SNDL Inc. Q1 FY2022 Earnings Call

Hello, and welcome to The Valens Company's First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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. Welcome to The Valens Company's first quarter fiscal 2022 financial results conference call for the period ended February 28, 2022. A replay of this call will be archived on the Investor Relations section of the Valens website at thevalenscompany.com/investors. Before we begin, please let me remind you that during the course of this conference call, The 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 facts, constitute forward-looking information or forward-looking statements within the meaning of the applicable securities laws and are based on assumptions, expectations, estimates, and projections as of the date hereof. Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions, and anticipated courses of action. 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’s Discussion and Analysis each filed with Securities Regulatory Authorities. 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 that actual results will be consistent with the forward-looking statements in the future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures measured and discussed, please consult our latest MD&A. Now, joining me on the call today are Mr. Tyler Robson, Chief Executive Officer; Mr. Sunil Gandhi, Chief Financial Officer; and Mr. Jeff Fallows, President. Mr. Adam Shea, Chief Commercial Officer, will also be available for questions. You can now follow along with the presentation on our website. 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 from the first quarter of fiscal 2022. We really want to start off with kind of three main points before we jump into it. Number one, revenue growth; we're back. We grew over 26% in Q1 from Q4. We mentioned it was coming, and it's now here, but it could not be possible without other pieces we put into place in 2021. With that, we are seeing so far in Q2, and we're expecting double-digit revenue growth to continue into Q2. I want to touch on costs. They have been higher than what we want them to be. Some are out of our control as we went through on our Investor Day, and some are in our control as we had to invest in new brand launches to set them up for success as we integrate the acquisitions. However, with the financials, we do not show the progress we have made in our integration initiatives that will pay off in the back half of the year. The third one, the long-term positioning of the company has not changed. In the public markets, we are measured from day to day, but the true value of the company is measured in years. The cannabis space is no different. And 2022 is going to be a challenging year for many reasons, and the money we raised earlier this month puts us in a position to drive innovation, profitable revenue growth, and realize the benefits of our planned integration initiatives. I will go to Slide 6 to dive into a few more things happening behind the scenes, and we are going to grade ourselves on what we've done in the last quarter. The first one is growing our adult recreational market share in Canada; I would say we're meeting expectations. This is clearly the bright spot in the quarter. We are one of the fastest-growing companies in Canada's cannabis recreational space, growing 36% quarter-over-quarter, and now we have over 3% market share as of February 2022. But the most impressive part is we achieved this despite the Canadian sales declining 4.6% in Q1 relative to Q4, according to estimates from Hifyre. The second one, our U.S. business in Green Roads. Progress is improving. Despite a decline in Green Roads' revenue due to seasonal trends, we were able to launch new products as part of our Own the Day campaign, as new product formats appeal to the mass market in conjunction with our Own the Day brand campaign, which has seen great momentum. The third one is achieving positive EBITDA by Q4; progress is improving. We are making progress towards the goal by having action on 95% of the first $10 million in cost efficiencies. While this is not yet reflected in our financials, we do expect to see an impact over time, especially in the back half of the year. Number four, reducing cash burn through improvements in EBITDA, working capital management, and monetization of non-core assets. This needs improvement. To be frank, this is getting most of our attention. With our integration initiatives only beginning in February, they were largely not reflected in the quarter, but as I mentioned, we are quickly making progress. We are now fully integrated into the operations at Citizen Stash, and we're looking to monetize the facility. This was always the plan. We know we have work to do here, and it's happening. Financials are backward-looking, and we have made progress since the quarter-end. Let's chat in the coming quarters. Number five on developing our U.S. THC strategy as permissible; progress is improving. To be clear, with the back half of the initiative, we continue to make progress on developing a plan of attack that will not add any cash burn. We will discuss more in the upcoming quarters. With that, I'll turn it over to Jeff Fallows.

Thanks, Tyler. Moving on to Slide 7, with the quarterly highlights. We've made significant progress in Q1 with net revenue increasing 26.1%, primarily driven by strong growth in provincial sales, which increased 36.7% in the quarter. Importantly, our Canadian recreational market share also expanded, growing from 2.4% to 3.1% from November to February, as the products listed in 2021 began to meaningfully contribute to both market share and revenue gains. This is a particularly strong showing, given that the market contracted 4.6% over the same period, according to Hifyre data. Given the strong growth and recreational market share, we have now become a top 10 licensed producer in Canada and expect to continue our momentum on the back of the launch of our Versus and Contraband brands, which have already met with strong provincial demand, as well as our newly acquired Citizen Stash brand, which is now benefiting from our stronger and more efficient fulfillment capabilities. We have also seen an inflection point in our B2B sales, and we expect to see continued strength in this segment. Our Green Roads U.S. CBD business was the outlier this quarter in terms of revenue growth, as December is a seasonally weak month, and changes in new programs were not launched until later in the quarter. The quarter also saw several operational achievements, including a listing on NASDAQ, new commercial contracts, and the initiation of commercial beverage production at the Pommies facility. Lastly, we completed a $32.3 million capital raise subsequent to quarter-end, adding strength to our balance sheet. Our tangible book value per share now sits at $1.57 against a market price of $1.65 as of last night's close. Tyler, I'll pass it back to you to go through provincial sales.

Thanks, Jeff. Obviously, provincial sales has been a highlight of this quarter. With exposure to over 80% of the Canadian market, we're working to deepen our relationships and really work closer with some retailers, which you can see. Again, we do expect double-digit growth in Q2 as we're basically halfway through. So we're pretty excited to continue to push, and I think there's a lot of opportunity in adult rec alone. Getting back into it, we're really now a top 10 player with 3.1% market share. And when you look at the top 10, some of those positions are up for grabs as we continue to dominate adult rec and grow faster than the majority of other players while they are losing market share. Just to highlight some of the successes we've had, BC God Bud is the number one best-selling SKU across all product categories in Alberta, Ontario, British Columbia, and Saskatchewan during the first three months of 2022. This speaks to the momentum we're truly having. I'll go to Slide 9 and talk about provincial sales. Good progress on provincial sales, but it's low-hanging fruit that still remains. We need to penetrate more stores; distribution is key to success. We have been successful with the select few SKUs like BC God Bud and store penetration. We believe the success will continue to strengthen our penetration across a broader portfolio of brands in the upcoming quarters. Innovation: We continue to have one of the highest acceptance rates of new products, which flows through to the provincial boards and then to distribution platforms. This speaks to our innovation and the great pipeline of products that's still to come. We want to touch on innovation, and I think we've gone over it a few times in the past on what innovation means. I've made a few bold claims that are coming to fruition now. I truly believe in the infused pre-rolls and the adaptability of our platform to capitalize on that. In the upcoming quarters, we are winning adult rec not only with provincial boards but also winning distribution. As we continue to drive profitable growth with key innovations like infused pre-rolls, we believe that we will continue to move forward. I still believe we have the most versatile and flexible platform in adult rec, and you'll see it with this list of not only infused gummies, beverages, and different vape pens coming to market. B2B right before we move on to Jeff; we obviously grew. I kind of said it and Neal, the analyst from Haywood straight up asked me what to expect, and I said growth. We grew 53%. As we move through the fewer bigger, better strategy, we are hitting our stride, but we expect it to be choppy as we meet the demand plans of other licensed producers, which we are working through. Cannabis is a volatile market, not only in the stock market but also with provincial boards and players. As we continue to move through, we believe it will stabilize. But we are comfortable with where we're going. With that, I'll turn it back to Jeff Fallows.

Thanks, Tyler. And moving back to Slide 11, as discussed previously, Green Roads decreased quarter-over-quarter by approximately 10.5%. The decrease was attributable to the December slowdown, which is expected to persist from year to year as Black Friday deals pull demand forward into November and consumer spending shifts away from health and wellness products in favor of more indulgent consumer products. Furthermore, the launch of our brand campaign delayed the launch of other online programs, and we faced additional competition in online advertising as our competitors have started to pursue unsustainable spending strategies to attract new customers. While this has created some short-term challenges for us, longer-term, we believe this will provide a tailwind for us in the market as our competitors strain their capital reserves due to higher customer acquisition costs or choose to divert funds from innovation, R&D, and other necessary investments with longer-term consequences. On the Investor Day, we discussed our product rationalization efforts aimed at simplifying buying decisions and creating a proper channel alignment strategy to ensure we have the right products in the right formats, in the right channels at the right price point. To that end, we have launched approximately 39 new products and an additional 20 reformatted products under our six solution categories, which include sleep, pain relief, relaxation, performance, stress relief, and pet. One example of a new product is our arthritis pain relief product, which has become a top-selling product for us after only being in market for a few weeks. Moving to Slide 12, Green Roads operates three distinct business segments in the U.S.: online direct-to-consumer, brick-and-mortar retail, and white label and international. As discussed on our Investor Day, we continue to see a transition of the business to the online direct-to-consumer channel, which now accounts for 54% of revenues. We expect to see continued growth in online revenues as the brand campaign launched in January continues to take hold and as our sophisticated e-commerce platform supports a rapid scale-up. The retail business has seen and will continue to see the most changes given the post-COVID environment and as we complete our team realignment and build-out, which is focused on deepening our penetration in existing channels, expanding our relationships with existing customers, and launching Green Roads products into new channels. Finally, progress is being made on our white label and international business as cross-selling to existing Valens customers begins to bear fruit and drive volumes to our Green Roads manufacturing facility in Florida. Now I'll turn the call over to Sunil. Sunil?

Thanks, Jeff. Let me first start by saying that our operating environment continues to have some challenges, specifically with ongoing inflationary cost pressures, a very volatile supply chain, and retail price compression in the Canadian market, given the highly fragmented state of the industry. As a result, we are taking actions to rightsize our cost structure and streamline our operational processes, which I will discuss in more detail later in the call. That being said, we do expect that from an industry perspective, 2022 will be a challenging environment for undercapitalized companies, with further financial failures anticipated across the marketplace. Despite this tough operating environment, we are beginning to see the benefits of trading on NASDAQ, with overall liquidity in our stock improving by 55.5% quarter-over-quarter. The management team continues to believe that the long-term benefits of trading on NASDAQ will outweigh the short-term volatility we experienced in our share price in the first three months of 2022. Now moving to Slide 14, as Jeff mentioned, our Q1 2022 results demonstrate that the underlying business has passed an inflection point. Consolidated revenues increased by 26.1% to $23.2 million in Q1 2022, benefiting from strong Canadian operations, which represented 74% of total sales in Q1. Provisional sales increased by 36.7% to $10.8 million, driven by a combination of the consolidation of the first full quarter Citizen Stash and the launch of our Versus and Contrabands brands in Canada. We are pleased to see that the B2B segment returned to growth in the quarter, and the increase was driven by onboarding new customers, as well as specific sales which allowed us to move through higher-priced inventory. Moving on to our Green Roads U.S. CBD business, which saw revenues decline by 10.5% quarter-over-quarter to $5.1 million. This was due to trends with December being the slowest month of the year, as Jeff mentioned earlier. Now, moving on to Slide 15, adjusted gross profit was $3.8 million, or 14.6% of net revenue in Q1 2022. The decline in adjusted gross profit was attributable to a change in sales mix, including lower sales from our higher-margin Green Roads business and an increased sales contribution from our lower-margin B2B relations. Additionally, adjusted gross profit was negatively impacted by the monetization of higher-priced inventory through our B2B channel to better align our inventory with future requirements, as well as higher transportation and raw material costs stemming from ongoing supply chain challenges. Despite the sequential decline in adjusted gross profit, we were encouraged to see gross margin improvements in provincial sales, which saw an increase of 229 basis points over Q4 2021 as provincial sales reaped the initial benefits of cost efficiency gains despite retail price compression in the Canadian market. Now moving on to Slide 16, adjusted EBITDA was negative $17.6 million in Q1 compared to negative $13.3 million in Q4 2021. The reduction in EBITDA was primarily related to lower adjusted gross margins and an increase in spending associated with the new brand launches, both in Canada and the U.S. Our operating costs and estimating profile remained flat from the previous quarter, despite onboarding and consolidating the Citizen Stash business for the first time, demonstrating some of our cost control initiatives starting to take place. Subsequent to quarter-end, we announced the decision to shut the Citizen Stash facility and shift all production to our Colonna campus. This is expected to positively impact EBITDA in future quarters after the realization of one-time costs.

Now, moving on to Slide 17, this waterfall shows the main sources and uses of cash since the end of Q4. In December, we raised $40 million in debt financing and subsequently repaid previous existing debts. Working capital also represented a $3.6 million drag on cash in Q1 as we positioned our operations to support the launches of Versus and Contrabands in Canada, while ensuring our entire pilot wreck portfolio would experience stockouts during this period of rapid growth in provincial sales. Working capital investments are expected to moderate and flip to positive contributions in future quarters, especially in the latter part of the fiscal year. The quarter represented a heavy investment of cash, and we took on the additional equity raise of gross proceeds of $32.3 million, which closed in early April. The negative adjusted EBITDA profile of our business represents our primary focus as we move through 2022. Key elements on the pathway to achieving positive adjusted EBITDA include the following: 1) integration initiatives that we've already launched, where we've passed $9.5 million of annualized cost savings with another $10.5 million coming; 2) further savings in procurement and biomass sourcing as contract growing arrangements begin to provide product; and 3) revenue growth, as Tyler and Jeff both mentioned previously; and 4) we expect reduced one-time costs associated with brand launches and acquisitions moving forward. I’d like to touch on an illustrative example of our cash conversion cycle on page 18 to provide some perspective. It takes about 90 to 95 days to complete, serve, and move through the drivers behind what actually causes an increased investment in working capital. As we walk through this example, first on day one, we purchase flour from third parties, generally with standard payment terms of net 30 days. By day 30 to 35, we process and package the flour into a finished product and start to ship it to the provincial boards, where we recognize that revenue will not be collected yet. At this point, payment for the raw flour has already been due and made. Another 30 days forward, by day 60 to 65, we are required to pay the excise tax to the CRA on the sale that has already occurred a month earlier. It's important to note that the excise tax on flour products can amount to 30% to 50% of the gross revenue of the product. Moving forward, by day 90 to 95, we then finally collect the gross revenue from the provincial board. The OCS, our largest customer, offers net 60-day payment terms after taking delivery of the product. So while this is a simplistic illustration, it's not necessarily representative of all product types; it's important to note that as we have rapidly growing provincial sales, we face significant demand on working capital associated with sourcing inventory, excise taxes, and receivables management from the provincial board. As of February 28, 2022, the company had approximately $43.5 million of inventory on hand compared to $42 million as of November 30, 2021. This increase in inventory was mainly attributable to the drive for cannabis inventory, packaging, and supplies in preparation for new product launches across Versus, Contrabands, and Citizen Stash. Additionally, we have had to increase safety stock levels due to the disruptive supply chain environment. This was offset by a decline in finished goods inventory and extract of cannabis as we moved through higher-priced inventory to our B2B channel. The upfront investment in inventory has been a drag on our cash this quarter, as we begin to rapidly scale provincial sales. As we have launched new brands and products, this has caused—and it is expected to continue to cause—some near-term volatility in inventory balances. However, as previously indicated on our Investment Day, we expect this investment in inventory to stabilize by Q4 2022 as consumer demand and purchase orders of our products achieve a more normalized level of sell-through and enforce tighter inventory management. Now from an accounts receivable perspective, as of February 28, 2022, the company had $35.6 million of trade and other receivables compared to $28.7 million as of November 30, 2021. As of February 20, 2022, the company had $13.8 million in trade receivable balances over 60 days compared to $6.8 million as of the previous quarter end. Some of the increase in receivables was also driven by the timing of shipments, and since quarter-end, the company has subsequently collected 81% of the balance that was outstanding at quarter-end.

Now, I'd like to move to Slide 19. We've made significant progress on the first wave of our integration initiative as we have executed on approximately 95% of our first $10 million in cost efficiencies through operational and organizational changes. Out of the $9.5 million acted upon, approximately two-thirds or $6.4 million of the savings are coming through on the SG&A side, of which almost half are driven through M&A synergies while the remaining half were related to organizational realignment at balance. This is expected to positively impact SG&A in future quarters after accounting for the one-time costs. The remaining one-third, or $3.1 million, was driven by operational efficiency, including automation, process standardization, and supplier optimization, which is expected to positively impact margins in the second half of the year. We remain on track to achieve an overall total of $20 million in annualized cost savings by the end of the fourth quarter of 2022. With that, I will now turn the call over to the operator to open the line for the Q&A session.

And our first question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your questions.

Hi, can you hear me? I apologize for being on mute. My first question is about the contracts you're arranging going forward. I want to understand how you're managing to stay flexible while also securing longer-term contracts, particularly in light of your success in gaining market share in the flower and pre-roll categories. How do you plan to ensure that you align with consumer demand while pursuing these contracts? Thank you.

That's a great question. I'll answer that one. So depending on what brand we use, we have different strategies. We are spot buying for some materials and then we are contract growing others. So we are planning our product roadmap for the next two years, and we will be sunsetting some strains in genetics and bringing in new ones. So there’s always something new to try, always something exciting. What we did was very intentional. When we looked at the Citizen Stash platform, we knew there was a tremendous amount of synergies, not only in headcount but also in contract growing. As we maneuver through the brands and products, we've strategically placed them with certain growers at certain scales. What you're going to see from The Valens platform is a reduction in cost per gram, new innovations, and new genetics coming in that we're not tied to. So I want to be very clear: Valens does not grow cannabis; we have contracts to purchase it. If it doesn't meet a specific Valens standard, we are not obligated to buy anything. We have the most versatile platform in cannabis, and there are a lot of exciting genetics coming down the line, not only for the new Contraband launch but also for the Citizen Stash launch. We will continue to be the lowest cost biomass in Canada to the point where we are trying to push it lower, and some of the provincial boards are worried about our competitors and trying to hold the floor. So we can be more aggressive. As we move towards profitable growth, you're going to see a lot of that come to fruition.

Okay, great. Thanks. That's really helpful color. Second question for me, and then I'll jump back into the queue. Just a higher-level one. So when you look at the Canadian market in terms of shifts and formats, most of the gains have been with pre-rolls over the past year or so shifting from flower to pre-rolls less so for the 2.0 products such as vapes and edibles. Given the historical focus of Valens as an extractor and kind of having some expertise in those categories, what do you think is really going to be needed to see a bigger market share gain from the 2.0 categories? Do you feel like as we move out of COVID and get more and more brick-and-mortar shopping, that'll offer opportunity to see an increase, especially amid some of the pricing pressure that you're seeing in the vape category? So really just how you're looking at the 2.0 categories, vapes and edibles, over the next 12 months, and when are you seeing the opportunity for market share gains there? Thank you.

That's a great question too. I'll start with that one, and Adam, I'm going to kick it to you. When you look at the platform in Canada, I would say, one, it's competitive to start; but two, because we are the most versatile company in this space, I think we can take advantage of that. Not only are we not tied to specific genetics, we're not tied to certain products, and we can push innovation harder, quicker than some of our larger industry peers. When we really look at consumer trends, I called it a year ago; I believe infused pre-rolls will outgrow the pre-roll category by year-end. We are starting to see trends in that direction. Overall product development and/or distribution of 2.0 products, I think there are two challenges: the marketing limitations and education, which is industry-wide, but also pricing. With compression, we expect it to come down, but we expect to combat that with higher-margin products and different brands. We are really focusing on quality and consistency rather than some of the lowest-priced options. Adam, feel free to comment.

Hi, Tyler. I'll add just two points to what Tyler said specifically around the brand portfolio that we've now laid out. It gives us the flexibility to access and provide consumers 2.0 products at a range of price points, whether that's an opening price point or more of a premium price point, across categories like edibles, beverages, or vapes. Our agility in being able to offer quality products at a variety of price points will allow us to accelerate innovation and gain a disproportionate market share in the 2.0 category. So lots to come from us on this front in the quarters ahead.

Great. No, thank you very much for that detail. And I'll go ahead and jump into the queue.

And our next question comes from the line of Frederico Gomes with ATB Capital. Please proceed with your questions.

Hi, good morning, and thanks for taking my questions. Just on your provincial sales this quarter, you showed some good growth sequentially, and in the slides, you mentioned an increase in gross margins in that segment. However, your overall gross margin did decline this quarter due to the sales mix. I'm curious if you can give more color on your margin in Canadian recreational sales. Are you having to compete on price to gain share? Obviously, you had some good market share gains recently. What gives you confidence that you can expand margins in that segment, considering that the market is very fragmented and competitive? Thank you.

That's a great question. So I'll start, and then Sunil, I'll pass it to you. When we look at our branded portfolio, we expect different margins from different brands. As we roll out Versus, which is a market share leader in every category, it will play well, and I think we'll continue to see that roll out. When I mentioned double-digit growth, I'm not speaking 10% just to be very clear because we are winning adult rec. When we roll out, we are obviously moving through some of our inventory. But as we move through that inventory and monetize it, we expect to be very intentional about what brands we push and in what markets for different products. Again, because we have the versatile platform, we can do things that other people can't. Sunil?

Sure. Just to build on what Tyler mentioned, the Canadian adult rec market is obviously very price competitive. You can't deny that. What we've shown is that between category management and our brand strategy combined with operational efficiencies, we're still gaining margin despite the challenges of retail price compression in the Canadian market. So yes, it's a headwind, but we expect to outpace the category while building our margin profile with it. From an overall standpoint, we expect Green Roads to continue contributing a meaningful share of our business. As that grows, we would anticipate our overall margin profile to grow; where things become less predictable from one quarter to the next is on the B2B side, which tends to have more volatility in the margin segment. So I'd just say, the long-term trajectory is a positive one as we see growth on both the Green Roads and adult rec segments, but there can be near-term volatility due to the B2B side.

Thank you. And then my next question is on your U.S. B2B business. We had a decline this quarter, but can you talk about any early signs of your initiatives to grow that business? Are you seeing any pick-up in sales after the quarter-end compared to perhaps last year? What sort of growth in sales should we expect for the next quarter and the remainder of 2022? Thank you.

That's a great question. I'll pass it off to Jeff after one quick comment. We did expect a slowdown at the end of the year when you look at Black Friday and the sales push we had then going into the Christmas season. Historically, it happens every single year with the Green Roads platform. So everything happened exactly as expected, and Jeff, why don't you kind of comment on what we're expecting going forward?

Yeah, sure. I appreciate the question. When you implement changes in a business, these things take time, as you can see by some of the numbers—39 new products, 20 product format changes, launching a brand campaign, realigning and reinvigorating team structures, etc.—these changes take time. So yes, we're seeing some positive signs. As I said in my prescriber remarks, things like the launch of one of our first new products, the arthritis product, has been incredibly successful in terms of capturing the demand and the revenue profile we were targeting. We're encouraged by product launches like that. Also, the conversations that we're having with new distribution partners are also encouraging. So Frederico, we believe we are on the right track with our U.S. business. We believe the solution selling that we've moved the business toward is the right move, and we believe the products we have in our development pipeline are aligning with what the market is looking for, so we are encouraged by what we see.

Our next question comes from the line of Nicholas Cortellucci with M Partners. Please proceed with your question.

Hey guys, thanks for the presentation. I had a question about the beverage segment. With the new regulatory changes that healthcare has put forth about a month or two ago, what do you think is the incremental change for the beverage category and your market share as a whole?

That's a great question, and we are ecstatic that the change is finally coming to fruition. Maybe I'll kick it over to Adam on what he expects the beverage segment to contribute to our adult rec numbers.

Beverages are unquestionably going to be a significant unlock in 2.0; it's going to be a terrific way for us to bring new consumers into the category. The changes recently announced will amplify what we're already doing, which is offering a range of beverages across both high THC and sessionable drinks. The portfolio will play in an accessible price point while adding value with high-quality products. This will unquestionably be a very significant growth driver for us as we move forward this year and in the years to come.

Great. Okay. That's all for me. Thanks, guys.

And our next question comes from the line of Nick Phase with Brian Garner. Please proceed with your question.

Yeah. Thank you for that. You did a $22.5 million bulk deal a couple of weeks ago, and by doing so, you wrote about $100 million in shareholder value. So what was so urgent for you to do this deal, and when can shareholders expect some positive returns from that? Thank you.

That's a good question. Sunil, I'll probably kick it over to you and Everett. I will comment that with the Bud deal, we needed to solidify the future of the business and with the very turbulent market, we couldn't afford to be unpredictable. We were extremely intentional with the Bud deal, and it always tends to trade down after, which was to be expected, but it will recover in time. We are making tough decisions as a large shareholder myself, acting in the best interest of all shareholders. We believe it was very intentional and needed to ensure we could achieve the profitable growth expected in the coming years. Tomorrow isn't promised; we have no idea what's happening in the world—supply chains, interest rates, geopolitical issues. We needed to solidify the platform, and we did. So Sunil, Everett, feel free to comment.

I can appreciate the short-term implications; it didn’t look great, but the reality is that as a business, we felt it was essential that we have the capital position to get through the storm of 2022 that we see in the sector. Combined with what's happening in global markets on a macro level, for the reasons Tyler mentioned—political unrest, global uncertainty around interest rates—you can't predict what will happen tomorrow. The strong interest from our investor base allowed us to make the move we did to solidify our future.

Just to add to that, if you look at all the integration initiatives that happened at the end of Q1 and into Q2, right? The reality of those changes will be vastly visible in Q3 and Q4. But we wanted the right financial footing to be flexible in this competitive environment.

Sorry, Nick, maybe if I can add one different perspective to this whole thing, wearing a former banker’s hat here: you never try to time the market; windows come and go. Quite frankly, if you don’t last through it, you miss out. So we had an opportunity, we believed it strengthened our balance sheet, and it was the right choice in pursuing financing when we did.

So it was all just about paying back debt and not doing anything new?

Not sure I understand the question. Sunil, Everett, if you could provide clarity that would help.

I think you need to repeat your question; we didn't quite catch it.

Yeah, to be honest, I don’t really understand your answers either. So it’s all about paying back debt and not doing anything new or expensive for the company.

No, just to be clear, as we put in the press release, we have a very clear pathway for what we're spending. This is not to repay debt, right? As we've been through thoroughly on the presentation, this is about managing working capital and cash flow of the business as the integration initiatives are still in process, with a lot of one-time costs associated with this. We believe this adds value to operations today, and this is not about paying back debt. It's to keep the balance sheet flexible and ensure we can thrive during the latter half of the year.

So it’s mainly for working capital then, meaning operational losses that you expect to occur in the coming months?

Yes. And with the brand launches that we thoroughly went through in the presentation today, I'm happy to walk through it offline with you, Nick.

I think the closing point on that one is we needed optionality. In this market, you need to be very strategic and aggressive when the time comes, and we didn’t want to be looking over our shoulder. So we needed to solidify the future of the organization, and this was the best decision for the company.

Any recent trends in market share that you want to share with us?

I don't have exact numbers for market share going forward. But what we will see is double-digit growth in adult rec, and we continue to move the needle forward.

And our next question comes from the line of Aidan Giangregorio with Stiefel. Please proceed with your question.

Thank you. This is Aidan speaking on behalf of Andrew. First of all, congratulations on the quarter, guys. Just curious about Quebec; do you have any updates on your progress there kind of moving into the Quebec market that you could share with us? Thank you.

I probably can't give away too much information on the Quebec market. We do have one SKU available online that we are continuing to push, and we expect more in the future. But I think the big focus for us right now is on the big three provinces: BC, Alberta, and Ontario, and really opening up distribution and product depth in those markets while we push on Quebec. It is a bit of a fickle market, but we are continuing to move forward. Adam, I don’t know if you have anything to add?

No, I think you hit it spot on, Tyler. We've got a very methodical plan that we're executing with the Quebec provincial board. For us, any significant progress that comes in the quarters ahead in Quebec will be incremental to the existing plan. So I feel good about our progress there; as for Tyler’s point, we're focused on Alberta, British Columbia, and Ontario through a whole series of new distribution strategies. So lots to come in the coming weeks.

Okay, great. Thank you. I'll step back into the queue.

And our next question comes from the line of Rahul Sarugaser with Raymond James. Please proceed with your question.

Good morning, Tyler, Sunil, Jeff, Everett. Thanks so much for taking our questions. Congratulations on the provincial sales ramp; that certainly has been impressive given the broader environment. I want to drill down a bit on the B2B sales. You've seen a 50% sequential growth there. Some of it was due to selling through some of the higher price inventory. Given that was potentially a blip in this quarter, how should we think about those B2B sales going forward, and what margin profile should we expect as you essentially work through this selling?

That's a great question. Sunil, I'll leave the margin question for you, but as we continue to execute our strategy of fewer, bigger, better, it's working and was intentional. We are continuing to stabilize, and what we’re seeing right now is unpredictability from some of our partners where they're doing some wishful thinking. As we stabilize quarter to quarter, it's not that we're not getting the revenue; it might just be bloated in some quarters over others. We expect our B2B segment to continue to grow, but Sunil, why don’t you touch on margin and B2B?

Sure! The margin will follow some of what Tyler mentioned on the sales side. That being said, the B2B segment relies on relationships; hence some volatility quarter-to-quarter. Obviously, we expect sales and margin to be consistently moving forward in the long term, but it's hard to provide guidance in that area as we need to lean on the demands of others.

Great. That’s very helpful. And then my follow-up is on Green Roads. You identified that December was a weaker month seasonally. However, we've seen a couple of slightly weaker quarters from Green Roads compared to the macro annual historical number provided during the acquisition. Recognizing, of course, that the U.S. CBD space is highly competitive, what are some of the bigger strategic moves you and the Green Roads team are doing to consolidate and try to drive that revenue back up to historical levels and beyond?

That's a great question. Jeff, why don’t you start, and I’ll add on at the end.

As we looked at the U.S. CBD space, there had been a significant shift in how the market viewed CBD and the channels through which consumers are accessing it. When we saw that change occurring, we evaluated our product portfolio, sales approaches, and team structures. The conversation we've been having revolves around realigning our channel strategy, ensuring we have the right products in the right channels, and not just saying, 'We have CBD for sale,' but rather offering differentiated solutions for consumers. Obviously, this process takes time. We would've loved to have turned it on a quarter ago, but having the majority of that work complete and April being a big month for launching several new products, we're excited about what the performance will bring in future quarters. That is primarily it—we needed to refresh our product portfolio and establish new channels.

Rahul, just to comment further: it's really about redefining the portfolio and placing it in the appropriate channels, whether it's smoke and vape, C-stores, or retail. We're responding to consumer trends that change based on location and listening to the consumers to capitalize on those.

Great. Thanks again for taking our questions, and good luck in the next quarter.

And we have reached the end of the question-and-answer session. I'll turn the call back over to Tyler Robson for closing remarks.

I appreciate it. I want to thank everyone for your time today. Obviously, there was a tremendous amount of growth in the quarter. There is still a lot of work to do, and we're not getting caught flat-footed. I look forward to speaking with everyone in mid-July when our next quarter comes out because I believe it will be positive. Thank you for your participation. Operator, you may disconnect the call at this time. Thank you.

Thank you. Have a good day.