Green Organic Dutchman

Good morning, ladies and gentlemen. My name is Anis and I'll be your conference moderator today. Welcome to the Green Organic Dutchman First Quarter 2022 conference call. To ensure an enjoyable experience for all participants, all lines have been placed on mute. Following the presentation, we will open the call for questions. If you would like to ask a question, simply press star, then the number one. If you would like to withdraw your question, press star, then two. This call is being recorded on Thursday, May 26, 2022. I would now like to turn the conference over to Shane Dungy, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Anis. Good morning and thank you all for joining us for our Q1 2022 conference call. Today we'll provide comments on our performance as well as an update on our operations and how we're executing our plans. This call is being recorded and the audio recording will be available on the company website at tgod.ca. Joining me on the call this morning are Sean Bovingdon, Chief Executive Officer, and Nicola Thompson, Chief Financial Officer at the Green Organic Dutchman. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that cause actual results to differ materially. I will refer you to the news release and MD&A for more information on these assumptions and factors.

With that, I'll now turn the call over to Sean. Thank you, Shane, and good morning, everyone.

Thank you for joining us today. The progress and momentum built in fiscal 2021 has carried forward into the first quarter of 2022, including another record month in March. Our focus on quality and consistency have continued to drive brand value, and the solid revenue growth along with continued cost-cutting initiatives, an increase in the revenue mix towards premium flour, and an increased utilization of our Ancaster facility have improved our gross margin again this quarter. In a challenging and highly competitive environment, we've been successful at continuing to grow revenue and our retail distribution by investing in relationships with retail cannabis chains. Operationally, our strategy and execution has repeatedly delivered quality product to consumers, and demand has outpaced production while we remained mainly insulated from the pricing pressures our peers have been facing. Meanwhile, our yields have been consistently strong, repeatedly at or above 100 grams per square foot of canopy, while maintaining the THC levels always above 22%, with some strains reaching as high as 28% in the Teagut premium flour category. Our quality, high THC premium flour with strong terpene profiles, such as our sugarbush and maple kush strains and our newly launched cherry mints, continue to be the key drivers of our growth. We continue to develop and launch new premium strains to strengthen our leadership position in the premium flower category. In response to this growing consumer demand, we commenced our first harvest from our Valleyfield facility earlier this week and are excited to be able to offer high quality Quebec grown product to the market. Annually, that valley field will produce an additional 2,500 to 3,000 kilos of flour, while it still remains the production facility for our portfolio of hash products. In Q1, we also launched our highly Dutch six-month oak barrel aged hash in the Quebec market. It will be available in Ontario shortly, and we expect Newfoundland and Manitoba availability to follow. We launched TGOD pre-rolls for our Rockstar, Tuna, and Sugarbush strains in January. Based on the early success, the TGOD pre-rolls will be available in Cherry Mint and Maple Kush in the upcoming months. We also added the Cruzee Supercharged Dubies, combining the flavorful indica flower and rosin to create a unique consumer experience. We are encouraged by the stronger than expected consumer demand for these pre-roll offerings. So our three strategic initiatives have continued to drive demand and expand distribution. That's thanks to our commitment to the TGOD promise to deliver consistent, high-quality, high-THC products, our focus on growing key retail chain penetration, and our dedicated sales model. We've been able to continue the momentum from Q4. These three initiatives will continue to be the foundation of our growth strategy for the remainder of 2022. We are pursuing opportunities for additional cultivation for 2023 to meet the strong demand for our products, in particular for our premium flour. We continue to have strong conviction in our potential to achieve significant growth quarter over quarter as we remain focused on the quality and consistency, as well as continued cost discipline and execution. We are pleased with our progress and continue to build TGOT into a profitable, sustainable, and agile cannabis company that importantly is growing faster than the legal market in Canada. With that, I'll now hand over the call to Nicola to take you through some of the financial results.

Thank you, Sean. As Sean mentioned, we built on our momentum from Q4, which included another record month in March. We achieved record quarterly net revenues of $10.6 million. a 96% increase from Q1 2021, and a 12% increase from Q4 2021. The quarter-over-quarter increase in revenue can be mainly attributed to the launch of additional premium flower strains, the launch of pre-rolls, and the continued traction for highly Dutch organic flower. With Acosta providing direct store support, bud tender, and consumer education, in addition to the new listings accepted in the key markets, the company achieved significant increased revenues. Gross margin before changes in fair value adjustments improved in Q1 2022 to 35% from 32% in Q4 2021, reflecting higher net revenues due to sales mix of products moving towards premium flour, which now represents 27% of our revenue. We believe gross margin in Canada can be consistently between 35% to 40%, as we continue to sell proportionally more premium flour, which should result in us achieving break-even adjusted EBITDA on a monthly basis in Q2. We have also continued to keep a close eye on costs, further driving down general and administrative expenses, which decreased to 3.9 million in Q1, a 14% decrease in comparison to 4.6 million in Q4 2021. As a result of the increased revenue, increased margin and cost reduction, our adjusted EBITDA loss was $2.2 million for Q1 2022, representing a 57% improvement from Q1 2021 and a 26% improvement compared to Q4 2021. For more information on adjusted EBITDA and non-GAAP performance measures, please see our disclaimer in our Q1 press release. As of 31st, 2022, the company had positive working capital of $19 million, including a non-cash contingent consideration liability of $4.8 million. Subsequent to the quarter, we added to our financial liquidity by negotiating with our Canadian lender to increase the term portion of our existing revolver loan by $4 million to $24 million. Additionally, on May 17, 2022, we raised additional working capital through an asset sale of our leasehold improvements at the Pushland facility, providing net cash proceeds of $2 million. To further bolster liquidity, we are in negotiations for the sale of Hempoland and anticipate completing the sale within the coming months. In closing, we continue to build our momentum and are making significant financial progress in 2022 with a focus on achieving positive adjusted EBITDA and expanding profitability into 2023, with increased production and distribution in key Canadian markets as well as abroad. With that, I will hand my call back to Sean.

Thanks, Nicola.

Before we move to the question and answer portion, let me leave you with these final thoughts, please. We are pleased with the progress and momentum we've made over the last year, and these results can be attributed to the launch of new products and our existing products gaining further traction, affirming the strategic approach we have taken. We've continued to expand our product offerings in all provinces where we currently have listings and now have flour available in BC, which is a key growth market for Teagard this year. As the exclusive producer of wild edibles in Canada, we are continuing to see expansion for listings of wild edibles across the country as well. We look forward to sharing news on additional SKUs and distribution points as they occur through 2022. We are preparing for future growth in Canada and abroad. while not losing our focus on cost, discipline, and execution. As previously mentioned, we remain on track for break-even EBITDA, adjusted EBITDA on a monthly basis in Q2, and are pursuing additional cultivation opportunities to further expand our market share and to improve shareholder value. Demand for our products remains strong, and we look forward to sharing more on our growth strategies in the coming months. To conclude, I'm proud of our continued growth quarter over quarter as we move towards profitability while building a strong, sustainable organization and brand that resonates with consumers. Personally, I'd like to thank our employees for the continued hard work and to thank our shareholders for all your continued support. With that, Anis, we're ready to take any questions.

Thank you, sir. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, too. If you are using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Tammy Chan with BMO Capital Markets. Please go ahead.

Thanks. Good morning. First, I just wanted to start on the premium segment of the market, I guess in the flower category. So, Sean, you said that demand is outpacing production right now for you. Yet I see some of your other competitors are walking away or abandoning their efforts for the premium segment. So it's just all a bit conflicting. Can you offer a bit more commentary about that segment? Like how big is demand in that premium category right now? Is it really growing strongly or is it more moderate growth? Anything you can say there would be helpful. Thank you.

Hi, Tammy. Thanks. Well, what we're seeing from our own personal perspective is everything we grow in the premium flour category goes out the door and is already sold. We're having excess demand from both Ontario, Quebec, and Alberta right now for our sugarbush, maple, kush, and even for the cherry mint that has just come to market. the POs we're receiving are greater than the actual allocation we can supply. So that's why we're looking at additional cultivation capabilities for 2023. In terms of the whole market, all I can see and what we've been seeing is some of the larger players have been hit by the kind of price compression. And there is, much like there was in the early years in the U.S., There has been some price compression in the kind of value market of flour. We haven't had that in our premium flour segment, such that we've been able to kind of maintain the kind of price that we're getting while increasing the demand. And as far as the whole premium segment of the market as a whole, I don't think it's changed particularly. from what it was over a year ago in terms of being, you know, kind of 15 to 20% of the total market for flour. But we're just taking a larger portion of that. We're in the top 10 premium flour producers in Canada when you look at flour over $32 for a three and a half gram jar.

Okay, that's interesting. Okay.

And then going to your path to profitability, can you just clarify what you mean by break even on the adjusted EBITDA line on a monthly basis? So like, are you saying one of the months into Q2 is when you'll start to get to break even? Like, I just wasn't sure what you meant by that.

Yeah, it's as, you know, any particular PO delivery date on revenue can, because of the set windows for deliveries to some of the provinces, you know, if you have something on May the 29th or June the 1st, it makes a difference, right? Because each PO can be quite significant. So for June, for certainly for the month of June, we expect to be EBITDA positive. It may be May if one of the POs gets delivered on May the 31st or next week as opposed to June the 1st. But certainly for June, it'd be EBITDA positive. For the quarter as a whole, it won't be from a quarter. But by the month of June, as the trend is moving where it is, and then every month afterwards, that's when we start to be EBITDA positive on a quarterly basis for the balance of the year.

Okay, got it.

And then from last question for me is on your balance sheet and liquidity. So I think you highlighted a number of initiatives and things that you've done recently and post the quarter. I guess I'm just thinking, like, if you did need additional capital beyond what you've stated, whether it's for buffer or for capital spending, you need to do etc. Like, what other I guess what other options or alternatives would be available to you?

Well, firstly, the hemp Poland sale that's underway. We've been talking about that for a while, and we're in negotiations now with a potential purchaser on an exclusive basis to complete due diligence and expect that to be concluded in the coming months. You know, the events in Ukraine slowed that down, obviously, in the Q1. But it's on track now. That's a significant portion. Beyond that, when we look at needs for capital, it's likely connected to an expansion of the cultivation for 2023. And whether we have some avenues with regards to debt or the EBITDA positive that we're going to be creating for the second half of the year.

that would be the first sources that we would look to use.

Beyond that, we still have $23 million of room on our shelf prospectus should the equity markets improve in the latter half of this year.

But that wouldn't be our first choice.

Got it. Thank you.

Thank you. Your next question comes from Venkata Villagapudi with Research Capital. Please go ahead.

Thanks, guys, for taking my question. I have a follow-up on Hempul. You guys mentioned that there is a confirmed buyer and the transaction is going to be completed next month. I just want to ask, If there is any change to the earlier guidance on net proceeds, I think you mentioned something like 5 to 6 million net proceeds from the transaction. Is it correct?

That's correct, Ben, and there's no change to that expectation.

Okay. That's good to know. And my next question is on your partnership with Ecosta. In the MD&A, you guys mentioned that retail distribution is improving into Ontario. So do you have any data points related to percentage of revenue from Ontario this quarter?

I just got a report yesterday, but I don't have it at hand, to be honest. But I know the distribution points from where we were in Q1 had increased by about 20% in January. but I know that numbers continue to increase through to April. I just don't have those numbers on hand.

I can just sit there and help out, Sean.

Oh, yeah, if you've got the time to grab those.

Yeah, so in Ontario in Q4, Ontario represented about 22% of our sales mix, and now it's for Q1 2022, it's up to just up 35%. So we've seen significant growth in the Ontario product.

Okay, thanks, and... Yeah, and final question from me. It's related to clarification about adjusted EBITDA. So I see that you guys managed to reduce the operating expenses slightly this quarter to 5.8 million from 6 million last quarter. So do you think there is further scope to reduce the operating expenses going forward or is it the... How do we expect?

Yeah, absolutely. We're looking to have an additional kind of 10% a quarter reduction looking into Q2 and into Q3. And then it'll kind of stabilize out from there on Q3 and Q4.

Thanks, Shane. And is there any update on EU GMP, by the way?

Yeah, again, with the COVID travel restrictions and getting the final inspector visit to sign off on that, that is confirmed for August now, and that's the final step for having that EU GMP. Everything else has been submitted and cleared.

Okay, thanks a lot. That's it from me. Thank you. Ladies and gentlemen, as a final reminder, if you have any questions, press star one.

There are no further questions at this time. Mr. Bovingdon, you may proceed.

Great. Well, as I said, it's been a very encouraging quarter, and Q2 is looking to be just as encouraging. Going forward, a lot of work over the last year to get our products to the standard that generates the interest from the consumers and the increased demand that we're seeing. It's nice to have challenges of getting more supply and looking at options for additional cultivation for 2023 to meet the demand, as opposed to having large amounts of imagery that you can't sell. So it's been a very encouraging trend for the last two quarters, and we fully expect this to continue going forward as we focus on getting that adjusted EBITDA positive position and then being able to improve our operating cash flow for the back half of this year and build on that for future growth into 2023. So with that, again, thank you, everybody, for joining us today.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.