Q3 2021 Valens Company Inc Earnings Call

[music].

Hello, and welcome to the Valens company's third quarter fiscal 2021 financial results conference call.

At this time all participants are in a listen only mode.

Brief question and answer session will follow the formal presentation.

If anyone should 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 Everett. Please go ahead.

Thank you operator, good morning, and welcome to the balanced company third quarter 2021 financial results Conference call for the period ended August 31, 2021, a replay of this call will be archived on the Investor Relations section of the Valens website at the balanced company Dot Com slash investors.

Before 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's expectations or estimates of future performance.

All 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 of the date hereof.

Pacific forward looking statements include without limitation, all disclosures regarding future results of operations economic conditions and anticipated courses of action. These 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 our latest annual information form and our latest management discussion and analysis, otherwise known as M. DNA each as filed with the Canadian Securities regulatory authorities at SEDAR Dot com or on the balanced company's web site at the balanced.

<unk> Dot com.

The risks described in the annual information form, which may cause the actual results performance or achievements of the Valens company.

Be materially different from estimated future results performance or achievement expressed by the forward looking information or forward looking statements are hereby incorporated by reference yearend. Although these forward looking statements reflect management's current beliefs and reasonable assumptions based on the current available information to management as of the date hereof, we cannot be certain on the actual results.

That 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-GAAP measures measures discussed please consult our latest MD&A as filed on SEDAR.

Now joining me on the call today are Mr. Tyler Robson, Chief Executive Officer, Mr. Sunil <unk> Chief.

Chief Financial Officer, and Mr. Jeff Fallows, President with that I would now like to hand, the call over to Tyler.

Thank you Eric and welcome to everyone that has joined our earnings call to discuss our results for the third quarter ended August 31, 2021, I'll start by giving a recap of our most recent highlights and review all we've accomplished over the last year before Jeff goes into more detail on our operational and strategic accomplishments from the quarter average discusses our corporate develop.

Capital markets activity Sunil will also give an overview of our financial results for the quarter.

First of all though I want to start by saying, we acknowledge it was a it was a challenging quarter that we're not shying away from it at the end of the day that business is stronger and we did make strategic initiatives to move the business ahead.

I'll, probably start by talking about some of the challenges first including the supply chain.

We all know Covid has been a challenging time for us, but we're still making strides ahead and as we continue to strategically move the business.

There's been some delays in manufacturing capabilities or even automation.

So it's not that we're not doing exactly what we said we're going to we are just taking a little bit longer than expected weather delays and physical equipment coming into <unk> or even getting taxed income from Europe to come Commission some of the equipment. So we see some delays, but we're still extremely confident on where the business is going.

Just to Echo again, how we are constantly we obviously saw strong growth in the quarter as evidence of that.

<unk> successfully transitioning into a BDC and positioning as one of the fastest growing LTE, Canada BDC revenue lines represented roughly 50% of net revenue in Q3, and we expect to see continually grow provincial sales growth, 20% quarter over quarter supported by 76, 5% increase in consumption level that retail outpacing our competitors.

<unk>.

Our motto has always been fewer bigger better and I think we are seeing that so again I want to make sure people understand the difference between a skew in our lifting we are still running under the model fewer bigger better and we're also kind of adding a new win create build and optimize as we are building new markets and the BDC. We're now looking at optimization not only through.

Optimization of automation, but also looking at that delisting, a few non moving velocity skus and really doubling down on a few of the big one.

Also when you look at a few of the accomplishments in the quarter looking at the acquisition diverse and depending acquisitions citizens that fell down in the bar category.

We still wholeheartedly believe those are strategic move burst amplifies the balance provincial listing and for the example that we see God by the top five seller and flower Skus during September in Alberta, Ontario, NBD. According to high fire. Another thing I'll touch on briefly is just the market innovation again, I don't think anyone can touch us on the market innovation for not only whats.

Already launched what's coming in the next few weeks and kind of some of the projects. We're working on one of the big things, you'll see at our balances are infused payroll.

Skus.

I don't think anyone else can contract capabilities. There we've seen a few infused pre rolls that I'll call sub par to the premium category and youre going to III multiple coming out of balance. So youll see one the task Youll see one with live resin and then you'll see one was distillate, but not only will you see a brand one year <unk> partnerships.

Start to leak out at some of those vertical as well and I'll have to look at them from the last call. Our beta speed relationships are stronger than ever and Youll see some of them. So obviously you saw the six relationships go public you're going to see a few more coming very very soon.

For now ill turn the call over to Jeff Fallows, President of our company to dive into the deeper operational achievements and strategic initiatives initiatives.

Thanks Tyler.

We are very pleased with the progress we have made on our strategic initiatives and have taken some tough but needed first steps to transform <unk> into a leading cannabis consumer package. Good company in the third quarter, we experienced strong growth in product sales on a sequential and year over year basis, resulting in a 20% increase in net eventual sales and $76 five.

Increase in consumption level retail sales according to high fire I highlight this growth in provincial sales in the midst of a tough market backdrop not to suggest we are satisfied that the topline revenue performance in the quarter, but as a clear indication that the mechanisms are the mechanics of our previously discussed strategic plan, including differentiated.

Launch grow and optimize phases is working and has only just started to produce the results. We envisioned at the outset, our launch phases generated deep and broad SKU penetration at the provincial level with our provincial listings, increasing by 37, 1% to 200 to 181 in Q3 2021.

One compared to 132 in the second quarter 27, additional provincial listings were achieved since the end of Q3 2021, and another 40 provincial listings will be added from the acquisition of citizens dash amounting to pro forma 248 provincial listings.

We believe this industry leading growth has successfully set the stage for the next phase in our strategic plan the growth phase and which we intend to target accelerated expansion of market share strong revenue growth and margin improvement as we enter this phase we have already initiated both process and operational changes to ensure we are able.

To efficiently service the anticipated increase in demand in.

In addition, we have repositioned our <unk> business to focus on deeper relationships with larger partners and we'll be making targeted investments into automated equipment to handle both the growth in volumes and support our key growth objectives and increase in margins. We anticipate the benefits from these and other activities will be realized over much of the 2022.

Full year before we turn our focus to the final step in our strategic plan the optimization phase.

Our U S strategy and green roads with slightly more than two months of revenue accounted for during the third quarter of 2021 and revenue contribution of $11.0 million. We believe the U S. CBD segment will be a long term growth engine for <unk> going forward, we will remain focused on executing and leveraging both our relationships and manufacturing expertise.

Dry bulk channel and volume growth for new and existing Green roads products in the U S. Canada and internationally, we've witnessed the remarkable demand in popularity for products across the CBD and cannabinoid based wellness space and are fortunate to have gained a piece of this significant market.

While our top priority remains building, our Canadian and U S. Domestic footprint, we continue to make capital and asset light strategic advances to expand our international opportunities indicative.

Above this strategy, we recently entered into a long term partnership with Australia as Epsilon Health care limited. This exclusive manufacturing partnership will give all of them to access to Epsilon, good manufacturing practices or GMP facility in Australia to.

The key benefit of this partnership will be to accelerate our growth our growth in Australia, while also giving us access to EU GMP grade products for export to key international markets, such as Latin America, Europe, The U K and the age of Asia Pacific Region.

Entering this partnership with Epsilon is another milestone for bonds and delivers on our key and promise deliverable in 2021. The agreement also reaffirms volumes positioning as a leading global CPG candidates manufacturer.

Additionally, we continue to advance the Pommies facility in the GTA as we anticipate receiving health, Canada approval to begin manufacturing and distributing our candidates to Plano and three point O products in the near term.

We continuously strive to grow our distribution network in order to meet the market demand across Canada and bonds currently manufactures products to serve six provinces and one territory. During the third quarter, we made significant progress in our efforts to bring our innovative product portfolio to Quebec, a key market that represents nearly 15% of.

And cannabis retail sales.

Specifically volunteers received authorization from A&P to two contract and subcontract with a public body in Quebec.

<unk> authorization is set in motion valens ability to become a registered vendor to supply goods and services in Quebec.

We've consistently messaged since the beginning of the year that bounds would exit 2020, one as a very different company than when we entered implicit in that assertion was our belief that at the end of the year, we would be best positioned to service, both our customers and consumers grow market share and drive towards profitability and be a leader in the industry.

We believe bounds as posed poised to enter 2022 from a position of strength with our balance sheet that allows us to operate in a nimble manner in order to capitalize on future M&A opportunities and organic growth the future prospects for violence have never been better and we are excited about the opportunities that lie ahead, both for the company and our shareholders.

I'll now turn the call over to Everett to discuss industry trends and capital markets activities Everett.

Thank you, Jeff as Tyler and Jeff have made clear we are a very different company than we were at the beginning of 2021 illustrate this I wanted to start with five quick facts that we believe only scratches the surface on putting that into context, the transformation balances undergone.

Roughly 50% of our sales in Q3 2021 were made up of U S. CBD and Canadian provincial sales were both segments were largely nonexistent last year.

Valens owns green roofs, a top 10 U S. CBD brand, which has shipped over 10000 locations and has a robust e-commerce business, whereas at the start of this year balanced did not have any U S operations.

Three we have now shipped well over 1 million units to seven provinces and territories in 2021, showing the power of our team and our platform where last year, we only manufactured hundreds of thousands of units and shifts to four provinces.

For edible provincial listings made up roughly 25% of our overall listings at the end of the quarter, where we had zero at the beginning of the year.

Five Valens successfully launched the top five drive candidate SKU with versus without cultivating cannabis, where a year ago. This wasn't even a product category we operate today.

We believe our joint BDC and BTB platform that mirrors large CPG companies offers a unique opportunity for investors to gain access to higher margin branded products and increased utilization manufacturing for third parties, while leveraging the sophisticated platform we have built today.

The edibles category is going to continue to be a focus for us as seen by the innovation products that we have launched across the category, including very Cherry chocolate.

Covered gummies Vaca ice cream sandwich cookies, and cream chocolate bites and.

And the chocolate peanut butter cups, just to name a few in Canada. The animals category is one of the fastest growing having increased retail sales of 123% since Q3 2020.

And now represents five 1% of the market as of Q3, 2021 in Alberta, Ontario, and BC According to high fire.

With our recently announced agreement to acquire citizen Stash and acquisition averse, we've gained exposure to a much larger share of the market operating in two of the best segments for profitable growth candidates to point out products and premium dry flower and.

In Canada today extract based products make up approximately 30% of sales compared to California, more sophisticated cannabis market, where they make up almost 50% of sales. This growth is also illustrated in premium cannabis with the Canadian premium premium cannabis, making up 14% of the market we're in.

California, This makes up 31% of the market today.

We believe that California is a great roadmap for the future growth and upon closing. These two acquisitions. We believe we have two brands that are well positioned with leading provincial listings and market share.

Furthermore, the pending strategic acquisition of citizens Dash is expected to provide accelerated entry into the premium flower vertical with an asset light approach citizens Dash is a world class genetics company that will bring to balance our network of contract growers that has a very similar model to other CPG industries interact.

With agriculture.

Citizens Stash is expected to bring 40, plus provincial listings to our platform increasing our pro forma provincial listings to 248 balances now present in seven provinces and territories and this will grow to nine across Canada, assuming the successful close of the citizens acquisition.

Additionally.

Our acquisition of burst, which closed subsequent to the quarter was the natural progression of our active partnership which has allowed valens full access to its broad product portfolio offered across the cannabis one point out and to point out categories. We view this acquisition of burst and the pending acquisition of citizens back once completed to strong.

Lead position balanced branded products across the value chain and showcases balanced low cost manufacturing platform, we anticipate both acquisitions to be accretive to Dallas.

We have remained focused on finding strategic M&A opportunities that would complement our longer term vision with the U S being at the top of our list. We are working to provide our shareholders with greater exposure to this massive market and a variety of strategic verticals. In addition, we are constantly monitoring the Canadian and international markets for growth and synergies.

Alongside all of these initial achievements and as we recently announced despite a longer than expected timeline due to the backlog as a result of the pandemic. We are diligently pursuing the process of completing our listing on NASDAQ and anticipate we will commence trading on the exchange before the end of the year.

The NASDAQ listing is expected to provide balance with greater trading liquidity, while also allowing for a broader base of institutional investors.

With that I'll now turn the call over to Sunil to run through the financial results for the third quarter of fiscal 2021.

Thanks, Everett now moving onto our third quarter 2021 financial results.

Net revenue increased by 15, 8% to $21 million for the three months ended August 31, 2021, compared to $19.0 million in the same period of fiscal 2020. The increase in revenue was primarily driven by cannabis operations revenue and more specifically by an increase of $45 million or 29, 7%.

Product sales offsetting this increase was the continued decline in revenue associated with toll attraction co packaging services and bulk oil sale as the company continued to execute on our strategy of transitioning away from a focus on toll processing to our product development and manufacturing company.

Gross profit margin for the third quarter were 26, 8% compared to 22% in the second quarter of 2021, the improved gross margin at our most recent quarter compared to the previous quarter was mainly attributable to the higher margin profile in the green roads business the margins in the Canadian business continued to perform.

Below our long term expectations due to the inherent inefficiencies of new production processes, especially those associated with new product launches.

In addition throughout the last year bounce has experienced supply chain challenges and chronic labor shortages in the market, which ultimately drive up labor costs.

As expected, though that gross profit will continue to improve over time as we optimize our product mix production volumes increase and processes are made more efficient through automation initiatives.

Operating expenses were $24.0 million compared to $15 million in the second quarter of $2038.0 million in the same period last year.

The increase in operating expenses compared to the previous quarter predominantly due to the inclusion of a green rose business, along with increased D&O insurance costs, covering our U S operations, serving as a secondary factor and all other remaining expenses actually coming in slightly lower than the previous quarter.

Balance ended the third quarter of 2021 with an adjusted EBITDA of negative $8.0 million compared to negative $5 million for the quarter ended may 31, as the increased revenues and gross margins were offset by higher operating expenses.

We do remain confident that our transition to a global product development and manufacturing platform and our acquisitions of burst candidate and the completion of the pending diligence that acquisition will result in positive performance in the coming quarter. We are looking forward to the fourth quarter 2021, and fiscal 2022, where we are.

<unk> increased the recurring lines of revenue as a result of our focus on capturing additional market share and increasing our listing base.

The company will continue to leverage our updated business model as well as the pipeline of new partnerships accretive potential acquisitions and global expansion opportunities to create substantial value for all shareholders and stakeholders.

From a balance sheet perspective balance continues to manage its working capital balances to ensure a strong balance sheet position as at August 31st 2021 overall receivables on the balance sheet were $42.0 million, which included $39.0 million of trade receivables from customers with the balance.

That being made up of other non trade receivables.

Balance of trade receivables as of August 31st actually declined by 9% from the balance outstanding at the end of the previous quarter with the inclusion of receivables from Green Road, serving as a partial offset.

In addition, violence that subsequently collected and has that trade accounts payable outstanding with the same partners, representing 68% of the total accounts receivable balance which is outstanding as of August 31.2021.

As the revenue mix continues to move toward increased sales with provincial and BDC customers with more regimented and favorable payment terms relative to b to B L. P. Customers. We do anticipate continued improvements in the amount of outstanding in here.

From an inventory standpoint, the company has $35.0 million on hand as at August 31, 2021, compared to $17.0 million on hand as at May 31, 2021. The increase in inventory was largely driven by two main variables one being the need to procure and build inventory in advance of the numerous.

New product launches that are being undertaken and secondly, there was an operational need to build more finished goods inventory to more effectively service, our key provincial customer with growing volumes and demand for our various products.

Can be demonstrated by the 5 million dollar increase in the company finished good position as at August 31, compared to the previous quarter.

The cycle of new product launches and changes in product mix can be expected to cause some near term volatility in inventory balances in the quarters ahead, but should we expect it to stabilize once customer demand and sales patterns achieve a more normalize a bit mixed data.

Balance ended the quarter with a strong cash position of $31 million as of August 31, 2021, compared to $32.0 million in the previous quarter. There was a significant amount of capital flows within the quarter, starting with the $43 million capital raised at the beginning of the quarter. This was then offset.

Partially offset I should say by the proceeds of approximately $18 million required to close the acquisition of <unk>. In addition to the settlement of various transactional cost capital spend debt repayment and the full payment of our full year's premium on the company D&O insurance policy associated with entering the U S. Mark.

The total of all of these above items resulted in the use of $28 million in cash.

And then the increase in inventory levels of $18.0 million to support operational requirement was partially offset by the declining trade receivables as the recent improvements in the operational cash burn rate.

With these items largely behind US we feel good about the strength of the company's balance sheet and cash position as we enter the fourth quarter.

Yeah.

With that I will turn the call over to the operator to open the line for question and answer section.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

To ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two.

We would like to remove your question from the Q4 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 Andrew <unk> with Stifel. Please proceed with your question.

Good morning, and thank you for taking my questions.

Maybe just to start off on on Quebec.

Yeah.

Could you provide an update on on the process what.

And what do you think.

Needs to be done.

In order to become an approved vendor and.

You know once you do become an approved vendor could you walk us through if possible.

On how protocols work in the province.

To ultimately have your brands and products on the shelf.

Yeah, absolutely. Thanks, Andrew for the question, obviously, it's Tyler few.

A few different things here, one Kodak is definitely a challenging market, especially with the change in management.

With the new CEO coming in relatively soon and I think I'll call. It October 22nd this new start date.

It's been a few challenges and changes and they've slowed down a few things as we continue but we're still super excited and extremely confident that we will be in Quebec in a meaningful way in the near future.

Obviously with some of the challenges of changing management, new change relationships you change ideas you changed strategy, but.

I'll Echo again, we are confident that we will have a meaningful position in Quebec. We are working on an agreement it is well underway.

I won't comment further on on when we're going to have it done but it.

It is in the near future and we are excited.

Definitely looking forward to seeing your products to my own province.

Maybe switching gears.

Talking about <unk>.

Gross margin improvement.

I think you mentioned you know the driver in this quarter was was mostly CBD.

Could you talk a little bit about your facility utilization rate, where it stands now you know you have a lot of SKU listings that you've won.

A lot of new brand partnerships that you've announced and obviously you know pushing on your own brands as well going forward. So how can we see that utilization rate ramp up.

What do you think that could do to gross margins and and you.

You know maybe tying that in with you now.

You make a.

A comment earlier on the difference between listings SKU listings and Skus manufactured.

Can see here that your listings are almost double the rate of the skus that you're manufacturing, which could potentially be a leading indicator for your gross margin. So you know.

A lot of moving parts here, if you could just touch on that and what we can expect going forward.

Yeah, absolutely. So obviously a lot to unwind and that one I'll start with kind of Kate <unk> as we continue to ramp up its hard to pinpoint an exact number on where we are especially with some automation skills coming online and like I touched on earlier, we expected to have some of it online.

Earlier to be Frank and again some of the challenges of not only getting a commission your validated getting physical taxane from Italy to bring on some of that stuff. So I don't think I can pinpoint an exact number but what we will see is less manpower more automation and that's one of our key focus is to drive gross margin and in time, you will obviously see you continue to get better and better.

And improve over time.

Yeah, I think that's basically the best way to say it Jeff.

And I think if you think about it.

I liked the distinction between the number of Skus in the listings. Obviously, we believe the listings are a leading indicator of future revenue potential and what we've done in the last quarter is is focus on getting all of those products available are the processes available to handle the volume growth that we're anticipating so.

Do you think about when you scale up to start a process theres lots of inefficiencies as lots of learnings and there's lots of things like that that go directly against our gross margin those things largely being worked out and as the volume start to increase and those provincial orders start to increase.

Your first orders are always small right Andrew and then the second order in the third or fourth letter. So as those orders continued to increase and you get the real benefit of launching those products, that's a natural progression.

Progression that the gross margin increases.

Fantastic and just a last one if I could.

Just on the cash burden SG&A Sunil thank you for that for that good color there.

Obviously, you know on the SG&A line, we saw an increase.

Quarter over quarter, and this is above well above the Q1 levels here.

Could you.

With with with the color that you provided on an insurance payments and closing of acquisitions could you provide a little bit of color on it.

You know what we could expect maybe in Q4.

Should this stabilize out should we even perhaps expect.

A decrease in expenses here.

I'm, just a little bit more color on that could be helpful.

So I think I'll start by saying I think the.

The most material change from the previous quarter was obviously now, including Greenville incentive business into our numbers right. Otherwise if you actually look at Q3 versus Q2 are asking airline win with actually very very stable. So now taking into account green roads to be part of our business going forward and the D&O costs also being part of our business going forward.

I can't tell you exactly where it's G&A with lined up next quarter, but I'm not expecting material changes from where we want it right now.

Thanks for that then I'll get back in the queue.

Yeah.

Our next question comes from the line of Federico Gomez with ATB capital markets. Please proceed with your question.

Good morning, guys and thanks for taking my questions. So just to start off.

About your Europe or U S. B D segment.

Could you comment on the competitive landscape. There what are you seeing in terms of pricing and just overall growth in dentistry.

It's a very fragmented market there and how confident are you about reaching the targets that you set for a program for 2022.

Yes.

Yeah, Great Hello, and thanks for the thanks for the question so.

The CBD space, obviously, when you looked like you said, it's fragmented and we're starting to see.

Some consolidation and some of the smaller players start to fall away out of this space as the users are and the consumers of CBD in the market begin to get a little bit more discerning about the products that they're that they're utilizing and we like that trend and we like the opportunity that that provides to agree modes.

We continue to move forward. There is a couple of tailwind that it would argue greatly propel the opportunity that we're seeing in the CBD space down there. Obviously, the first is getting a little bit more clarity from the FDA as you were.

No. When you look at the store formats et cetera are carrying various CBD products in the assortment of products that are available and some of the larger format stores very limited right now given the FDA uncertainty really limited to sort of topical et cetera, and those distribution channels. So getting some clarity there will be a nice tailwind for us and as.

Youre, saying in for Matt.

EBITDA targets or the or the opportunity we saw in green roads would would be a go a long way to fulfilling that.

<unk> that we have that sort of one catalyst alone otherwise as we're bringing the two businesses together and we're consolidating relationships and making introductions for green roads to valens relationships as we have.

<unk> told the market, we were going to do and also.

Compare.

Correct, Assortments and an IP opportunities opportunities sure IP et cetera, we're pretty excited about what we're seeing other green roads. We're excited about the team that that's down there in what theyre doing for us. So while it's I think it's too early to comment any more on sort of that EBITDA number that we announced as part of the acquisition.

We are greatly encouraged by what we're seeing and we still very much like that opportunity.

Yeah. Thanks, Scott.

That's great color and maybe just Don on your outlook here and we know that Q4 is still going to be two.

A transitional quarter for you guys, but just looking forward into 2022.

Should we look at that growth will come more from your B to C side as you point out products, our <unk> products are or maybe from green roads or even international how should we look at that it jumps up a mix between b to C b to B and Green roads any international Thank you.

Yeah, absolutely. So I think what are you going to skus all the above with a major major focus on BDC not only in Canada and the U S. As we move towards the BDC model and really get behind some of the brands and open up distribution I think that's going to be one of the biggest growth factors that youll see in 2022.

Yeah and.

Obviously as Tyler said.

Strong emphasis our expectations arent DTC side, but got to underplay, what we're seeing from the <unk> side and the opportunity that we're seeing there we continue to like the relationships that we have and that we're building and think that theres very strong potential for our base business and those relationships.

And as we look south of the border and we looked at Green roads again, the pipeline of opportunity that we see there the conversations that are currently ongoing.

The general market backdrop of several catalysts as we just discussed for the CTV space. We're very encouraged about what the what the contribution agreement can be making two bounced financial statements in 2022.

Frederico endeavor here, maybe if you have further kind of give context to that and you saw this quarter that we had 50% of our sales coming from provincial sales in Green roads already now with the closing of citizens Dash I think <unk> see that aspect greatly increase going into 2022.

That's great context for you from a modeling standpoint, we're obviously, we pick citizens dash in the 2.0 areas because theyre not only the fastest growing but we see long term the best profitable growth in those two categories.

Okay. That's great. Thanks, I'll hop back in the queue. Thank you.

Our next question comes from the line of Sharon Merrill with Canaccord Genuity. Please proceed with your question.

Hey, good morning, and thank you for taking my question.

So my first question I, just wanted to touch on where the business is that with the SKU optimization.

The press release. It was noted that <unk> reached critical mass on SKU portfolio. This quarter and I think earlier in the prepared remarks, I believe Tyler mentioned that there was some additional opportunity to move away from underperforming skus.

And what's being distributed today.

So I just wanted to calibrate what portion of the currently listed Skus do you see opportunity to drop and then also as it relates to the student dash portfolio. What portion of that business is current distribution do you see opportunity to take offline or optimize on that front.

Thanks.

Yeah of course, maybe I'll start with citizens as we move closer to closing that transaction I think there is a good opportunity to again optimize their portfolio and really bring them into the fewer bigger better strategy and really bring velocity and some of the skus skus, it's really automate their packaging right now theyre doing everything by hand, and the way they're sourcing biomass.

That is not efficient if you know what I mean, so bringing a fewer bigger better model to them I think will greatly improve their gross margin as we incorporate it also when you look at our Skus, what youll see over the next couple of quarters and it again it takes longer than people think it does do even needless to skewer list of SKU with the provincial boards, So youll see us move on some from.

One of our smaller partnerships, where our non velocity skus and really double down and one thing that have greatly affected our velocity or even optimization.

Our provincial sales or selling so quick we can't keep up with the demand. So it's negatively impacting our gross margin short term as we continue to throw bodies at it where we lack automation. So theres some processes right now where you look at we have 10 manual people packaging things out that are going to go to one one machine. So its greatly going to affect our not only our opened up.

But our gross margins. So there are a few skus, you're really getting behind you look at BC got Budd you looked at the first pre rolls and then you look at our beef category youre going to see greater velocity and more automation coming out of those.

Thank you for the color there and then my second question.

More on the international front.

Could you help outline some of the capital requirements with the Epsilon South Florida agreement.

My understanding is that bonds assumes the operational and capital expenditures at the facility. So just curious what's remaining from a capex perspective, and then what the expectations are for Capex spend over the next year.

Sure. So first of all address sort of the opportunity in Australia. So out of the gate, we don't anticipate any significant capital investments into the facility at all right now. It's an operating platform is already has the capability of producing product and in fact is producing products for valens.

Already today.

The potential for Capex goes forward as the market continues to develop there and as we've always said once the economic opportunity proves itself, we'd be more than happy to put capital to work. So as we continue to build out that business. Once it gets to capacity and once we start to see the opportunity continuing to increase for us there.

We won't be shy about making some additional investments and.

Into that into that market, but to be clear that's not that's not a big swing capital investment that's some.

All equipment that may be.

Grading some additional or some of the equipment. They have down there. So it's not a big swing. It's it's a right size capital investment, but its only when we see the economic economic opportunity to earn a return.

Perfect. Thank you for the color there and I'll hop back in the queue.

Our next question comes from the line of John Chu with that's Jordan <unk> capital markets. Please proceed with your question.

Hi, good morning so.

Put the strategic transition, mostly behind you now you're in your growth or ramp up stage.

Is it safe to say that the third quarter and even the quarter prior to that the second quarter was really good.

Trough or bottom and that going forward, we should start to see accelerated sales.

And with that gross margin improving.

And then obviously the EBITDA is starting to improve from from deals I was going forward is that a fair statement.

Yeah, Yeah, I think that's a fair statement John the question becomes just a matter of timing on that so when you were launching a SKU just to be clear as Tyler said, its a long process, which is when we announced them to the market all the skus that were getting listed in noting the listings.

Don't Wanna be judged necessarily on our listings what we what we're trying to do is be clear with the progress that we're making with our strategic plan.

I actually get to the the largest scale revenue that those skus listings represent could be anywhere from six to 12 months right. So as the province.

The listing brings it all and you meet the first delivery opportunity to the province, they do their initial orders and then it gets into the system and through the system and you start to get that velocity it could be anywhere from six to 12 months. So yes, 100% getting those listings in was a big first step we're very excited about that and we are going to be working with the provinces to drive.

That volume as quickly as possible, but just to set realistic expectations out there as to what that means from a growth and a margin profile perspective.

Yes, it's coming it'll just be product dependent and it'll be over the next six to 12 months.

Okay. So then maybe adding on to that so your manufactured skus.

I guess, a few quarters ago, you're in the low 60 ish it dipped into the low to mid fifties and now you've jumped back up to 67 as of the third quarter.

So it sounds like those 10, new additional manufacturer skus from the prior quarter.

That sounds like it's going to be a drag on margins then for the near term similar to the idea you had before that the.

The revenue that you can have a higher cost structure and then we'll kind of take a bad for their revenue. The catch up is that going to act as a bit of a margin headwind.

Even though your heavier lifting is starting to ramp up revenue.

I'd say, yes, and yes or no.

I'd say, yes, when we started selling there is additional cost profiles, we've been tried to be clear about with the markets, but no. Additional SKU listings are variations of existing skus. So theyre not whole new Skus for example, so variations on pre roll formats or.

Putting whether you do a five and a packer tended to pack or something like that these represented additional skus, John but they don't necessarily have a at the same kind of impact is when you're launching a new product line.

So the 67 manufacturer skus, they're not.

Okay.

They're not yet.

Okay, Yeah, exactly so they're not they're not a wholesale new product forms that are based on existing processes and variations that we're adding to those so from an efficiency perspective, theres much more or theres much less hit on cost.

Even though we believe that there's real opportunity for those skus in the market from a revenue perspective, so not is not nearly as pronounced as historically when we were launching all new product forms.

Okay. So those 10 additional quarter over quarter and manufacturer Skus, it pretty well all of them are our central sexually derivatives of existing Skus correct correct. Okay.

Perfect and then just the last question, Dan you talked about or Telerik talking with some supply chain issue, which is still a equipment and getting technicians over and whatnot.

Have a meaningful impact on <unk>.

Sales for the quarter or margins and have those issues been resolved yet.

Yeah, I would say overall sales like if you look at what we could have done in the first pre roll for example, you can't meet the demand and if you look at like even the labeling of that skin, we're doing it by and as compared to automation. So it affects margin ended effect velocity of Skus, though I think bulk of those coming in and again I think people are underestimating some of them.

The global supply chain issue, there's absolutely nothing we can do.

And some of the automation is on route it's been delayed a couple of weeks some cases a couple of months.

But again, we're not going to we're not going to risk putting inferior product on the shelf the rep or do damage to the reputation and our brand so.

What are the product of the environment, essentially but yeah. We did leave some money on the table and it did affect our gross margin. So we will clean that up and we're extremely excited to get those products and processes online.

So is that going to be still a modest drag in Q4 that.

Yes, okay.

Okay Alright, thank you that's.

That's it for me.

Our next question comes from the line of Neal Gilmer with Haywood Securities. Please proceed with your question.

Yes. Good morning, all thanks for taking my questions I'll, probably just sort of continue along the lines of.

The listings here to understand that and then a second question after that.

You, obviously had a 37% increase in the listings that you put in and then subsequent to that some more what sort of driving the success to be able to get those provincial listings and then sort of the subpart to that question would be you.

If you can take for example, the six manufacturing agreements you recently announced are those already.

Listings that you have with the provinces are those are net new listings that we should expect as you start to.

Manufacture those products and get them into the provinces.

Yeah, absolutely. Thanks for the question Neil I'll touch on the provincial success first why are we winning provincial lithium.

I think it's kind of a three pronged stool, one innovation I don't think some of the products going live anyone else can do you look at it peanut butter coffee look at a few of the other edible innovations. We've got listed you look at the hard sell servers that are going live and it can with a resealable lid.

We have innovation that no one else can touch to.

The product offering the depth of product, where it's basically where I don't want to call. It bartering in trading with some of the provinces like look we will do that for you. If you guys gave us. These two products. So it's really both the relationships we have in place and really being seen as an ally to the provincial boards.

Other than that I think would see pricing as the lowest cost producer are the largest purchaser of biomass in the lowest cost producer for both biomass I think we can do a product offering that no one else can touch on the pricing as we continue to bring on automation and optimize a lot of the processes yoga youll really see that gross margin start to improve.

Second question with those.

Six agreements that we went live with some of them are to provincial boards and some of them are strictly bulk back to the license producers with excess capacity. We have so when you really look at utilization of infrastructure, that's where we really start to move the needle as well as in back filling our excess capacity.

Okay. Thanks, John I appreciate that my second question sort of comes back to I guess the strategy. Obviously this has been a transformative year and you've had a number of acquisitions as we look forward now is your strategy sort of focus on integration and demonstrating how accretive those acquisitions are in and making sure that.

Everything goes well with respect to the acquisitions or are we to be expecting still you're you're very aggressive taking a look at potential opportunities and and could have some some further acquisitions over the course of the next 12 months or whatever.

I would say the biggest thing is getting our attention right now is going to be integration, but also supply chain. When you look at the ecosystems that we bought and I'll use.

Citizens dash with the pending transaction coming you look at the ability for us to move the needle not only on supply chain standpoint, and really get the automation, even like against sourcing biomass. It at a significantly deep discount to what Theyre currently paying I really think integration and supply chain are going to be the story of Alan going forward, obviously, we're going to be opportunistic if there.

Right.

Opportunity comes along but the story for us is getting the integration and supply chain all those acquisitions that we've made.

Great. Thanks Tyler.

Our next question comes from the line of Gerald Pascarelli with Cowen. Please proceed with your question.

Hi, good morning, Thanks, very much for taking the questions.

So my first one is on Green roads.

Obviously, a nice contributor to your to your top line this quarter.

Even though it was a partial quarter.

I'm just curious if you could provide any color on how sales are maybe trending.

Into your fiscal <unk> and then.

Do you expected benefit.

That you expect green roads to get following the passage of AB 45 in California. It seems like obviously, a net positive for the industry just in terms of distribution white space. So any color you could provide there would be helpful. Thank you.

Yes. Thanks for the question so from a greenhouse perspective, and a revenue perspective going into the fourth quarter.

I would expect in the short term of the company to continue to operate as it has.

Similar basis to what it did in the third quarter, as we're going through and making introductions and also driving through some some the balance.

Added value to the equation. It takes time to get that stuff properly implemented and get out into the market. So I would expect the bigger changes are the more growth to happen going into 2022 down a green roads, but that being said I think as I said earlier there are some potential positive catalyst.

South of the border there that could change that equation dramatically.

California is an interesting opportunity and from a greenhouse perspective, where there wasn't.

Significant sales into California, obviously, given the the previous.

Regulatory state there, but on the back of that opening up absolutely that's an opportunity for green roads and ones that we're going to be helping them realize.

In the coming weeks and months here.

Got it thanks very much for the color that's helpful.

My next question is.

On your on your partnerships I know that you had called out in the press release that Youre transitioning away from your smaller non profitable BTB partners, which obviously impacted your revenues, but at the same time, you Shine a big custom manufacturing agreement with six larger customers and so I guess like as we look at the <unk>.

As news going forward is that disruption from the transition behind us.

Should this should this new manufacturing agreement.

At a minimum partially or if not fully offset some of the disruption that youre that youre seeing currently.

In your revenue trends.

Commentary there would be helpful. Thank you.

Sure. Thanks, Gerald it's a great question. So if you look at the transition of that business. Those six agreements are projected to ramp up over the next few quarters. So yes, I think it was the right decision to go away from underperforming partners right. We you want is more profitable growth and what we've tried to do with these <unk>.

<unk> partners is we want more consistency from them and we want that relationship of higher utilization higher volumes and that's what we've got another six partnerships three three of them were the top seven Lps in Canada, and as Tyler mentioned I think you continue to see that to grow over the next term. So I think you see that ramp up over the next two quarters because some of the.

Agreements don't start till Q1, Gerald but largely youre seeing that transition over that and obviously that transition to the <unk> going to more consistent and larger players yeah, and one thing I'll kind of add on to that as evidence 60 agreements that would that did go live all of those were Canadian based groups, what youll see in the upcoming weeks.

Months quarters is some U S partnerships again, the same relationship you have in Canada, we're going to be taking them <unk> joining them in the U S, which you will see go live in the foreseeable future so fewer bigger better both sides of the border.

Got it.

Super helpful. Thanks, very much for the color.

I will hop back into the queue.

Yeah.

Okay.

There are no further questions in the queue I'd like to hand, the call back to Tyler Robson for closing remarks.

Okay.

Thank you operator, and thank you for everyone, joining obviously not the ideal quarter and again, we're not shying away from it there are headwinds in the sector and we're doing our best and if you look at the achievements, we've made not only internally, but in comparison to some of our peers. We are winning we are confident that we know exactly what we're doing.

Is it going as fast as it should know it never does but at the end of the day, we are getting better every single day.

Underlying sentiment and underlying fundamentals are clear and it's coming to <unk>.

Coming to fruition in all products in all verticals.

Momentum is fueling our growth and will continue at the end of the year into 2022 unique and innovative products and global increasing provincial listings and delivering sustainable value to our shareholders.

I want to say, thank you for all the support and with that I'll turn it back to 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.