Q1 2021 Sundial Growers Inc Earnings Call

[music].

Good morning, and welcome to sundial growers first quarter 2021 financial results Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

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Yesterday afternoon sundial issued a press release announcing their financial results for the first quarter ended March 31st 2021. This press release is available on the company's website at S. N D. L group Dot com and filed on Edgar and SEDAR as well and presenting on this morning's call we have Zach George.

George Chief Executive Officer, Jim Keough, Chief Financial Officer, and Andrew <unk>, President and Chief operating Officer.

Before we start I would like to remind investors that certain matters discussed in today's conference call or answers that maybe given to questions could constitute forward looking statements actual results could differ materially from those anticipated risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on <unk>.

SEDAR and Edgar.

Additionally, all financial figures mentioned are in Canadian dollars, unless otherwise indicated I would also like to note that we are conducting the call today from our respective remote locations as such there may be brief delays crosstalk or minor minor technical issues. During this call. We thank you and advance for your patience and understanding we will now make.

Repaired remarks, and then we'll move onto the question and answer session I would now like to turn the call over to Zach George.

Good morning, everyone and thank you for joining us on our first quarter 2021 earnings call.

And now more than a year into this global pandemic. Unfortunately.

Unfortunately, COVID-19 continues to significantly affect Canadians and the third wave is in full force.

That said, we believe that there is a light at the end of the tunnel as vaccines are currently proliferating across the country and the world Our top priority remains the health and safety of our employees, we remain committed to stringent procedures to ensure the protection of our employees and consumers, while minimizing disruption to our operations.

Despite the negative impact of store closures and orders to stay at home have had on retail sales. We are grateful to be designated as an essential service provider, which has enabled us to continue to operate and serve customers and consumers, while so many small and medium sized businesses and not have the same opportunity.

We are pleased to announce on <unk> first ever quarter with positive results from adjusted EBITDA.

This result reflects the continued efforts from our teams across the organization to build a platform targeting attractive capital deployment opportunities. While we focus on the continued improvement of our cultivation practices and and immature and rapidly changing industry.

Sundial continues to focus on operational improvement and capital deployment opportunities, both of which will enable sundial to become a stronger and more diverse cannabis company.

Since December we have made a number of investments across the capital structure of public cannabis companies and last week, we entered into an agreement to acquire all of the issued and outstanding common shares of inner Spirit holdings, and the spirit leaf retail cannabis network.

We are pleased with our investment track record, which started with our internal program and has evolved to include a partnership with third party capital.

While we have made several significant strategic investments this past quarter, we continue to see a robust pipeline of additional investment and M&A opportunities.

On Dow remains debt free and has a total capital base, including liquid securities loan assets, and and unrestricted cash balance of more than $1 billion.

Today, approximately 70% of this balance sits and unrestricted cash.

Maximizing our returns on deployed capital and corporate stewardship are key priorities for our board and management team.

At the end of the first quarter of 2021, the company had deployed approximately $96 million into several cannabis related investments.

These investments generated $15 7 million and interest income and fees, including $12 9 million of realized and unrealized gains on marketable securities as of today's call, we see absolute realized and unrealized gains and Q2 that are greater than that of Q1. However, much of this exposure is subject to market risk.

And may change prior to the end of the second quarter.

In terms of our cannabis operations sundial remains focused and committed to its cultivation and processing activities and the improvement of its cultivation outcomes.

Revenue declines and the first quarter were the result of the continued growth of the discount segment inventory monetization across sundial grassland brands and slower industry sales driven by seasonality and COVID-19 restrictions across Canada are negative gross margin in Q1 was largely attributable to aggressive price reductions on our grasslands product.

<unk> undertaken to optimize inventory levels to align with demand in addition to maintenance capital items, and and unanticipated spike and utility pricing in February.

Moving forward, we will be limiting the offering of discount products and markets, where we view. The economics is neither attractive nor sustainable sundial has no interest in pursuing unprofitable revenue growth and we are unwilling to seek the maintenance of market share at all costs. We believe that the combination of continued oversupply of lack of dip.

<unk> and the majority of branded products and addition to regulatory and operating dysfunction at many levels will create a reckoning for the industry. During 2021, we welcome this reckoning and the rationalization and regulatory evolution moves the Canadian recreational industry towards greater health over the next several years.

We have made progress with our cultivation results and Andrew will provide more details.

But we still have work to do on our core operations to achieve the goals that we've established for sundial and our shareholders. We continue to see some of our Canadian peers move away from cultivation, partially or entirely due to the inability to deliver consistent cultivation outcomes.

But we have not waiver with our commitment to cultivation and our indoor modular facility and our brand promise to consumers is fundamental to our strategy.

We continue to maintain our focus on keeping our employees safe and adjusting to market demand our strong financial position unique cultivation facility and focus on premium inhalable have positioned us for improved performance and the second half of 2020, one and beyond I am excited about sundial as future and our competitive positioning.

Thank you all I'll now pass it to Jim for commentary on our financial results.

Thanks, Zach and good morning to all who are listening in I would like to remind everyone that all amounts are as I mentioned. This morning are denominated in Canadian dollars unless otherwise stated.

Let's start with a review of the improvements that we've achieved and our liquidity and capital structure during the quarter.

We opened 2021 with $60 million of cash on hand.

By the end of Q1 that number was $873 million and as of May seven 2021, the company had and unrestricted cash balance of approximately $753 million. In addition to investments and marketable securities at market value of $327 million for a total of 1.08 billion when combined.

Our outstanding share Count was 177 billion at the end of Q1 and sits at $1 86 billion today.

During the first quarter of 2021 sundial issued 857 million common shares pursuant to at the market equity programs registered direct offerings and warrant exercises for total proceeds of $854 million.

Subsequent to the quarter and the company issued 85 million shares through its at the market equity program for total proceeds of $97 7 million.

The first quarter of 2021 was a transitional period for sundial and we've realigned our business into two segments for operational and reporting purposes.

On being cannabis operations and the other being investments.

By the end of the first quarter of 2021, the company had deployed a portion of the capital raised into several cannabis related investments totaling $96 million.

During Q1, the company realized $2 $8 million of interest and fee revenue from loans to third parties.

And $12 9 million and realized and unrealized gains from investments and marketable securities.

This revenue has been classified as income from operations, reflecting the new segmentation of our operations and the intent to continue to deploy significant capital targeting a portfolio of enhanced risk return opportunities and the cannabis industry to provide exposure to attractive debt equity and hybrid instruments.

Now, let me explain the net loss for the quarter and more detail net loss for the three months ended March 31, 2021 was $134 4 million.

Compared to a net loss of $64 1 million and the previous quarter.

Effectively all of this net loss arose from a $130 million of noncash fair value adjustments that are required under on FRS reporting on the derivative warrants attached to the direct offerings that were issued during the quarter.

There was no cash impact from the fair value changes, resulting from these valuation adjustments.

There will be no cash payment ever for the derivative warrants amount that is disclosed on our balance sheet.

These two amounts will fluctuate each quarter with our share price until the warrants are exercised or expire.

For clarity management estimates that as this revaluation was done using market conditions as of May 10 2021.

Fair value of the outstanding derivative warrants, which are shown as a liability on our balance sheet with decreased by approximately $34 million there would be a noncash gain on our income statement from the same amount.

Sundial continued to strategically deploy its capital throughout the first quarter and subsequent to quarter and to summarize our deployment of capital and our investment segment to date on it.

Now invested $22 million and Endeavour limited the Canadian producer of cannabis edibles.

We entered into a strategic capital partnership with the SaaS group focused on cannabis related opportunities and investments and Canada and internationally.

The first mandate of the joint venture is a special opportunity funds.

And initial commitment of $188 million by sundial and.

In addition to commitments from third Party limited partners.

And the other acquired just over 10% of the issued and outstanding common shares of the Valens Company, Inc. Balance as a research driven vertically integrated end to end developer and manufacturer of innovative cannabinoid based products.

And they also announced that it entered into an arrangement agreement pursuant to which the company will acquire all of the issued and outstanding common shares of inner Spirit holdings and the spirit Lee from retail cannabis network for total consideration of approximately $131 million, including cash of approximately 102 million.

Now, let's turn our focus to the operating results starting with adjusted EBITDA and so on and all recorded its first ever adjusted EBITDA of $3 3 million and Q1, and 2021 compared to an adjusted EBITDA loss of $5 6 million and the prior quarter.

The significant increase was mainly due to realized investment gains and income from the companys strategic cannabis related portfolio investments.

As discussed this will be a core part of some of those operations moving forward.

And Q1, we've seen task flow improvement due to investment revenue as well as realignment and refinement of our cannabis operating model.

And the first quarter cash provided from operations was positive $2 $3 million before changes in working capital, including the first quarter of investment revenue.

And the previous quarter, the company used $12 2 million from operations.

Net revenue from cannabis for the first quarter declined by 29% to $9 9 million from $13 9 million and the previous quarter.

Sales were negatively impacted by provincial boards, reducing inventory levels retail market conditions and continued price compression across the industry and sundial product portfolio.

Average gross selling price per gram equivalent of branded products and net of provisions was $3 15 per gram compared to $4 14 per gram and the prior quarter, reflecting industry price compression and a consumer shift to value products.

General and administrative expenses were about 9% higher at $7 1 million compared to $6 5 million from the previous quarter.

Reflecting legal and other fees related to the investment segment and the build out of our direct sales team.

And Q1, and 2021 sales and marketing expenses reflects spending discipline and seasonality and $950000 compared to $2 3 million and the previous quarter.

We have increased investment commitments and both our sales and marketing teams and have added key additional team members.

Adjusted gross margin before inventory impairment and and fair value adjustments was negative $1 6 million compared to $3 2 million from the previous quarter.

This was despite our improvements from cost optimization initiatives, our focus on margin accretive strains and skus and improve cultivation outcomes.

Primarily to market price trends and to value price products.

There is more work to be done to improve our margins from cannabis operations.

Total capital expenditures and the first quarter of 2021 were not material, but we have budgeted $5 $7 million and capital expenditures for full year 2021 related to processing automation and minor facility improvements and maintenance capital.

Now I would like to invite and restored or president and CEO of sundial to provide remarks related to cannabis operations.

Thank you Jim.

As we continue to see volatility in the industry and continued price compression sundial and <unk> ability to deliver high quality inhalable <unk> through a commitment to cultivation excellence we're on.

And a key component of our strategy.

The price dynamics of the discount segment are not sustainable for sundial portfolio of assets.

Moving forward, we will focus on improving our margins through product mix and strategic revenue management, while consuming to further simplify our supply chain and our portfolio of products.

While there is still room for improvements in those areas. We have made progress over the course of the first quarter of 2021.

The sundial and <unk> commitment to cultivation excellence has been developed around three pillars of focus.

People process and plants.

So let me start with people.

And quarter, one we restructured our supply and operations teams at our olds facility.

We believe that a more streamlined organization will allow our teams to become more nimble and make more informed decisions given the dynamic nature of the industry.

We have recently invested and cultivation leadership, and we'll also be adding product engineered capability at our old facility to develop a more sustainable innovation launch program.

We went from more than 100 Skus at the beginning of 2020 day less than 40 Skus at the beginning of this year.

We launched three concentrates skus and the first quarter of 2021 under the top leaf and growth plans brands.

We signed a new partnership with stigma growth to develop additional hydrocarbon concentrate offerings under our top leaf brand.

Our innovation pipeline for the balance of 2021 is focus.

And we will be launching several new products and the next few months.

Our second cultivation pillar is around process.

With over 700 harvest since inception.

<unk> has tremendous access to cultivation data and insights.

Our team is currently and the process of revamping our entire genetics playbook.

Which will allow us to drive further cultivation consistency.

And quarter, one sundial harvest at its highest potency flower since the old facilities inception, with top leaf Li push cake initial lots and producing potency and excess of 28% THC.

Our product has seen strong velocity since launch.

We have increased our average potency results by approximately 15% year over year.

And finally, our third cultivation pillar is around plants.

We continue to invest and developing a library of cultivars that look to achieve a combination of higher potency more robust European profiles and above average yield.

We received our first laboratory results on our new extended library of genetics, and we'll prioritize these from launch in the fourth quarter of 2021.

Our focus is still on branded sales. However, we have seen and increasing sales trend and wholesale market opportunities.

We feel that sundial is well positioned to take advantage of <unk> opportunities as other licensed producers divest from cultivation practices.

These pillars are underpinned by our continuous focus on reducing costs.

And the first quarter of 2021, our cultivation and production costs were reduced to an average of $4 million per month.

From 10 million per month, and the first quarter of 2020.

Our topline numbers progressed versus Q4, 2020 and year over year.

As <unk> mentioned earlier sundial will not pursue unprofitable revenue growth and we are unwilling to grow market share at all costs.

We believe increasing our investment into our direct sales team will enable us to win and accelerating the distribution of our products through new customer acquisition brand activation and by improving education with both customers and consumers on our product portfolio.

As a result, we added 13 dedicated salespeople to the organization and quarter, one which significantly improves the breadth and frequency of our customer coverage and will be a key enabler to increasing our market share and the core and premium segments moving forward.

With an increased focus on driving the right assortment and store level on.

And new retail team increased distribution on Sunday of priority Skus by 25% across several key markets and the first quarter.

While we are encouraged with the progress made on operations for quarter one we.

We still have work to do on driving a sustainably profitable cannabis operations segment with cultivation excellence at our core.

With that I'd like to turn the call back to Zach for closing remarks.

I, thank our team for their efforts our customers for their trust and our shareholders for their continued support as we work to position sundial for success.

Thank you for joining us today and please stay safe I will now turn it back over to the operator for the question period.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad Youll hear a tone and acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

If you are participating online you can submit a question using the ask a question tab on your screen, we will pause for a moment as callers join the queue.

Our first question comes from Tami Chen of BMO capital markets. Please go ahead.

Thanks, and good morning, everyone.

First wanted to ask.

And you could explain a bit more on the rationale for the acquisition of the inner spirit franchise and from corporate stores is it too.

Javier and marketing team better engage with their network and stores to increase penetration of sundial product. Just if you could elaborate a bit more on the thinking of why.

Sorry and to retail.

Okay.

Hi, Tammy and good morning, Thanks for the question. Unfortunately.

Unfortunately, we're going to actually punt on this question for now we are satisfying a number of conditions to close the transaction.

And we'll be providing a very fulsome update closer to the time of close which as we said as early in Q3.

And we'd be happy to give a much more detailed answer at that time.

Okay fair enough.

And we can pivot to what's been happening and do the rec market here So no debt.

And the press release, and and then your comments Youre talking about this sort of sustained price decline and flour and Canada. So I wanted to ask.

First off why and your view.

And this is sustainable.

And how long do you think it might continue and how do you think about this overarching dynamic.

You're trying to drive more higher margin sales, which will naturally come with higher price point products. Thanks.

Hey, Jamie it's Andrew here, Thanks for the question.

Yes, I think first and foremost the price compression continues and.

I think we've seen that.

As of last year moving into this year as well so as far as time lines go on that we're going to be in that position I think as an industry for a while and I think largely that's driven by <unk>.

High inventory levels, and really monetizing that inventory across all provinces with a lot of license producers. So.

It's here to stay for a while but as you mentioned, we're pretty optimistic given that this is a.

And I think the important thing for our position on that is.

We have the ability to.

Not chase revenue and not chase market share and the discount segment, our balance sheet is extremely strong.

And we have the ability to lead for healthier industry dynamic and.

I think we say it and the opening comments one of the one other key actions, we're taking is and really get selective on key markets and we're going to make decisions on pulling out of some markets on the discount segment.

And I think that's a good thing for the industry and Thats certainly a good thing for sundial.

And we're going to continue to focus on and we mentioned the frontline sales and investment that we have I can tell you for.

Hardly that that team is not going to be focused on driving discount products and really renting market share. They are going to be talking about our premium offerings and top leaf sundial and I think consumers want to hear that certainly our customers want to hear that and Thats really where were focused on so we're in this for a little bit while longer no question, but were pretty optimistic.

The segment is going to move.

Consistent with other more established categories and CPG.

Got it thank you.

Our next question comes from David <unk> of ATB capital markets. Please go ahead.

Hi, good morning, congratulations on the quarter, Thanks for taking my questions.

I wanted to go back a little bit to your strategy here Zach machine with acquisitions, taking a stake and company is now <unk>.

Not to mention the inner Spirit holdings acquisition, specifically, but can you maybe help us understand I mean, what is the overarching strategy here and we note that.

You are and the process of acquiring inner spirit versus taking a stake and other companies I think you mentioned on the on your prepared remarks balanced company.

There is also and Diva. So what is the overarching strategy here is it a combination of both or are there certain metrics youre looking for and certain company has to decide how to proceed or just any commentary on the strategy there would be helpful. Thanks.

Sure Good morning, David and thanks, Thanks for the question so.

Look I think the strategy on capital deployment is very much in line with our commentary from from last quarter.

So we do see and Canada.

<unk>.

On its way.

And a material.

Sure.

And we are looking at opportunities and the space from really two two main perspectives.

Non.

In terms of.

Classic M&A, where we can consolidate.

Or be a consolidator take take.

And certain costs out of our structure.

And position ourselves well on the Canadian market and then we also have the ability through our partnerships and what we've done off of our own balance sheet to look at asymmetric investment opportunities, which are really just that where we see and.

The attractive risk reward.

And typically the opportunity to earn modest equity like returns and many cases higher up and.

And the capital structure. So when you look at some of the the <unk>.

Small stakes, we've taken and the equity of certain businesses the common theme that you'd see.

It was really a differentiated model from our perspective that would not apply to certainly every company our business model and Canada, but from our perspective, there are a few that really stand out in terms of capabilities.

And.

What we perceive as a strong future role and the Canadian landscape.

So we think that will evolve over time, you'll likely see us recycle capital and a number of instances.

There are many reasons why.

Smart M&A transactions never get completed.

But we are we continue to have wide ranging discussions with a number of parties and the industry and are trying to walk slowly towards these transactions that we think make a lot of sense for sundial shareholders.

Understood. Thanks for that color and would agree with you that.

More on.

And this is a very differentiated and what looks like a potentially lucrative business model. So with that said I think Jim or Andrew you mentioned two of your operating models share both the reporting and strategic purposes include both the cannabis is number one and number two is your investment model shifting back to your cannabis business.

And here.

Exact as well you mentioned.

The potential stopped unprofitable business segments within and your Canada segment. So I'm just wondering from the potential that you have now with your balance sheet and over a total dollars on the investments you're making into companies why bother with cannabis.

And so far as you know, we're seeing where the market is and all the challenges there when in fact and investment side of the business could potentially be much more lucrative and counted so in other words. This is all this trouble worthy effort. Thanks.

And let me just answer and then I'll pass it to Andrew.

But I think what we're seeing is.

As we mentioned on a number and as you know.

No as well David a number of our peers are effectively moving away from cultivation.

We have and we believe is a world class facility.

As we've.

Really learned to operate within that facility and refine our cultivation practices, we've reached improved results.

Do you see this as a commodity business at the end of the day.

And so I think it's a contrarian perspective to take to effectively tripled down on cultivation, but one that we're embracing.

And I think that youre going to see more cultivation and get pulled out of the system and youre going to see a wholesale market that comes back and a very robust manner as this industry evolves and.

You've got some.

A small number of very strong players that have very very low cost structures and what we're trying to attack is really the premium flower segment.

And it all comes down to really usable plant matter and cultivation and outcomes, we need to have narrower more consistent outcomes and that's that's really the charge that Andrew has been leading.

Yes, and I'll, just I'll just add to that.

Look I think.

We're pretty manically focused on inhalable and that's obviously the largest segment inside candidates our right to win and that is really predicated on cultivation and Zach mentioned, we have the small batch at scale facility that really will enable that strategy to really take take fold and look there is some.

And there's some small and micro.

Growers out there they are doing a fabulous job, but nobody's done and at scale.

And that's really our mandate rate, if we do that really really well and.

This side of the business is all about making it as boring as possible and as predictive as Zach mentioned as possible. So when we do that and when we're able to actually drive that cultivation consistency at a scale that really nobody is doing and the industry globally quite frankly, that's really our right to win and that's what folks on and when we do that thats going to have a significant and.

Back on their ability to kind of drive shareholder value.

Okay. That's very helpful. Thank you and then if I can just squeeze one quick one related to both of what you guys are talking about here just with respect to your JV with the SaaS growth.

And your previous commentary on potential stock.

Is there opportunities then to build from what Dan into potentially spin and one of your own internal businesses.

Oh tier and into a stock or should we be thinking about this as more external opportunities.

I'll hop back into the queue.

Sure David So, yes, you should be thinking about those vehicles today as.

As as oriented to pursue external opportunities youre point on spinning out segments.

Could be a very.

Important discussion.

Two three years out to the extent that we have more scale and stay at a stabilized business that we think as a pure play would have a better positioning.

And the markets in North America, we're certainly not there yet we're just at the early stages.

On the development of this platform, but certainly something that we're thinking about.

As we look further down the road.

Given the constraints of a stock structure.

You are likely not going to see this back look at.

Any of our internal assets other qualifying transaction and.

And we expect to provide.

The market with an update on our partnership with SAP.

The.

Third party funds that were engaged and raising today as well as.

And any updates related to this back in the next 30 to 60 days.

Okay, Thanks, very much and congrats on the quarter.

Our next question comes from Pablo <unk> of Cantor Fitzgerald. Please go ahead.

Thank you and good morning, two questions one regarding M&A as you describe it.

Can you talk about the opportunities if youre thinking on opportunities overseas or say and the U S unrelated to that I'm, assuming that's because of your U S. Listing sold you will U S listing you on more limited in terms of doing businesses sort of quiet and businesses and the U S and the second question is more on the operational side.

I understand you are going through a transition period do you have a war chest they ought to with all that cash that was raised.

But you had reported sales to the provincial boards fell about 37% sequentially can you give some context around that number where the retail underlying trends I suppose are weighted to the minus 37.

And then just elaborate and does it what do you need to do better to improve that number right what I'm learning and maybe I'm wrong is that small companies can do very well and the value and or the lower price points and other companies can do very well in the high premium.

Skill doesn't necessarily seem to be.

And to be a range.

And maybe for success necessarily right. So so just talk about how you are going to improve the business relative to what was that.

And that drove that you reported and the first quarter. Thank you.

Sure Let me, let me, let Andrew speak to revenue and the current market environment and steps, we're taking to improve.

Cooperations, but on the on the first question regarding M&A Pablo.

On.

You are correct to point out that our NASDAQ listing creates challenges for us to directly invest in plant and touching assets and the U S.

And that opportunity set will.

Volume over time.

And there's various ways that we can take advantage of opportunities and the U S. As some of our peers have and structured manner.

Or through.

Entering for distribution or product mix that is not tht related but thats an evolving scenario.

We are getting presented with a lot of opportunities internationally.

We have vehicles, we have capital too.

To look at it and take advantage of those opportunities.

But I will say that we are very committed and focused to being successful and Canada.

And.

Being a part of what we think will be a very healthy landscape.

And when we emerge from the current dysfunction and the next two to three years.

Okay.

Hey, Pablo it's Andrew here, Thanks for the question.

I'll break this up into two pieces for because I think there was this concept around kind of whats happening and the industry and some of the dynamics there that that we're dealing with in Canada, and then what do we do and about a specific to the operations. So let me let me give you some color on kind of.

What's happening and certainly what we saw on Q1 and we're seeing the same thing kind of in Q2 with regards to industry headwinds. So first and foremost let the industry was what was down and.

In January and February debt, we saw a bounce back in March.

But we had a we had a slow industry to start with I think don't want to belabor, the point or on pricing dynamics, but that's real and.

And the discount segment and then we used to have value, but now we've got value and discount and.

And the discount segment is accelerating.

At a unsustainable pace and it's certainly not an area that Sunday and want to lean on.

And I think so.

We saw some provincial boards do what they needed to do with regards to managing their inventory and reducing weeks of coverage and and that's really impacted us in the first quarter largely and western Canada.

That said moving forward as I stated before our strategy is still very much in the inhalable piece and we need to drive a better product mix, particularly in and.

And a brand like top leaf and we have some outstanding strong pricing on top of LIBOR.

We're close to $7 per Gram.

And in the markets that we compete in that and that premium segment and that significance as we drive a better premium segments mix into a profile, that's what we want to see and Thats.

It's going to mean, we're going to have to make some some tough decisions, but rate decision and when it comes to walking away from the discount segment and select markets or it's just doesn't make sense.

Let me just quickly touch on on the op side.

I'd love to say that the.

Progress in the operation side and the facility follows kind of a 90 day window and a physical calendar, but it's just not that simple we have been and operations really for about two and a half years here.

And we've been focused really on and optimizing our costs over the past year.

And while that discipline will remain and it's also about taking the next step and doubling down on cultivation as we mentioned and in my opening remarks, I mentioned kind of three pillars on that and that's really around people process and plants and it's in that order for us. It's very very very important we have new genetics that are coming to market and Q4, we're excited about that.

We're taking our existing commercial strains and streamlining that and.

And that's part and parcel to what we mentioned and the remarks as well around our SKU optimization. It's all about simplifying the supply chain, we're seeing some of our counterparts go the opposite way and I don't think thats needed, especially if you want to play and the corn and the premium segments you have to earn your right to win there and and that's really what we're focused on and the in the and the facility and the operations that is helping that provides some color for you.

And.

Thank you and that's very helpful can I ask maybe just squeeze one more.

And when I talk to there are many companies out there.

And that there are different and strategy when it comes to strange right. There are some companies that if I look at the scanner data almost.

And almost 40 or 50% of your flower business may come from just one strength right, whereas you have other companies, where they have a more diversified strength portfolio strength and then there's a third category that I can see here the.

And limited edition and companies that have.

Strains for the season, and then they change and later on and I'm, just trying to I suppose it all makes sense, but do you have any view on whether what's better right now or theyre, just different and strategies and through each Darren Thanks I'll pass it on.

[noise] balance Andrew here. Good question look, we're big believers and focus on your core.

I get that right and and earn your right to move into more diversification and product portfolio. So first and foremost we've got to make our current commercial genetics work, but we also know consumer preference moves over time, and certainly what we've seen and more established markets out of the U S.

And that cycle is six to nine months and you can really get a good strain.

And and drive that forward, but then you're going to have to come in with a good innovation pipeline.

And that process given that we're and anchor foods business. You know it takes time and run that R&D cycle. So genetics will be a key part and that's part of my three pillar kind of process I laid out their plans being the last piece of that is going to be a key part of our focus and move forward and we have the facility with the small batch scale capability to run that play, but I would say primary.

Focus and I mentioned and the SKU optimization initiatives, we got to get the core right. Our customers are asking for it I think consumers are looking for consistency and cultivation and I think we can deliver on that and that's what we're focused on on the short term here.

Got it thank you.

Our next question comes from Vivien <unk> of Cowen. Please go ahead.

Hi, Thanks very much.

And so I just wanted to go public Bob to the portfolio cleanup.

And you guys engaged and in the quarter. So it makes sense that you would discount grasslands product moving through the system. So that you guys can now have a better footing.

And the Orient towards.

<unk> market share versus market share at all cost, but as I look at your balance sheet. It looks like your inventories grew about 30% over the course and a quarter or so can you help me reconcile that.

Yes, Thanks, Vivien I'll, let Andrew talk about inventories and how thats feeding operations into Q2 and beyond.

And maybe and thanks for the question, yes, absolutely I think when you have that.

A $10 million topline number and.

And as we as we grow out I think that that's a big focus for us so.

And the best way for us to manage that inventory level to a sustainable rate as you know we want to have at least two to three months of inventory on hand, sellable inventory, the right quality inventory and.

And we are proactively managing that as best we can given our cultivation and focus.

And we've also got obviously, a dynamic and the industry with provincial boards trying to get their weeks of coverage and inventory under control. So it's very dynamic.

And it's certainly an area of focus for us and it's very much predicated on our ability to grow consistent quality product to consumers and customers want once we do that we can drive that topline number up and certainly you know.

You get that inventory level to where we needed to be which is about two to three months as I stated.

Yeah.

Got it and then just to follow up on that then Andrew presumably the inventory that you guys have on hand is is that our quality that you had talked about the day improvement in and potency.

Year to date, and then how do we think about.

Gross margin go forward was the negative gross margin in the first quarter are truly a one off and how do we think about where copper and the price margin. Thanks.

Okay.

Yes. Thanks good question.

I think the gross margin and it's certainly not.

It's certainly not across the entire portfolio I think that's the first piece I've mentioned.

And Theres, certainly a pretty large range there on how we look at inhalable and the margin profile that we're able to drive.

Well look maybe I'll touch on a couple of pieces and then if Jim Zach on AD and please feel free to do so but the big one is we saw it kind of further price compression and the quarter I am not going to belabor that point. It is what it is and we're seeing that across the industry.

We had some discounts and allowances as well and some are terms and that was really proactive for us because obviously the ability to manage the right assortment that store level starts at what is in stock at the provincial level. So we want to make sure the freshest and highest quality product is there. So we were proactively managing that we had some.

Some discounts and allowances and some return that we had to manage through a normal course of business, but as we get tighter on our inventory provincial boards get tighter on their inventory and get more selective on their SKU Assortments, we're certainly and a better position to manage that moving forward and then my last point I would say and you look at gross margin. We did have some cultivar.

Cultivation production variance and Theyre due to increased power charges that we saw largely in February.

And that's tough to manage given our fixed cost.

Cost base, and our asset and old and.

Anticipate that to be onetime factors and certainly we'll see that kind of bounce back as we come into Q2, and the balance of the year, but pass it Zach and Jim to Atlanta.

Yes.

The point on on our utility cost is an important one so we actually saw on the month of February.

Power prices effectively double there.

And they are back down to.

Basically January levels now.

But that was a painful spike that impacted our cultivation and processing costs.

Can you quantify what the magnitude of that that incrementally on the energy complex.

Yes, it was approximately $300000.

Okay understood. Thank you very much.

Once again, if you have a question. Please press Star then one on.

Our next question comes from Sean <unk> of Canaccord Genuity. Please go ahead.

Hi, and thank you for taking my question.

My first question is just on some commentary and the press released a round and the company is seeing and increased sales trend for wholesale market.

I was wondering if you could detail some of the developments that you're seeing on that side, particularly as it relates to across the different pricing spectrum.

Where are you seeing kind of the resurgence of interest and then also if I could tag on.

Paris and now expect to approach this segment of the market going forward, what should we expect from our branded products versus wholesale mix and the balance of the year. Thank you.

Okay.

Hey, Sean it's Andrew here and my apologies that first piece of the question cut out for me would you mind, just repeating that and I'll take it from there.

Yeah sure. So the first part was just on some of the commentary that was in the press release regarding increased sales trends on the wholesale markets.

Just wondering if you could detail some of the developments that you're seeing and.

Those wholesale markets, particularly as it relates to the different price product.

Product pricing spectrum.

Got it got it okay. Thanks.

It's actually really interesting, we're seeing kind of a full 180 when it comes to demand on <unk> kind of wholesale side of it.

As we stated we're seeing a lot of our P series.

Simply divest from cultivation and.

And.

That's driving a lot of interest in producers that can do that at scale and so.

And I'll, certainly well positioned to take advantage of that so I would say that you know.

Early days of kind of.

When we went legal here in Canada, we had a huge demand there on on wholesale and <unk>.

We saw that kind of taper off a little bit in 19, and 20, and we're seeing that come back full force.

So I think that's a really positive for us given our small batch scale approach and our focus on cultivation and.

And I would say when it comes to the pricing side of what we're seeing and the market.

The same thing we're seeing on the retail side quite frankly, everybody wants above 20% THC.

And you're starting to see a pretty big.

Florida, there when it comes to the ability to monetize and get product above, 20% and certainly didn't get above $23, 25% and youre seeing very very healthy margins on that side, but again, nobody is really doing that at scale and.

And there's a lot of larger companies that really want and maintaining the right.

Product coming in and they just can't get that consistency through the different markets and what youre able to procure that product from at the prices they need to get at that given that the.

Supply is pretty short and that high potency range. So I think that just gives you another bit of color there on <unk>.

What does it mean for US I think it's just.

It was a core focus of our business early days, we made a pivot in 2022 really about 80% branded and 20% wholesale we're still focused on the branded side, but we're going to be advantageous as it makes sense for us and our business as we have more of these conversations and we look at.

Scaling appropriately.

With the right cultivars and the right partnerships on the wholesale side.

Okay.

Alright, Thank you for the color there.

My second question and this kind of pivot to to.

And I'm talking on the cultivation and production costs and the month.

So you noted that our average production and cultivation costs per month came down to $4 million and the quarter versus $10 million last year.

If I remember correctly from the Q4 reporting I believe that figure was down to $2 million per month on a on a on a monthly basis.

And so I'm, just trying to get and understanding for why the sequential increase on that front.

And how that played into your margins and then.

Also if theres any sort of forward commentary and maybe detailing relative to Q1, where you think a sustained average cost level is.

And I appreciate that thanks.

Jim do you maybe want to touch on that Greg just on the changes we've made and CMP.

Yes, sure happy to.

I think that.

And that as Jack mentioned, we had some elevated costs and I think you only mentioned one one aspect of that I think we saw some other nonrecurring elevated costs and that we did a complete replacement of of and.

And many of the grille rooms of the lamps and.

And then we had some other processes that we accelerated testing and and and other aspects that we accelerated that we're on a temporary basis. So the total number that I think we look at and in terms of non recurring cost was about 700000 $700000 and.

I think we have to be cleared also when we speak about.

About the debt.

Cogs numbers that you're referring to and and and the cost of CMP is some of those CMP costs of course are sitting now and inventories as we talked about and the and the previous question. So not all of those are flowing through.

To our income statement, but.

But I think that will we expect it will get down to a more normalized level of.

Something and the range of three to $3 $5 million.

A month on CMP costs.

Alright, Thank you for the color and that's it from my questions.

This concludes the question and answer session I would like to turn the conference back over to Zach George for any closing remarks.

Thanks, operator, and thanks to everyone for joining our call today, we look forward to updating you in the coming months Stacy.

Stay safe.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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