, everybody. Thanks for taking my question. So the inventory write Downs, you announced Dom in particular with concentrates and the trim a quite significant there and I'm just wondering.
You know with with additional inventory or outdoor cultivation coming online in Canada in the fall I think this October approximately how likely do you think it is not only for for you organic ground, but for others across the board to really see additional write downs, because I think a lot of analysts thought.
You might have been one to maybe maybe a couple to a few quarters of write downs, but I think we're seeing this consistently across the board and I'm just wondering from your perspective, Greg. This is something we should expect moving forward out into the falls well. Thank you.
Well, it's great. It's a great question, David I think where we we have made you know as we've outlined on the call and CRM DNA I mean, we've made decisions to scale that production. So the one who we don't get caught in that situation right in the future and I think where and as Eric mentioned in an answer to an earlier call.
We have made inventory provisions against product that we don't believe we you know we have a market for I can't I can't necessarily comment on other companies per se, but I think you know that has always been one of the challenges in the space has been do you have the right product for sale in the marketplace I mean part of our shift in.
In some of those write downs was driven by you know a shift in marketplace to.
You were product higher.
You know higher a higher teachey skews and kind of far more focus core strain. So so I think I don't expect necessarily.
You know that.
You asked about outdoor production for them I mean, we've seen my understanding for example is the bulk of the outdoor production that was produced last year is just predominantly gone for traction right and that's what the you know the total Extractors had been using you know, it's driven down the whole tell you know that the total price.
For it but we that's why we've gone through such an extensive.
Review of our you know our stream mix and doing market research and looking to understand the consumers. So that we are positioned for the right products for the rate consumers. So.
Thanks, very much so for me.
And our final question today, well Oh.
We'll have time for.
Two more questions.
Our next question will come from Graham Kridler from eight capital your line is open.
Hi, good morning, and thanks for taking my question here just one question I wanted to follow up regarding putting together some of the pieces from a forward looking commentary, which I appreciate and the minimum EBITDA on the revised credit agreement here. So for for fiscal Q4, I'm looking at night.
No real incremental growth there, Greg you mentioned until till fiscal Q1, and still expecting some some drag on gross margins as you in treating some new products, there and thinking about the fixed cost side of things. It did decline sequentially and there might be some further savings because the labor force. There now I know you mentioned that the calculation has a different from the CRE.
Got it agreement versus how it would show up on the financial statements, but what I'm wondering is based on everything that was laid out there I'm not expecting a lot of growth. It is it possible that reaching that positive EBITDA might be at risk in the fiscal Q4 here depending on how the next month because it appreciate some color on that thank you.
Yeah, I got to maybe I'll turn over to dark, but I mean, you know we we do have as a Atlanta and we've got new product set of launch we've got new products that are launching you know kind of in the and then currently in the next month and I think you know we're optimistic but it just takes time for them to have.
Dramatic impact right, but I'll give an example that when we did our first sell into our first province of trailer Park buds.
It was a 1.2 million dollar order. So it was a major province, and it was a big order so.
It's dependent so I don't want a gift guide you know directionally, but dark if you want to add some color too to Graham's question.
Yes, I would indicate that as we've stated we're not going to be provide specific forward looking guidance, but what I will say is that we aim to be in compliance with any covenants related to our debt and.
No we do understand some of that the near term challenges and Ah. We believe that's been factored in at the time going into the negotiation and so again, we plan to be in compliance with the covenants, but it's based on the future event and a color can comment at this time.
Okay. Thank you very much right that's it for me.
And our next question comes from the line rule CEREC Officer from Raymond James Your line is open.
Great. Good morning, Greg gave me dairy Palo Thanks for letting flight and at the last question here, So really I sort of one macro question Greg in your comments you noted that the market is really quickly shifted towards the value.
Yes.
And you also noted it.
Got it has been all that slow and adjusting to the shifting consumer preferences.
So I'm sure we agreed to Mike will continue to be quite dynamic and you may have already answered. This in pieces, but to summarize my question is what strategic management and operational changes are you undertaking to make organic we have more nimble in the future and then hence give shareholders confidence in your outlook for 2021 offering.
Yes, it's a great great question rule I think you know as I as I outlined earlier I mean.
We were slow.
In part predominantly because of coal bid and some of that things that were impacted by cold and not only in staffing and kind of equipment and materials of that Unfortunately did have an impact in us getting kind of our plans up to marketplace and I think.
You know so so we were planning and we started that planning process you know last year.
But I think you know we have gone in and this was part of.
Having paula move into the Chief strategy Officer right as is.
Having someone dedicated to strategy, having someone dedicated to product developments and working with our marketing and sales team and operations team to look at you know product trends and what.
Not only we've always been a company that has wanted to be out in front on certain products. One example, when we you know on pre rolls when the rack market opened we were really a dominant player there because we saw the opportunity I think as we look to future products. We have to give you do that so so I think from a consumer perspective, you know.
Our focus is looking to bring continue to bring differentiated products as I said for example, we're bringing a value chocolate bar to the marketplace.
But it's a very high quality chocolate right. So we believe that while it's going to be priced in Nevada. Your category, it's going to differentiate itself and taking it looks like God and we are looking to future products right as I said that having hydrocarbon extraction puts us in a position to in the future bring differentiated products beyond simply distillate.
The patterns to the marketplace and I think companies have to wait for the future.
Hey, that's that's really helpful. And then of course, you know me I was asked for an update on our partnership with license so have the Atlanta towards manufacturing and.
In addition, phenomenally bye bye.
Equally given that you know the real shift what's kind of 2.0.
Yeah, you know I mean, you you'd have to us Kevin in the team at high since I I do know certainly they they were because of their facility in the space. They were temporarily shut down completely for you for number of months. They have returned two.
Partial activity in facility. So that has had an impact on them.
But I think you know we you know when is it again as I mentioned before I think what are the key things as a shift in the future towards a minor capital into as we see the price of you know Iceland distillate continue to be driven down I think the but the real tremendous market opportunity as on a minor.
So.
Great. Thanks, so much that's helping me today.
Thanks.
And our final question today will come from the line of Doug Meetme from RBC capital markets. Your line is open.
You don't give maybe on mute if you're still there.
Okay. There are no further questions at this time, ladies and gentlemen. This concludes today's call. We thank you for your participation you may now disconnect.
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