Q2 2021 Valens Company Inc Earnings Call
Yeah.
Hello, and welcome to the Valens company's second quarter fiscal 'twenty 'twenty, 1 financial results conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
And once you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Everett Knight Executive Vice President of corporate development and capital markets of the Valens Company. Every please go ahead.
Thank you operator, good morning, and welcome to the balance company second quarter 2021 financial results Conference call for the period ended May 31.2021.
A replay of this call will be archived on the Investor Relations section of our website at the balance company Dotcom slash investors.
4 we begin please let me remind you that during the course of this conference call Valens management may make statements, including with respect to management expectations or estimates of future performance.
Such statements other than statements of historical fact constitute forward looking information or forward looking statements within the meaning of the applicable security laws and are based on expectations estimates and projections as the date hereof specific forward looking statements include without limitation, all disclosures regarding future results of operations economic.
Condition and anticipated courses of actions.
Forward looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations for more information on the company's risks and uncertainties related to forward looking statements. Please refer to the latest annual information form and our latest management discussion and analysis, otherwise known as the M DNA each ads.
With the Canadian Securities regulatory authorities at SEDAR Dot com or on the balance company's web site at the Val income company Dot com.
The risk described in the annual information form, which may cause the actual financial results performance or achievements of the Valens company to materially differently from estimated future results performance or achievements expressed by forward looking information or forward looking statements are sure by incorporated by reference here on.
Although these forward looking statements reflect management's current beliefs and reasonable assumptions based on current available information to management as of the date hereof, we cannot be certain of the actual results will be consistent with the forward looking statements in the future. We caution you not to place undue reliance upon such forward looking results for any reconciliation of non <unk>.
<unk> measured and discussed please consult our latest MD&A as filed on SEDAR now.
Now joining me on the call today are Mr. Tyler Robson Chief Executive Officer.
Mr. Sunil Gandy are new Chief Financial Officer, and Mr. Jeff Fallows, President with that I would now like to hand, the call over to Tyler Tyler. Please go ahead.
Thank you Everett and welcome to everyone that has joined our earnings call to discuss our results for the second quarter ended May 30, <unk> 'twenty 'twenty 1.
I will start by giving a recap of our most recent highlights before Jeff goes into more detail on our operational and strategic accomplishments from the quarter and average discusses our capital markets activities.
I'd also like to welcome Sunil Gandhi, our newly appointed Chief Financial Officer, who will give an overview of our financial results for the quarter. So no brings strong corporate and operational finance experienced the balance and we were very fortunate to have him on board as we move through the second half a whole second half of our fiscal year and continue to execute our growth plans.
But before I kind of jumping on my part I want to be fully transparent with everybody.
That was a it was a tough financial quarter, but I think there's some very good things that came out of it that will dive into later today.
When you really look at how we entered the quarter to how we exited its 90 day.
Really jumping into our philosophy, a philosophy of fewer bigger better I truly believe we are executing that and 1 thing I want to bring to light is the very clear distinction between what is a manufactured SKU and what is the listing into provincial board. So we only added 4 new manufacturing processes to drive velocity and depletion rates at the provincial boards, but what we.
Did was take a lot of our products to the other provinces for faster Depletions more operational efficiencies that will increase our gross margin long term. So when you really look at what we've done is it's really an operational wind for a quarter, even though the financial results lagged.
Getting into it we really created a winning portfolio of products, having such great selling success and working with the provincial boards strengthening our sales and marketing team.
And again going back to velocity and depletion rates, which we're seeing month over month week over week.
Another thing we really did in the second quarter was was operationalized pre rolls when you look at our efficiencies that we get with pre rolls taking those to the eventual boards were going to succeed and we're going to win the pre roll category.
[noise] across new categories. We've also launched new edibles launched a number of baked goods diverse double chocolate Brownie. In addition to 1 of our Bath products, the nuance soothing Eucalyptus CVD Bath bomb in Ontario, and.
We're hearing great things. Another thing we did this quarter was really start to turn on the innovation.
Of rare and strategic cannabinoid when you look at the C. B M <unk> and Delta AIDS in Canada very few people have the ability to commercialize those we've had great success, which you guys will see some of those in the later half of the year.
With that overview I'll now turn the call over to Jeff Fallows, President of Valens company to dive deeper into the operational achievements and strategic initiatives for 2021.
Okay.
Thank you Tyler.
While our second quarter financial results were impacted by the effects of retail closures and both inventory right sizing and administrative listing delays at the provincial level, we made significant operational strides at all 3 of our facilities and believe our strategy continued to demonstrate its effectiveness as we gained significant market penetration in a difficult market environment.
This was demonstrated by a 76% increase in country, what countrywide provincial listings 132 compared to 75 SKU listings in the first quarter of 2021, we attribute our SKU listings success to the product development and commercialization strategy, we introduced at the beginning of the fiscal year.
This strategy is broken down into 3 core phases launch.
So optimize.
More specifically, we are now moving firmly through our launch phase and our manufacturing and gaining listings for products across all canvas categories. Our primary focus on the launch phase is to commercialize our core product portfolio with the largest possible addressable market, which is why we decided to enter the flower pre rolls.
And topical markets in addition to making the acquisitions necessary to accelerate our edibles footprint and expand our offering in the health and wellness vertical in Canada and the U S.
Our recent launches in these 4 new categories complements our existing product offering and nicely rounds out our complete offering of cannabis products.
Although the cost required to scale up and commercialize these new products led to a decrease in gross margin and adjusted EBITDA in the second quarter, we expect to drive margin growth in future quarters, as we improve efficiency optimize utilization levels and expand volumes across the country with these unique new offerings.
In the second quarter Valens manufactured 57, skus across all cannabis categories, only an 8% increase in comparison to 53 Skus in Q1, 'twenty 'twenty 1 keeping in line with our fewer bigger better approach the significant increase in provincial SKU listings was accomplished with only a minor increase in our total.
SKU count.
Further the aggressive SKU launching in previous quarters is transitioning into a portfolio management exercise, which is focused on identifying and discontinued discontinuing underperforming skus focusing resources on successful skus and strategically launching new and innovative skus into targeted market segments, where we believe we have done an excellent job.
Rob of preempting consumer demand, thus far and as the market matures, we will continue to closely monitor our portfolio offering and the popularity of all our products in order to optimize our productive capacity adapt to market trends gained market share in targeted segments and drive continued overall revenue growth.
Looking to the next several quarters, we will look to enter our growth phase, where we expect to continue our listing success grow volumes on our existing listings launched selective new and innovative products in targeted market segments and expand our provincial reach to all markets in Canada.
Since the end of Q2 'twenty 'twenty 1.9 additional listings were achieved and another 40 listings have been accepted by provincial distributors with the first shipments expected in Q3, 'twenty 'twenty, 1 or early Q4, 'twenty 'twenty 1 on.
The 132 Skus.
Mentioned earlier 32 were listed at the end of the quarter with sales expected to be recognized in the bounds third quarter results. This means on our momentum is only beginning and offers a clear indication that our products are winning in short provincial boards are recognizing that retailers and consumers are looking for our products.
To further increase bonds ability to capture market share in Canada, we expanded our Canadian distribution network to supply, Manitoba, New Brunswick, and Yukon territory with Valens manufacture products.
The company is now on 6 provinces, and 1 territory, including Alberta, British Columbia, Ontario, and Saskatchewan and nationally through medical cannabis medical cannabis by shoppers platform.
Valens will bring its latest latest innovative products to consumers in all regions of Canada with these latest network expansions and we expect to include more eastern provinces in the second half of fiscal 'twenty 'twenty, 1 with Quebec remaining a top priority by the end of fiscal 2020, 1 we expect to be in all provinces and territorial markets in Canada.
Once we have fully established Canadian our Canadian distribution network, we will be in a position to enter our optimized phase where we will work to further drive margin inefficiencies on popular winning skus, which will measure by market share consumer and retail feedback and market sales trends.
Quarter over quarter, our estimated share of the growing extract based market remained stable at 5% in Alberta, British Columbia on Ontario in Q2, 'twenty 'twenty, 1 based on high fire data and not including B to B L. P. Manufacturing, we expect this number to increase as we expand our portfolio of products and as we increase our partnership network over the course of the year.
Our estimated share of the cannabis infused beverage category grew 2.8% in Q2 'twenty 'twenty 1 from 5.5% in Q1 in Alberta, British Columbia, and Ontario based on high fire data with only 1 customer in this category to date.
Rice infused beverages accounted for approximately 1.7% share of the Canadian cannabis market in April remaining stable since the beginning of the calendar year. According to high prior data Valens expects to contribute to a cut to category a variety of market share in the coming quarters, what when the GTA facility comes online and we can begin to engage with more partners for source based beverage manufacturer.
Right.
We are expecting to report strong results from the second half of the year as we grow our leadership position on the Canadian cannabis product manufacturing market and crucially execute our U S strategy now that we have closed green roads, the green roads acquisition.
Over the second quarter, we transformed our future prospects by breaking into the U S market with the acquisition of Green roads for $40 million U S. This valuation equates to approximately 1.8 times 2020 revenue with a maximum earn out of $20 million subject to achieving certain EBITDA milestones in 2022, which are fully achieved implies approximately 4 points.
5 times fiscal 2022 EBITDA.
Valens now has significant presence in the largest cannabinoid market in the world, which is a monumental step in our international expansion strategy. Additionally, the acquisition strengthens our capabilities to supply global markets with an expanded product offering and increases our speed to market with a U S based manufacturing and co manufacturing platform the integration of the 2.
<unk> is ahead of schedule and we expect international shipments to continue to grow with a combination with.
With a combination collectively valens and green roads products are sold.
11 countries and discussions continue regarding various international distribution opportunities in Latin America, Asia Pacific and Europe.
Additionally, valens plans to invest approximately $10 million on the green roads to strengthen the company's resources across various business lines, including sales and marketing to capitalize on strategic opportunities expected to rise as the U S market matures.
Our Canadian distribution.
Excuse me, our Canadian domestic footprint remains 1 of the strongest in the country with our expanded capacity from our K 2 facility. The newly acquired life facility, which is which is scaling quickly and the GTA facility, which will focus on the formulation co packing and manufacturing of cannabis infused beverages and other customized to Plano and 3 bundled products using sourced by Valens.
Emulsion technology I'm pleased to say that the GTA facility has recently received the last few pieces of major equipment and with our health, Canada license expected imminently, we expect to begin to begin manufacturing and commercializing and shipping products from the facility in the second half of fiscal 'twenty 'twenty 1.
Our manufacturing expertise is unparalleled and our sophisticated popcorn is best positioned to capitalize on the future of the cannabis industry.
Every day extract based consumer packaged goods over the remainder of 2020..1 we will continue to expand into new markets strengthen our partnership network and bring our claim products to new customers on.
Now I'll turn the call over to Everett to discuss industry trends and market updates.
Thank you Jeff.
As Tyler and Jeff have made clear we believe we have maneuvered balance to provide a platform to seek to capitalize on huge opportunities ahead of us as the Canadian market matures and will continue to aggressively positioning the company for strategic opportunities as global markets begin to open up and large CPG players continue to enter the space.
T J avenues.
The importance of day, so is more apparent as we shift toward a more favorable regulatory landscape in the U S. As just yesterday Senator Chuck Schumer introduced a draft of the candidates administration opportunity act, which could be schedule regulate and tax cannabis in the United States. In addition to other social justice measures.
Although we cannot predict with certainty if or when candidates will be federally legal in the U S.
Our balance sheet remains strong as we successfully raised an additional financing from our bought deal transaction for proceeds of $46 million, which closed on June 1st.
This opportunistic equity raise provides the company with the ability to continue to pursue its strategic initiatives specifically by taking an.
Opportunistic approach to additional accretive acquisitions and to further secure our entrance into additional candidates to point out and 3 point out product verticals on a global scale.
This quarter, we were busy and launched a range of innovative products and for new categories, including edibles topical <unk> flower and pre rolls.
Since closing the acquisition of life. The balanced company is formulated manufactured and distributed over 50, new edibles products with various partners.
Wide variety of formats, including chocolate soft shoes, and baked goods. This includes unique chocolate offerings, including such as milk chocolate coffee quinoa with no added sugar Toffee Crunch ice cream sandwich chocolate bites.
E Berry chocolate Cherry milk chocolate fruit juice chocolate truffles, and the newly launched double chocolate brownie from burst candidates 1 of the first confectionery products of its kind to hit the Canadian recreational market.
Additionally, consumers can find soft shoes in a wide variety of fruit flavors, including pineapple coconut lemonade Cherry watermelon Black I E <unk>.
Raspberry and Green Apple.
We've also entered the growing topical market with our products that are crafted with all natural plant derived essential oils and infused with 100 milligrams of premium CBD. The nuance CVD back on is the first valens manufactured topical product and we are proud to say currently largest back from available and the.
Canadian market.
In partnership with various cannabis the Valens company also introduced a variety of flower and pre rolled products under the verse original line, including BC got Bud flower dreamweaver from pre rolls and Amp free rolls the first flower products sourced and manufactured by balance to enter the Canadian marketplace.
Since launch balance has experienced strong selling for this line of products across Canada wide distribution network.
As you can see our low cost innovative and adaptable product manufacturing platform has facilitated the efficient expansion of our operation and entry into new product verticals.
Even with the new product launches, we were able to get finished products to consumers in a record time, which allowed us to grow our SKU listings quarter over quarter significantly.
As Jeff mentioned, our product development and manufacturing capabilities now span all candidates categories, increasing valens total addressable market and market share capture ability the company expects to launch a range of new innovative products in the second half of 2021 and various formats as well as introducing Green road.
<unk> award, winning CBD products to the Canadian market offering consumers a wider range of products in the health and wellness segment.
In parallel we are strengthening our licensed producer partnership network with the addition of 2 leading Canadian producers balance will provide extraction and custom manufacturing for Rubicon organics and pre roll manufacturing and distribution services for citizens Dash candidates Corp, otherwise previously known as Experian biotech non.
Allergies with the potential to expand these agreements to include additional product development and manufacturing services as the relationship strength after.
After the quarter, we entered into a custom manufacturing agreement with gallery brands manufactured both beverages and edibles for 2 of their flight flagship brands Blessed and floor.
Alongside these operational achievements, we remain keenly focused on completing our listing on the NASDAQ which has been fortified by our U S. Entry. These initiatives will be instrumental in advancing our global opportunities and are expected to lead to valens, accomplishing a strategic and operational growth objectives, which we believe.
Will be transformational for the company.
We expect to be trading on the NASDAQ capital market in the third quarter of 2021 calendar year and have been working diligently to complete all requirements necessary. Prior to listing we expect to provide more information to the market.
In the next few months, we believe this will be a large step in the right direction for access to institutions and a greater liquidity, which seems to have dried up amongst small cap companies globally. During the summer as COVID-19 restrictions have lifted we believe unanticipated NASDAQ listing U S.
<unk> growing market share and entry into the flower category has justified our further narrowing of the multiple GAAP between us and our peer group.
And we intend to continue to execute on our business plan to show the market that will be leaving 2021 is a very different company than we started.
With that I'll now turn the call over to Sunil <unk> CFO to run through financial results for the second quarter of fiscal 2021, <unk> recently joined balance and has already taken the range and is demonstrating that it will be a great value add to the team. He brings over 25 years of corporate and operational finance.
<unk> largely in the consumer packaged goods and beverage industries. Most recently he was chief financial Officer of Trophy foods, a leading supplier of not base snacks baking in confectionary products with operations in Canada and the U S.
Going to be a great asset and we were very pleased to have him with us on this journey with that I will turn the call over to Sunil.
Thank you for the kind introduction ever it I'd like to extend my thanks to the entire balance team for their warm welcome and for their support in bringing me up to speed on my new role as the CFO of the company.
There is no doubt that balance is 1 of the most innovative manufacturers and the candidates industry and I'm pleased to join at such an exciting time in its evolution with the recent and important actions in terms of strategic acquisitions, launching various new products and creating 1 of the most adaptable product manufacturing platforms in the Canadian market.
Hope to leverage my financial operational experienced across the consumer package good space to build upon the strategic plan that balance that set in motion towards becoming a multibillion dollar global leader in the cannabis space.
Now moving on to our second quarter 2021 financial results net revenue increased by 6.5% to $18.8 million for the 3 months ended May 31, 2021, compared to $17.6 million in the same period of fiscal 2020 the.
The increase in revenue was driven by cannabis operations revenue and more specifically by an increase of $7 million or 75% in product sales as a result of a scale up our balance platform to develop and commercialize a range of new and innovative innovative product formats, including vapes beverages drink dropped.
Adabelle Bath bombs flower pre rolls Hashman crumble in addition to sourcing bulk winterized and distillate oil for our partner products.
Offsetting this increase was a $5.8 million decline in revenue associated with toll extraction and co packing services, which is reflective of our transition away from our previous focus on toll processing.
I was also encouraged a reduction in shipments of biomass from extraction partners as they continue to adjust their workforce on operations to manage through the uncertainty created by the pandemic.
Yeah.
Compared to the previous quarter ended February 28, 2021, net revenue decreased by $1.3 million or 6.2% for the 3 months ended May 31, 2020, watt, which was compared to $20 million in the previous quarter.
This decline was mainly driven by $1 million decrease in revenue from product sales due to decreased activity from canvas partners sourcing Balkan winterized sourcing bulk winterized and distillate oil combined with administrative delays with provincial boards and sourcing on lifting cannabis 2 point on 3 point on products as all parties continue to work through the <unk>.
<unk> of the COVID-19, pandemic with ongoing brick and mortar store limitations and closures.
We are optimistic that the bottlenecks are being alleviated as pandemic restrictions ease in many regions of Canada and this is demonstrated by the number of incremental listings, we achieved towards the end of the second quarter.
Listings increased by 76% to 132 compared to 75 listings only in 2020 in Q1 accuse me of 2021 with only a modest increase in the physical number of SKU count on.
Greatest significance is the fact that 32 listening tour achieved at the end of the quarter in key categories, such as concentrate pre rolls flower topical and beverages with sales starting to be recognized in balance third or fourth quarter free.
Fiscal year results.
Gross profit for the second quarter was 22% compared to 24% in the first quarter 2021, and 35, 8% for the same quarter in the prior years. In addition to the factors impacting net revenues gross profit was negatively impacted as the company experienced the inherent efficiency inefficiencies associated.
David with new product launches and the transition away from the historical focus on toll processing to the current strategic focus on product development and manufacturing.
It is expected that gross profit will improve overtime as production volumes increase.
Operating expenses for the quarter were approximately $15 million compared to $10 million in the same period last year.
1.3 million of the increase expenses were driven by professional fees associated with specific transactions such as the acquisitions of Green roads and life. In addition, the company experienced higher advertising and promotion expenses depreciation and amortization and the overall general and administrative costs associated with the <unk>.
Out of the organization to aggressively execute our product development and manufacturing growth strategy.
Balance ended the quarter, the second quarter 2021, with adjusted EBITDA of negative $5 million compared to negative 2.2 for the quarter ended to.
February 2020, what.
The decrease in adjusted EBITDA can be attributed to increased cost to innovate and produce unique products with lower utilization how's.
However, as balance continues to focus on capturing market share has increased from Rachel listings, we expect to achieve higher utilization had anticipated recurring revenue of these products is expected to drive value for quarters to come.
Additionally, the integration of life contributed to a small decrease in adjusted EBITDA.
We remain confident that our continued business transformation.
On the product development and manufacturing platform and our acquisitions of Green roads and life food technology will allow us to experience positive EBITDA performance in future quarters. We are also excited about the rest of 2021, where we will continue to leverage our updated business model recent acquisitions and expansion to create long term sustainable.
<unk> for all shareholders and stakeholders.
Balance continues to monitor inventory levels and balances outstanding with our partners to ensure a strong financial balance sheet position.
At May 31, 2021, we had $38.8 million in accounts receivable and expected loss rate for overdue balances of 0.8 billion based on subsequent collections in various discussions with associated partners and analysis of credit worthiness.
Balance is subsequently collected.
And has trade accounts payable outstanding with the same partners or has recorded an impairment loss provision representing almost half of the total accounts receivable balance which is outstanding.
May 31.2021.
It is acknowledged that this balance is higher than in previous quarters due to a combination of factors such as.
2 significant balances with core customers, which had extended payment terms coming in coming due in Q3 and the relative timing of shipments in Q2 in the coming quarters. We expect our accounts receivable balance to decrease has provincial sales increase and more revenues collected from provincial boards of more efficient and favorable payment processes in place.
Balance at $23.9 million of cash as of May 31, 2021, compared to $20.3 million as at November 32020.
Which includes gross proceeds from the various bought deal financing from 2020 in the first quarter of 2021 as of June 1st Valens closed a bought deal financing in which we issued $13.9 million units valued at $46 million, which were comprised of 1 common share of the company and 1 half share purchase more.
Sure.
Each full share purchase warrants exercisable at a price of $4.15 per share for a period of 36 months from the date of closing.
With that I will turn the call over to the operator to open the lines for question and answer session.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer session. If you'd like to ask a question you May press star 1 on your telephone keypad.
Information tone will indicate your line is in the question queue. You May Press Star 2 if you would like to remove your question from the queue Corp.
Core participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of David <unk> with ATB capital markets. Please proceed with your question.
Hi, Good morning, Thanks for taking my question and congratulations on the quarter.
I just want to go back to some of your prepared remarks here.
Thank you.
Put in the market now a 132 skus.
This quarter, which is about 75% quarter over quarter growth.
By our back of the napkin math, that's right up there with just about any of the Canadian Lps in general on my.
Question for you guys is how have you been able to achieve this especially with on.
Ontario cannabis store for example, you'll.
You'll see us pulling back in right sizing inventory, how have you been able to achieve this to that level.
But also just from a consumer perspective, how how confident are you guys that these are the skus that are really going to be in.
Important for consumer preference.
Yes, Thanks, David obviously, Tyler here, a couple of things unwind there because there's a few on do we remain confident yes, absolutely remain confident you pick the right skus.
And kind of internally I'll say men lie women line numbers don't the Skus, we've gone forward with we've achieved the listings. So when we have the listings in the provinces. They are very different than the skus manufactured and clearly they are winning for multiple reasons..1 we bring a value proposition to the table no 1 else does and 1 number 2 I guess is we have.
Cannabis IP that no 1 else has so when you look at the form factors the different delivery methods no..1 can touch on our platform, whether it's in edibles or even concentrates beverages, we bring something the table no 1 else does it and yes. Our listing skus are starting to compete with some of the tier 1 L. P. 's with multibillion dollars market GAAP, but at the end of the day numbers won't lie and you'll see core.
Over a quarter of growth with some of these depletion rates and that's 1 thing that a lot of people aren't talking about yeah. It's great to have a lot of listed items at the provincial boards, but let's chat depletion rate, let's chat inventory health and see how fast those skus are moving the velocities. So when we really put our best foot forward with these skus, which we did win everything we wanted to.
You'll see it in the next couple of quarters.
And David Sorry. This is Jeff I, just want to add 1 quick thing to that we want to be very clear the difference between a SKU manufactured in a skew listed the SKU manufactured has only increased by 4 skus on 57 Skus are 57 products that we make about 132 was the number of listings those 57 products make got.
Across the country.
Yeah, that's that's really great color guys. Okay. Thanks.
Moving along as well just to your pre rule on flower category. It seems like you're doubling down to some extent on that area. Im just wondering from your mark on gross margins here not EBITDA margins the gross margins.
How do you view that as impacting your overall business.
Increased or decreased gross margins, namely because given you guys are on the 2 point on 3 point.
Product category and those already command the highest margins in the space. So in other words do you see the pre roll and flower categories actually being.
Negative to your overall margin profile or or neutral or positive for that matter.
Yeah, David Hi, This is Jeff I'll take this 1.
To start so yeah. So we're the largest buyer of biomass in the Canadian market. So we get favorable pricing and are able to be very selective on the skus in the flower profiles that we bring in house, but that said.
These SKU offerings or are these product offerings for our customers are really designed to help them round out their brand portfolio. For example, the launch of diverse skus really they're targeted for them was to round out their product portfolio. So they get on the shelf so to speak and they are in the value focus category from a balance perspective.
The gross margin for us on that would be lower than than say other products, where our IP and technology has been added to a source based product it's true, but we're very comfortable with the overall gross margin profile that adding those to our products that gives us.
Okay. Thanks, and if I can just squeeze in 1 more here just with your U S strategy and congratulations by the way for closing Green roads. Besides green roads on the CBD side.
Is there any other opportunities that youre openly considering whether this P&C on msos space or manufacturing of partnering space or how should we think of your U S strategy in general is it stopping right now at least we're starting I should say with with Green roads and potentially down the road, you'll you'll look to something further.
Yeah, I guess, just 1 more to me again, David So from a greenhouse perspective that is really the first piece of the puzzle I think 12 months, David we're going to be talking about what a great transaction and an opportunity that was for the balance platform. As we are actively looking to increase not only.
Our <unk> business through the greenhouse platform, but also expand that business throughout the U S. So yes, we expect to be active yes. It's the first step of many and we think that we've got the team.
On the brand portfolio out agreements that we can do that.
Okay. Thanks, very much congrats on the quarter I'll pass it along.
Our next question comes from the line of Gerald Pascarelli with Cowen and company. Please proceed with your question.
Great. Thanks, so much for taking the question and this is has some demos on for Gerald today.
So with the <unk> acquisition now closed.
Love to get your thoughts on the U S CBD backdrop.
In particular at the brick and mortar retail level now that the economy is reopening at a better pace broadly faster than expected and given discretionary income that should also now benefit from from from child tax credits, which started today. So so any thoughts on potential momentum to the category.
And how has this evolved over the past few months.
Great. Thank you.
David Why don't you talk about 1.
Sure well thanks for the question, Yes, I think we're finally seeing an inflection point that not only in Canada with COVID-19, but in the U S as well.
Where you are finally, seeing these mom and pop shops that got hit so hard that were selling CBD now start coming back online where you can actually re re actually get those distribution channels that we had previously in 2019 on greenhouse I previously in 2019, and really focus on the online network too with people going out and actually doing things in.
Being more active and getting out it really that health and wellness segment.
Really is.
Part of that and that really benefits from it. So if you look even at conferences, we're having our first conferences with green roads, which truly drive that revenue and what we haven't been able to do to drive that brand to those next level and mom and pop shops in new consumers with that said, though with the benefit of Green Road Theres really the online network, where if you look at the return on.
<unk> spending cost of customer acquisitions comparatively to other companies I think they've been very strong in that category and regardless of I think the net benefit is now just another positive on that <unk> side, but the overall online network continues to chug along.
Very well.
Okay.
That's super helpful and I guess just to discretely on a follow up on on that day.
Can you just talk about what you're seeing in terms of the pricing environment in your CBD.
Last year, we saw a lot of them are large publicly traded companies take 15% to 20% price reduction to manage through through a pretty deflationary environment.
So as it stands today do you do you believe the U S. CBD landscape pricing landscape. It is rational and are you comfortable.
With your relative with your relative price crabs.
Yes.
On this 1.
Feel free to comment on ethics extremely.
Extremely comfortable with where it's at.
We looked at everybody we've talked to everybody. We have a good understanding on where things are at in and price doesn't care about our quality doesn't care about price when you're looking at a bottle of wine and liquor store not everything is price. The same people are willing to pay more for premium products. That's tested and the 1 thing on the Green road's platform that very few people on the U S. We're doing is standardized testing across.
The board, where you can actually see a Coa. So what we're seeing right now is the price per Gram is is higher than our industry competition right now because it's transparent.
Go ahead.
Yeah and on that note on that.
Green Dot is 1 of the only companies and you ask where a consumer can actually scan the barcode and go and find that Coa I think it's about trust for the consumer and in the CBD space.
Really in the 2018 with the farm Bill go on everyone and their dog was trying to starting to CBD brand and the consumer Hasnt really had is that trust. The reason, we thought green roads as the right partner for US is because it has that trust with the consumer and it shows what their price point being higher than a lot of others and I would what I'd look for you.
Third party data is how stable green roads pricing has been comparatively to others and if you look at the different price channels. The other reason that greener on the advantage. The online channel really has a better margin profile on pricing and that's where it's really more sophisticated so the more revenue you can do on that on line segment, which consumers still to.
Like the best.
It's really a margin enhancer and you can have more price protection on them.
Great. Thanks, very much I'll jump back in the queue. Thank you.
Our next question comes from the line of Andrew <unk> with Stifel. Please proceed with your question.
Yeah.
Hi, good morning, Thanks for taking my question.
Maybe just a follow on on on your flower and pre rolled offerings coming out of the gate, obviously very strong here in terms of positioning.
Could you give us a little bit more color on on your overall strategy.
Why is it that you chose.
On to launch or free products in this fashion.
And how do you see yourselves different from them.
On your peers.
Yes, I appreciate the question happy to touch on that so yes, we did have a successful pre roll on flower launch, but I want to be very clear, we left a lot of money on the table in this quarter with supply chain issues and it's almost like we're in a fight with 1 arm tied behind our back we couldnt get tens for the pre roll units in time so.
We have open provincial orders that we couldn't fulfill on time that we had to bump so.
It's 1 of those things, where it's just that it's a product of the environment that we're currently in and we will clean those up and as the world comes back around from the pandemic.
Ply change will tighten up and we will we'll be able to get access to materials that we need as flowers the product offering how we're going to be competitive in the best way to think about the balance strategy for flower is we're here to be a challenger, we're not going to be the biggest but we're going to be a value proposition that no..1 can touch and what sets us apart as we're not tied to a specific genetic.
If you look at company accepts cultivating for 120 days, they are tied to whatever genetic or whatever biomass comes down at the end of the harvest, we're buying selective screens selective terpene profiles and we're launching products for different value propositions and again being the largest purchaser of biomass and the lowest cost producers, we can add value where no 1 else can touch on we're currently <unk>.
Buying.
Way lower than people are producing in flooring and I'll call. It strategic we buy from different people have different time, and we'd play quarters. So depending on who has a quarter coming up if they're trying to meet their topline revenue.
Grabbed biomass that we're looking for at a significant discount to market. So.
On the best way to think about our flower strategy today is we're going to be a challenger in.
In this space.
Thanks for that great color and maybe switching gears.
You know correct me, if I'm wrong, but it seems like you have a pro forma cash balance sheet now of around $50 million.
10 million of that is going to the to the green roads building out.
On the presence there.
Could you talk a little bit more about what you guys plan to use.
The rest of your war chest for any color around.
The strategy behind M&A, what Youre looking for where you're looking for things.
And what you find attractive.
Yes, Jeff why don't you talk to US 1 sure. So first first important part to talk about is the capex that we we needed to finish to get our Cajun facility up and running capex at life to get that running the way. We wanted it and also pardon me. So the majority of that is largely done.
And as we said when we did the bought deal financing.
We're continuing to see opportunities.
Both north and south of the border that meant that we should have a balance sheet that allow us to be flexible and opportunistic in achieving those so the vast majority of that war chest as you call. It that's a good way to put it that's how we view that balance sheet.
We brought it on board to be strategic and to further our strategy and that includes <unk>.
A large opportunistic acquisitions in key market segments.
Okay, and maybe if I could squeeze 1 more in here.
Could you talk about where you are in terms of facility utilization or capacity utilization.
Throughout your footprint in Canada.
Yeah sure happy to take on that so.
I'd say I mean, we're largely still getting started so.
As you know our Cajun facility just came on at the end of November and we've been scaling up that facility. So if I was too low.
Little bit challenging to say because we would have to go almost product by product in terms of capacity, but I'd say, if if push comes to shove I'd say were maybe sitting around 40% today on our capacity and.
It's still the best days are ahead of us in terms of filling up that capacity.
Driving those operational efficiencies.
Okay. Thanks for taking my questions I'll get back into queue.
Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Good morning. This is Andrew bond on the line for Aaron Great. Thank you for taking our questions.
On.
You have a number of new Skus listings being launched and we've been hearing more about increased difficulty in getting Skus listed so I know you touched on your increased SKU listings earlier on the call, but just curious on how your conversations have gone with provincial buyers.
Are you seeing any difficulty in getting listings and some of the more saturated categories. Thank you.
Yes, absolutely maybe I'll talk about as an average feel free to comment we're having zero issues with the provincial boards and the dialogue is very very warm.
More of an ally than an enemy in this space. So we're very collaborative with a lot of the provincial boards asking what's working what isn't what price points are moving velocity going back to our strategy of fewer bigger better we're using a sniper rifle rather than a shotgun. So we're not even having conversations around something we really want to get behind at this point in the provinces are extremely open again pricing.
We can be more competitive than a lot of our industry peers. So the provinces understand that day and now they're coming to us with ideas like Hey, guys have you ever thought about doing X y or Z. We believe there is white space, we're talking to retailers directly.
Our provincial board strategy has to be 1 of the better ones on the entire space. So.
Zero issues with with maneuvering at the provincial board.
Okay.
Great Great that's great to hear and thank you for the detail I'll pass it along.
Our next question comes from the line of John Chu with Desjardins Capital markets. Please proceed with your question.
Hi, Good morning, just wanted to touch on the listings hair and so in a very simplistic way. If you have 57 skus that you're manufacturing.
And you've got 6 provinces and hypothetically you list every 1 of those skus on those 6 provinces and technically you would have.
Over 300 listings I guess is the basic way of understanding that so.
But obviously youre not going to have every single SKU as I said on every single province, but as you're adding 4 more provinces by yearend as we stated earlier and then some new products coming along as well maybe help us understand what's what's a normalized lifting number that you may expect to see once all of the <unk>.
Provinces are added to your distribution that you have a 57 skus.
What would be kind of on more normal looking listening across Canada.
Is that something you can give us a handle it.
I can't really touch on that because it's almost impossible every provincial board is so different than what we're seeing when in BC might not win on Ontario. So were tailoring our approach for the specific provinces and if you look at beverage for example.
If you look at where were at currently in BC and Alberta, we're not quite there in Ontario, because Ontario doesn't have the same beverage depletion rates or inventory health and if you look at how they went to click and collect obviously beverages aren't as popular in Ontario as of today. So.
It's really impossible, we're going to tailor each provincial board to the consumer needs and wants and then again optimize as we go on time. So I don't think I can give you a specific number.
And again when you look in Saskatchewan, Manitoba, sometimes less is more so we're really getting behind core skus and some of the smaller markets to again just drive operational efficiencies. So if you look at our core product offerings under reverse for example, youll see whole flower pre rolls Sunset Peach Vape pen and tropical lemon in every market.
But we're being very concise on strategic on some of the other skus, we're launching it in again almost proof of concept. So we'll launch it in specific markets for specific reasons and then once we have that data and once we're comfortable on really getting behind the product then we'll launch in other markets.
Okay.
A follow up on that then so as you get more data and obviously some of these products are very new very unique.
So that might.
Take some time for some of the provinces to get on board.
Is it safe to say that there is potentially some significant upside to the 132 listing because some of these products like brownies and bath bombs or just so new so there is potential for significant upside for more or less thing.
Yeah, I don't want to be over promotional but there is significant upside in theirs blatantly huge upside in what we're doing again, we've been very concise and a lot of people think we've been in the provincial boards longer than we have it hasnt even been 12 months since we've been listing in the provincial boards and we're winning.
And I know our financial results might not show that today, but when you go back and look at February March April on some of the milestones we've achieved with the protocols that don't go live until August September October.
It'd be a completely different story going forward and we're winning the provincial listings.
Tons of upside left on the board and again I'll touch back on some of the open pose supply chain is has been an issue and were not hiding behind it by any means we'll take it on the chin if need be.
But we're fighting with 1 arm tied behind our back right now and we will win the provincial boards listings and continue to drive depletion rates in and Youll see that in the future.
Okay, and then just I wanted to touch on them up more on the flower and the pre roll angle here.
By our estimates that 70% of any free sales and so you're getting into that market, just really increases <unk> addressable market. So we like that move.
Can you give us a bit more color because it just sounds like you've just been in the early stages of launching some of these first products.
Are there more flower strained and schemes coming pre rolls as well and is there an opportunity for another <unk>.
Third party partner.
Net to come in on top of in addition to <unk>.
Yeah, John this is Jeff versus the first.
And really the impetus where they came to us and asked us to round of their portfolio day.
Deeper in and analyze the opportunity. So that's the first I mean, what's going on obviously from a beta beside which is not in these numbers and not something we've talked about yet.
The feedback on the opportunity for us to support our R. L. P partners is great. So the demand we've seen the Paul we've seen the opportunity to fill volumes until our machines. I mean, we started with 1 machine we've already had to buy a second.
So when we think the opportunity and pre rolls in particular is very very strong.
Youre not going to see that from a BD perspective.
Okay, great and debt.
Maybe just last question here.
You've introduced some fairly unique for nufarm.
New form factors Reece.
Recently and obviously.
The store restrictions.
I'm guessing hampered with some of those sales because presumably they're going to want to take a look at it in person.
Versus buying something online site unseen for something game. So is that a fair statement that some of these new form factors, whether it's backed bonds are baked goods, you really need the stores to be opened to really start to generate meaning more.
More hype behind that.
Yeah, you're 100% right never feel free to jump in.
Online platform is very different than the brick and mortar physical locations and a lot of our products or price accordingly to be an add on at the end of the transaction. So if you look at hypothetically, a pre roll or bath bombs, youre going and therefore to beverages in our brownie you add on that at the point of sale when you're at the physical retail location, but not on E. Commerce. So we've seen.
On trend shift away from from some product in and we're already seeing depletion rates pick up now that Ontario is open.
So yeah, Youre, 100% right the day.
Market is just different from e-commerce or brick and mortar stores.
And John what I would add onto that is if you look at the innovative products. These products are brand new to the Canadian market.
You don't want really helps is that storefront environment to give that consumer education and frankly at the end of our quarter as of May 31st March most of those storefronts, where click and collect so I think that after that what we're seeing is a tailwind in the third quarter, where youre seeing that the stores open and also that consumer education happens, though for 2 point out products.
There's obviously a correlation to storefronts open and greater demand in those product categories and that's not new you can see that on the high fire data and in the U S.
Okay, Great appreciate the time guys. Thanks.
Our next question comes from the line of rivals Saragossa with Raymond James. Please proceed with your question.
Hi, good morning, gentlemen, thanks, so much for taking my question today I'm really wanted to focus on the <unk> acquisition.
On getting that closed so.
On the call. After the acquisition you talked a little bit about the synergies expected, maybe you can give us a bit of up debt about an update on.
You know how the synergies.
Our expected rollout how that strategy is evolving and in particular, how our green roads management, specifically is is influencing the broader strategy and balance.
Yes, absolutely every why don't you start and then Jeff and I will jump in.
Sure. So Rob as you said its a close in the third quarter. So we don't have any green roads results. So we'll have partial results coming in that third quarter as well as the management team being a bigger part of the corporation.
If you look at Dale Baker, He's now our president of the balance company U S and I think it's going to be a key part of that strategy from an integration standpoint today. We're well ahead of schedule I think where we really hit the ground running was on international where we're now utilizing that CBD platform for international sales ROE and now what we're doing.
<unk> is focusing on cost structure.
Even just leveraging tyler's relationships, we've already been able to lessen the cost of goods sold on isolate.
So we've found a decrease in prices as well as 1 thing that the green roads team isn't in today, they really sophisticated as you know on that online platform, but they haven't got into the MSL retail right and some of these other retail relationships. So that's really the concentration right now and getting that up to speed and we're well into our 100.
Day integration plan.
And we'll give updates to the market in due time.
And as well as I would say just kind of update on the overall kind of market. It's a nice thing to see as the questions earlier, you were seeing kind of an inflection point.
In Canada, the U S where openings are happening so green roads will be go into its first conference here.
Since which really can drive that brand recognition sales to new b to B channel, where they're already sophisticated I'm happy to see side. So.
That's a key thing is.
Opening up on that front and I am sure Dale can tell you about that in future quarters.
Perfect. Thanks, very much and just very quickly.
I'm sorry on maybe.
We add 1 more element to that conversation as well so we're already seeing and when we say it in our prescribed remarks that we're ahead of schedule in terms of integration.
Outlined 3 phases of than we did this on our public communications 3 phases of our synergies what are the key areas is on the beta beside and we're already seeing 2 important parks number 1 some of our existing partners coming to us for to handle a U S focused.
Factoring number 1 and number 2 already involved in discussions to help facilitate big box store.
Self listings with Green road products.
On 2 key areas for big Big volume improvements.
Already well underway.
It's only been about 3 weeks since we closed.
Terrific. Thanks for that Jeff I think you've just answered my second question. So I'll take another second question then so on.
Now extrapolating those relationships, particularly you highlighted tyler's relationships.
Again on the call last time, and if cleaners seemed to able to leverage that in the U S. How.
How about internationally can you give us a little bit more like just like you did in sort of clarity there in terms of the U S.
On structures and vertical as you go on after anything more specific you can share about the international.
Great.
Yes, I think it wouldn't be a surprise to you Raul to know to note that potentially green roads was focusing on some markets, where we were focusing as well. So 1 of the first things. We realize is we had a conversation with hey wait a minute, we're both having different avenues or different inroads into this that combine the efforts.
And formularies, where green roads was ahead, how can we leverage that to fly.
While more balance products through and where balance was ahead how can we.
Ah maneuver to get more green roads opportunities there those conversations have already started to happen on already formulating so that's from an international perspective.
That's an avenue, where youre going to see.
A lot of integration between the approaches that balance.
From a U S market perspective, obviously green dot starts from a great space and lefkowitz on devices will do great for us.
With little integration aside from these synergies that we're talking about but from an international perspective, the combined effort, they're really 1 plus 1 is 4 o'clock.
And Robert maybe expand 2 is from a strategy standpoint, now we have a manufacturing hub in Canada for the medical markets that we can distribute and obviously into Australia and other markets. But then also and we have a more flexible platform on green roads with their cgmp facility, they're going through the CBD channels right <unk>.
So I think that together, we're seeing the synergies and saying okay. Some markets. We can ship to our facility something we can ship to theirs.
And it has some unique synergies. So we'll keep you updated on that how does that expense.
Terrific. Thanks, so much for taking my questions and that's luck with the integration.
Our next question comes from the line of Scott Fortune with Roth Capital Partners. Please proceed with your question.
Hi, good morning, Thanks for the questions a lot have been answered, but just real quick follow through on the Green Mills up in Canada kind of the opportunity there to build CBD their distributions.
Focus on the timing and because it seemed like a lot are going after that market in a big opportunity for agreement just kind of stepped on Tuesday, they can opportunities for it and trying to points.
Yes, I think we this is Jeff thanks for your question.
Do think that there's an opportunity for green roads products in Canada, we're already starting that conversation key will be around the portfolio that we bring to market again, we're focused on volume and efficiency fewer bigger better is our mantra here. So there are some key green roads products that we will be looking to bring up in <unk>.
<unk> market segments, but we have also a lot of our custom manufacturing partners, who are also coming through volume to bring specific products to market and we will manage all of those relationships on an overall portfolio basis to make sure that we're driving volumes in all skus.
Timing and then timing on I don't really care.
On the Canada market from CBD opening up.
Yeah.
So the key difference from the Canadian market, obviously is that the sale of CBD products as regulated the same ads THC right. So so from a debt when you say the market opening up from a CBD perspective, I'd say 2 things number 1 CBD products are out there and are selling through the dispensary in prudential channels, but number 2.
The big opportunity and yet to be realized opportunity, particularly for companies like Valens relates to the health and wellness side of the equation and that's what many of the products that we've launched and we will continue to launch our focus on the health and wellness market, that's predominantly a CBD based market and.
And so we are pushing that agenda and I'm talking about market segment with our partners in Canada, If youre talking specifically about when CBD will be deregulated from THC environments and sold in say over the counter and and like a lot of our shoppers are some of those channels.
That's where that timeline is going to occur we don't it's not we're not clear we are encouraged on where some of the conversations ongoing.
Within our sites, but we don't make a call on specifically when that's going to happen.
Okay. That's perfect I appreciate it thank you.
There are no more questions in the queue I'd like to hand, the call back to management for closing remarks.
Yeah.
Thank you operator, and thank you to evidenced joined honestly, we had a tough quarter not the financial results. We wanted but operationally came out stronger than we went in.
We're confident in our ability to deliver and I think youre going to see that in the listings or excuse me had already manufactured and youre going to see greater distribution in Canada and 1 of the things you'll see is greater distribution in the U S post integration of Green roads.
Our fundamentals are strong and everything is kind of coming together operationally and we will deliver we're.
We're looking forward to our Q3 call on providing more updates with that I'll ask the operator to close the call. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.