Earnings Call
SNDL Inc. (SNDL)
Earnings Call Transcript - SNDL Q3 2020
Operator, Operator
Greetings, ladies and gentlemen. And welcome to The Valens Company’s Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in 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.
Everett Knight, Executive Vice President of Corporate Development and Capital Markets
Thank you, Operator. Good morning. And welcome to The Valens Company’s third quarter 2020 financial results conference call. A replay of this call will be archived on the Investor Relations section of the Valens’ website at www.thevalenscompany.com/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 and 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 expectations, estimates and projections as of the date hereof. Specific forward-looking statements include, with our limitations, all disclosure 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 the forward-looking statements, please refer to our latest annual information form and our latest management’s discussion and analysis, otherwise known as MD&A, each as filed with the Canadian securities regulatory authorities at www.sedar.com or on the Valens company’s website at thevalenscompany.com. The risks described in such annual information form may cause the actual financial results, performance, or achievements of The Valens Company to differ materially from estimated future results, performance, or achievements expressed by forward-looking information or forward-looking statements are hereby incorporated by reference herein. Although these forward-looking statements reflect management’s current beliefs and reasonable assumptions based on current available information available to management as of the date hereof, we cannot be certain that the actual results would be consistent with the forward-looking statements in the future. We caution you not only to place undue reliance upon any such forward-looking results. For any reconciliation of the non-GAAP measures discussed, please consult our latest MD&A as filed on SEDAR. Joining me on the call today are Mr. Tyler Robson, Chief Executive Officer; Mr. Chris Buysen, Chief Financial Officer; and Mr. Jeff Fallows, President. With that, I would now like to hand over the call to Tyler. Tyler, please go ahead.
Tyler Robson, CEO
Thank you, Everett. And welcome to everyone that has joined our earnings call to discuss our results for the third quarter ended August 31, 2020. Later on today’s call, Jeff Fallows will provide a more comprehensive update on our market operational achievements, Everett Knight will highlight the industry trends and capital markets activity, and Chris Buysen will give an overview of our financial results for the third quarter. But first I’m going to discuss this quarter’s performance and talk about our accomplishments and the obstacles we faced. I am pleased to say that despite the global volatility and economic uncertainty that has defined 2020 here at The Valens Company, we continue to execute and execute well. In short, the fallback in this environment in the last few quarters has been challenging. But I am proud to say that we have successfully accelerated our product manufacturing platform, which we view as the future of the company. For the third quarter of 2020, net revenue was $18.1 million, a 2.8% increase from $17.6 million in the second quarter of 2020. Last quarter, we went into more detail regarding reduction in extraction volumes. As a result, it is no surprise that we saw a whole processing and co-packaging category decrease from $7.3 million in the second quarter to $2.6 million in the third quarter. However, as we have clearly accelerated the growth in our product sales category by 52% in the third quarter. This means our product sales in the third quarter are up to 83% of revenue, or $15.1 million compared to $9.9 million in the second quarter of 2020. Revenue from product sales includes white label and customized product sales, both winterized distillate and isolate sales. We expect this segment to continue to increase as we expand both our portfolio of third-party brands and product capabilities. We also expect direct provincial sales from our third-party customers to increase significantly, and we expect product sales to make up greater than 80% of our sales in the next few quarters. As these results show, we have made significant progress building our white label and custom manufacturing business in line with our corporate strategy. It is our goal to eventually touch 20% of all manufactured products in the Cannabis 2.0 market. We are pleased that throughout the quarter, we have retained our position as a first choice partner with many leading licensed producers, cannabis brands, and CPG companies in Canada. We saw an increase in custom manufacturer agreements signed in the third quarter, generating first-time revenues from these new agreements in support of 2.0 product launches in the marketplace. We're now running our operations faster than ever before, with increasingly efficient production turnaround time. I’ll now turn the call over to Jeff Fallows, President of The Valens Company, to dive deeper into our operational achievements in this quarter, outlook for the rest of the year, and provide more details on our progress internationally. I will be available to answer questions at the end of this call.
Jeff Fallows, President
During the third quarter, I'm proud to say that our team manufactured a record 56 SKUs, representing a 56% increase from the 36 SKUs we manufactured in the second quarter of 2020. The SKUs span four product categories with formats ranging from disposable vapes, vape cartridges, oils, and oral sprays to beverages and concentrates, and were manufactured in partnership with over 10 of Valens’ customers. The increase in SKUs quarter-over-quarter can be attributed to product launches from new brand partnerships and the expansion and fulfillment of existing contracts announced in previous quarters. Some of the SKUs manufactured in the third quarter include SUMMIT and BASECAMP from A1 Cannabis, the first set of cannabis-infused beverages to enter the Ontario market; versus hydrocarbon-derived crumble, the first entry of the concentrates subcategory into the Canadian market and currently ranking shift by dollar sold of SKUs in the concentrated category since launching on the Ontario Cannabis Store only a few weeks ago; TREC brands and WINK Chalice and Onyx vape cartridges, the first vape products to enter the brand's premium product portfolio; and Verse Tropic Lemon 510 thread vape cartridges launched in mid-September and already a best seller on the Ontario Cannabis Store website. In future quarters, we will be focused on increasing operating efficiencies to drive greater product volume with existing customers in order to grow our overall market share. To prepare for this, we are scaling our white label and custom manufacturing footprint to not only fully capitalize on the existing market, but also establish a leadership position in the next growth phase, cannabis 3.0, where we will look to create next-generation products for our customers. At the end of July, we submitted a license amendment for our K2 facility, which we expect to be approved in the coming months pending Health Canada review. We expect the GMP compliance facility to come online by the end of the fourth quarter, providing an additional 42,000 square feet of manufacturing capacity and advanced product development capabilities to deliver edibles, topicals, and advance our existing concentrate offerings beyond crumble. The facility will house the largest concentrate producing capacity in the country, including our proprietary hydrocarbon extraction capability, and will allow Valens to expand its existing portfolio to include waxes, powders, and libs and vape pens in addition to bringing on new partners to grow this highly anticipated product segment. It will also expand our vape pen production and co-packing service capabilities, meaning increased capacity to deliver Valens industry-recognized vape product development services, including our blend formulation processes, using our proprietary terpene database and highly customizable hardware options. Already a leader as the largest third-party manufacturer of vape pens in the Canadian cannabis space, Valens is positioned for continued success in this category. The GMP compliant mass manufacturing facility is the first of its kind in the cannabis space and will provide the resources to execute on a global scale and unlock margin potential. We expect to obtain EU level certification for our K2 facility in fiscal 2021. Our 30,000 square foot GTA facility will also focus on the execution of Valens white label and custom manufacturing services with a concentration on beverage formulation and co-packing capabilities. The timeline for construction completion has been delayed by a few months as a result of the logistical challenges due to the COVID-19 pandemic, but the GTA facility is on track to be licensed in the second quarter of 2021. I now like to take the time to highlight our product strategies and research and development initiatives over the next few quarters. First, I’d like to talk about our product ingredient capabilities. Valens is the largest provider of cannabinoid-based ingredients in the Canadian cannabis industry with the ability to produce full and broad spectrum oils, distillate, resin, and isolate. Currently, we are in the process of finalizing R&D efforts for THC and THC free products, our clear differentiator in the CBD space, and moving into 2021 we plan to expand our ingredient offerings to further differentiate our platform. Next to tinctures and capsules. Although we are capable of manufacturing both product formats, we have seen significant growth in our tincture manufacturing, as it has become a more preferred method for consumption. We are proud to have recently hit a commercialization milestone in this product category, with a 44-day turnaround from concept to market. We have also made strides to revolutionize this more mature category in Canada using our advanced technology; we have created a terpene-rich oil blend with a faster onset time. We view tinctures as an entry category into global legal markets, as demand remains robust demonstrated by our growing shipments of products to Australia. In the cannabis infused beverage category, we have launched three SKUs out of Western Canada, and we are currently in the process of expanding our offering to include drink trucks and carbonated beverages using technology sourced by Valens. We are encouraged by the growth of the cannabis infused beverage category, which has exceeded our initial estimates already making up 1.5% of the cannabis market in Ontario, BC, and Alberta according to data available as of July 2020. We are seeing the most growth with vape products as they make up the largest Cannabis 2.0 categories. The increase in our market share has allowed us to expand our capabilities to include distillate vapes, distillate with terpenes, reintroducing CO2 full spectrum hydrocarbon tears, and more. Of the vape brands sold through the Ontario Cannabis Store in September 2020, Valens' manufacturing partners accounted for four of the top 15 brands by dollar value with the products from two of the partners establishing a spot despite only being in the market for a few weeks after launching partway through the month of September.
Everett Knight, Executive Vice President of Corporate Development and Capital Markets
Thank you, Jeff. To begin, I would like to thank our shareholders for their continued support. The third quarter was an important quarter for The Valens Company as we demonstrated our capabilities as a large-scale product manufacturer. Traditionally, we've been grouped in the same category as extractors as a way of classifying cannabis businesses that do not cultivate. But we do not believe this classification is an accurate representation of our business model or our competencies. Most importantly, it drastically underestimates the ability of our platform to drive value for our shareholders. For our shareholders, Valens is not an extractor. From a fundamental revenue standpoint especially demonstrated through our product sales in the third quarter, we are the largest third-party manufacturing company in the Canadian cannabis industry. To further drive this message forward, we officially completed our name change in the third quarter to The Valens Company, a rebrand that positions the business globally as a leader in the end-to-end development and manufacturing of cannabinoid-based products. In recent months, the Canadian cannabis market has shown tremendous growth. As of July 2020, cannabis sales in Canada jumped 15% month-over-month to $2.73 billion in annualized sales. And when you include medical sales, it is estimated to be a $3.3 billion plus annualized marketplace. We are finally seeing positive signs of growth despite early challenges with retail rollout with over 1,100 stores in Canada, including over 150 in Ontario today. In July, derivative products made up 27% of all sales in Alberta, British Columbia, and Ontario, which we view as no small milestone considering that cannabis 2.0 products first hit the shelves at the start of 2020. At Valens, we believe that the derivative product category will not only surpass the U.S. states that are closer to 50% in overall markets or overall sales, but eventually make up 75% of the overall sales as consumers seek new health-conscious and social-friendly forms of consumption beyond dried flower. We continue to believe that we are in the best position in Canada for the growth of this derivative marketplace, not only to launch higher quality products seen today, but also next-generation products curated through advanced research and development. We believe large CPG companies will look to enter the space through proven third-party operators who have scale and efficiencies to bring their products to the mainstream market profitably. As one of the lowest cost producers of 2.0 products in the Canadian cannabis industry, there is no doubt in my mind that Valens will attract these partners with the nimbleness platform to adapt to future trends in the industry as we move closer to cannabis 3.0. To extend our leadership position and advance our reputation as a cutting-edge provider at the forefront of this industry, the company is participating in a medical cannabis real-world evidence study led by Dr. Hance Clark of the University Health Network, otherwise known as UHN in Toronto, Canada. The study will explore the therapeutic effects of medical cannabis in all adults with chronic pain, sleep, or anxiety issues, and will leverage the blockchain secure technology of the medical cannabis by shopper’s online product portal of both tested and verified cannabis products. Being able to participate in this real-world study and having the opportunity to understand how our products could be used as a treatment is an exciting development. With insights and data from this study, we look forward to further advancing our commitment to developing and testing the highest quality and most reliable products for our patients using cannabis for both medical and recreational purposes. Also, in the third quarter, The Valens Company was granted a cannabis research license under Health Canada's Cannabis Act and Cannabis Regulations through its wholly-owned subsidiary Valens Agritech. This license permits us to conduct controlled human trials for the sensory evaluation of our cannabis extracts, concentrates, and oils including vapes and beverage and edible products at our extraction, manufacturing and testing facilities in Kelowna, BC. This exciting and strategic milestone gives us the competitive advantage to further innovate and differentiate our leading derivative product offerings. With this research license, we are now able to perform sensory assessments at the product development stage to determine quality and marketability of our products to maximize potential launch successes. Findings from future proprietary research initiatives will advance our understanding of cannabis preferences, allowing us to continue developing premium next-generation products that meet evolving customer and consumer needs. This license has come at an opportune time as we get ready to launch a range of new product formats, including edibles and topicals in the coming quarters. To conclude, we will continue to make every strategic decision with our shareholders at the forefront. Our track record of this case be illustrated by our last 12 months return on capital at 4.1%, compared to the industry average of negative 95.9% according to data available as of October 15. As always, communicating effectively and transparently with our shareholders and stakeholders and maximizing return on invested capital remains core to our operating philosophy. I'll now turn the call over to Chris Buysen, CFO, to run through the financial results for the quarter. Chris, please go ahead.
Chris Buysen, CFO
Thank you, Everett. In the third quarter, consolidated revenue increased $0.9 million or 5% to $18.5 million compared to $17.6 million in the previous quarter ended May 31, 2020, and $16.5 million in the third quarter of 2019. Net revenue, which excludes excise taxes for the third quarter of 2020, was $18.1 million. This increase in revenue was driven by a $0.5 million increase in revenue from the cannabis operations, which generated revenue of $17.7 million compared to $17.2 million in the previous quarter. As a result of the continued scale out of white label cannabis 2.0 product sales, which generated increased frequency and size of purchase orders from the provinces, and the sale of both winterized and distillate oil. As mentioned earlier, product sales in the third quarter made up $15.1 million of net revenue, a 52% increase from $9.9 million in the second quarter of 2020. Product sales consist of both winterized distillate and isolate and white label and custom product sales. This growth was offset by reduced shipments of biomass from extraction partners, as our partners adjusted their workforce and operations to manage through the uncertainty created by the COVID-19 pandemic. In the third quarter, we extracted 8,054 kilograms of biomass, using both input from our LP partners for toll processing and Valens’ own inventory for 2.0 products. In addition, the company generated $0.7 million in revenue from analytical testing to the company's labs, compared to $0.7 million in the previous quarter ended May 31, 2020, including $0.3 million in intra-company testing revenue, as the volume of third-party tests completed by the lab increased slightly in the third quarter. Trade accounts receivable increased slightly by $3 million, or 10%, to $32.6 million at August 31, 2020, compared to $29.6 million at the end of the prior quarter ended May 31, 2020. The expected loss rate for overdue balances is estimated to be $0.3 million based on subsequent collections, discussions with associated customers, and analysis of the creditworthiness of each customer. We expect net trade accounts receivable to decrease into the fourth quarter as potential sales ramp up to form a greater overall percentage of the company's revenue. Subsequent to the end of the quarter, the company has collected trade account payables outstanding with the same partners, or has recorded an impairment loss provision representing 44% of the trade accounts receivable balance, which supports the cash position of the company and speaks to the strength of our relationship with industry partners. The team remains focused on managing credit exposure with all of our customers. Gross profit increased to $7.3 million or 39.5% of revenue for the three months ended August 31, 2020 compared to $6.3 million, or 35.8% of revenue in the previous quarter ended May 31, 2020. Gross profit decreased by $5.5 million or 42.9% for the three months ended August 31, 2020, compared to $12.8 million or 77.8% of revenue in the same period of fiscal 2019. The reduction in gross profits can be attributed to the continued pullback in total extraction volumes, as the company shifts its focus towards driving greater white label and custom manufacturing product volumes and sales. The gross profit from cannabis operations for the third quarter was $6.8 million, or 38.4% compared to $6 million or 34.7% in the previous quarter ended May 31, 2020. The increase in gross margin was driven by the inventory write-down of $1.5 million in the second quarter, compared to $0.5 million in the third quarter, and the continued reduction in total processing extraction volumes realized in the third quarter of 2020. The analytical testing operations saw an increase in gross profit dollars for the third quarter to $0.6 million, or 86.8%, compared to $0.5 million, or 69.7% in the previous quarter ended May 31, 2020, and $0.1 million or 66.8% in the same period in fiscal 2019. Operating expenses for the quarter were approximately $10.7 million compared to $10 million during the prior quarter ended May 31, 2020. Adjusted EBITDA was $1.4 million or 7.8% of revenue for the third quarter of 2020 compared to $2.7 million or 15.3% of revenue in the quarter ended May 31, 2020. We are very proud to have achieved positive adjusted EBITDA for the sixth consecutive quarter, especially for the past two quarters despite challenging conditions in the market due to the COVID-19 pandemic. We are one of very few companies in the cannabis space that have been able to achieve this level of financial performance for our shareholders. For the third quarter of 2020, the company posted a net loss of $3.1 million or $0.02 per share, compared with a net loss of $3.5 million or $0.03 per share in the prior quarter ended May 31, 2020. On May 29, 2020, the company entered into a syndicated credit facility with CIBC and ATB Financial. Under the terms of the credit facility, CIBC and ATB will provide the Company up to $40 million of secured debt financing at interest rates ranging from prime plus 2% to prime plus 2.5% per annum, depending on certain financial covenants. The credit facility consists of a $20 million secured term loan which is fully drawn at August 31, 2020 and $19.5 million remains outstanding at the first principal repayments of $0.5 million on August 31, 2020, and up to a $20 million secured revolving loan, which has not been drawn on August 31, 2020. In addition, the credit facility contains an accordion feature that could allow the company to increase the aggregate commitments by up to an additional $10 million. The credit facility has a three-year term maturing May 29, 2023, and is secured by a first-ranking charge or substantially all of the company's assets. The Company has $13.3 million in cash and short-term investments as of August 31, 2020, compared with $58.7 million at November 30, 2019.
David Kideckel, Analyst
Hi, thanks for taking my question and congratulations on the quarter. You know congratulations as well, I mean in fact last quarter, you announced your extraction of payment business is going to be coming down and then really no fault of your own and being able to pivot to a white label and quickly manufacturing part of the business. So the question is given that this revenue was flat, essentially quarter-over-quarter, even taking into account this dip from falling. Can you maybe provide any guidance to what we should be thinking about for overall revenue for the next quarter?
Tyler Robson, CEO
And just to add, I'll be quarterbacking sort of that and directing the question about this just to ensure that there's coordination on our side. But from looking at the next quarter, obviously Dave, we don't give guidance from quarter-to-quarter on financial metrics. But I think directionally you can see our product sales continuing to evolve and grow as part of a percentage of our revenue and also in terms of aggregate dollar values. As we look out into the next few quarters, we're very encouraged by what we're seeing in terms of our product development pipeline, and also our crystallization, commercialization efforts to bring products to market.
Jeff Fallows, President
Okay, Dave. Maybe expand on that, too, is we’ve kind of illustrated that through SKU numbers right now. But as we do more provincial sales, look forward to us showing up as a percentage of market shares as well from a provincial sales standpoint. So if you're tracking this, I think you can track the success of our product portfolio through our brands, through that market share development, as well as driving unit volume to those SKUs. I think that's something to keep an eye out for.
David Kideckel, Analyst
Agreed. Okay. Thanks for that. And moving along as well, I'll lump these two questions kind of together. But by our math, and I think Chris, you mentioned you just did just north of about 8,000 kilograms of or you have that with respect to biomass processing. So by our back of the napkin math, it brings it to around 3% capacity utilization. So my question is really twofold. Number one, is that correct? And also, if so I think, Jeff, Tyler, and Everett, you mentioned moving into the next phase of cannabis products, that 3.0 products, can you kind of maybe comment a little bit more about what you think those products will look like? And if we're at what we're sitting at 3% capacity utilization right now? What percent do you think that's going to bring you overall within your existing facilities? Thank you.
Chris Buysen, CFO
I’ll address the capacity utilization. And I'll ask Tyler to speak on the cannabis 3.0 opportunity. From a capacity standpoint, it's certainly at the 8,000 kilograms, we are operating at the lower end of our capacity utilization, but it obviously depends on product that makes its way through the system. So from a percentage perspective, sheer mass numbers that make sense, but it obviously depends on the product that's going through. As we look forward, obviously, we expect that utilization to increase as we're launching more and more products in the market. And again, as capacity comes online and particularly product coming off the field, over the next several months, obviously, we're well positioned to be able to deal with that. Tyler, if you do want to have a conversation on the chemistry of final product?
Tyler Robson, CEO
Yes, I'm happy to discuss. When we examine category 3.0, it's important to break it down into more fundamental aspects. In Canada, when we analyze our usage across medical, health, and wellness sectors, you'll find 3.0 products tailored to various segments in different formats. One challenge we're noticing is the lack of innovation emerging from the Canadian market recently. We're eager to introduce new formats with varied delivery systems to cater to different consumers. First and foremost, in the health and wellness area, we are about to see products like bath bombs, lip balms, and CBD-infused honey. Valens is planning to explore sectors where we currently have no revenue. This raises significant questions, and we will address this on the call since there's a broad range of products on the way. This endeavor aims not only to enhance shareholder value but also to create new revenue streams. We believe that this market remains largely untapped, and we're excited to roll out new offerings in these areas.
David Kideckel, Analyst
Okay, that's very helpful. Thanks, guys. And again, congrats on this quarter, in spite of all the challenges presented throughout the industry. I’ll hop back in the queue.
Doug Miehm, Analyst
Yes. Good morning. First question just has to do with the EU approval. What are the hurdles that you need to pass over the next little while to see that approval in 2021?
Tyler Robson, CEO
Sure, yes. So basically, what we're doing with our facility Doug, from a strategic standpoint, is we've segregated only a part of our facility for EU GMP. So the rest of it can remain nimble like our current Canadian platform, where we're generating revenue here short term. The process is really to get vendor validation from a place in the EU to come in and validate your processes. So when this facility was being built, we did have two consultants to actually build it to EU GMP spec. Now, what we're doing is just trying to line up that vendor verification as we ramp up on the actual equipment to GMP specifications.
Doug Miehm, Analyst
Okay, And you can provide any better timing on when that may occur?
Tyler Robson, CEO
So, we should have information here shortly. I know we said fiscal 2021. We're obviously working forward and with K2, looking to get licensed here shortly. That will really be the first indicator here, Doug. So I think, why don't we keep in contact over the next few months. And we'll keep you updated on the exact timeframe, once we have that actual verification lined up.
Doug Miehm, Analyst
Okay. And then the second question just has to do with your capital and the types of companies you're working with it. Obviously, in the past given the EBITDA that you've produced and I'd say, that the capital that you've invested in the business, most people would argue that you're very good stewards of capital on a relative basis versus your competitors. I guess what my question is really has to do with your receivable strengths, but could you comment on the quality of the balance sheet, so the companies that you're working with these days, so LPs, whether they be large or small? And how that's having an impact on your ability to work with companies?
Tyler Robson, CEO
Chris Buysen, do you want to take this one?
Chris Buysen, CFO
Sure. Yes. So I guess from a customer standpoint, as we kind of chatted about earlier in the call, we're continuing to see kind of that shift from our historical kind of toll processing, co-packing relationships with LPs to more of a product offering where we're going to direct to province. So, definitely on the product side of the business, we're seeing no risk from a credit standpoint. As far as the existing relationships with our LPs, we are watching and monitoring that extremely closely. Our track record historically has shown minimal amounts of write-offs or exposure that we've had, I think proves to kind of our process and our diligence in making sure that we're not extending credit past what we're comfortable with to any of our partners.
Tyler Robson, CEO
Yes, Doug, one thing I'll just add there quickly is everybody is worried about the extraction volumes tightening up a little bit. The extraction is still there, but at some point in time we need a level of comfort that people can pay their bills. So I'm not willing to stick my neck out further than I ask for some of the partnerships we have until they become a little bit more fundamentally sound. So, it's a unique dance right now with some of our partnerships. And again, it's about the risk profile. We're comfortable with taking until some of these guys get their balance sheets in order. I think we'll be limiting what we're willing to put out there. And Doug, it’s really well noted.
Chris Buysen, CFO
Yes. Maybe to expand on it from a guidance standpoint. I think you can expect this to come down as a percentage of revenue. We're already seeing that happen right now, kind of subsequent to quarter end. So, I think especially as provincial sales ramp up too and we're getting paid by the government, this is something we have to worry less about in the quarters ahead. But I think our controls are really proving out that in the meantime.
Doug Miehm, Analyst
Excellent. Thanks very much.
Andrew Partheniou, Analyst
Hi. Thanks for taking my questions. I guess the follow-on to Doug's question. We're full into October. There's potentially the outdoor crop season coming. Just wondering what you guys are hearing in terms of pulling demands or potentially lack thereof for Croptober?
Tyler Robson, CEO
Maybe I'll start with this one. So, obviously, that's a key area for us. And those conversations have been ongoing for quite some time from our side in terms of we're reaching out to either outdoor growers or to our LP customers and ensuring that we're top of mind as they are considering this. So I say, we're watching that very closely and the conversations we're having about recently are encouraging with the opportunities that provide us. Again, when and actually that opportunity does come to us, we're not giving guidance on that, but we are encouraged by the conversations that we're having.
Andrew Partheniou, Analyst
Alright. That’s fair. The question, maybe you can just remind us with the imminent onboarding of your K2 facility. How is that going to affect your manufacturing footprint? It's interesting that you guys are going to be expanding while LP peers are contracting their footprint. So how do you reconcile that? And how does that position Valens to capture future opportunities in Cannabis 2.0?
Tyler Robson, CEO
Yes. So happy to touch on that. And I think it can really blow the doors open of what we're doing. One of the biggest things people don't realize is just the physical space constraint we have in our current facility. When you send 100,000 bulk vape pens to one of our partners, it takes about five pallets. But if you're putting those into master cartons, and then you're putting those into master case files, then you're shipping to four different provinces with different orders, different SKUs, it's a sheer volume challenge we’re facing right now. So one of the bottleneck is physical space. So as soon as we bring on K2 in this very short next little while here, we blow that open. But a lot of things people aren't paying attention to, again, is the innovation that we've done, the legwork we've done, where we just don’t have physical space. And that's why I touched on it earlier. The innovation in Canada right now, I think it's lacking. So with more physical space, we've done our R&D, we've done the shelf stability, we've done the consistencies. So as soon as we get physical space, we're going to be playing in new verticals to create new revenue opportunities and drive more shareholder value. It's not a lack of thought process of why we expanded when we did it. It was more of a proof-of-concept. And I think everybody else in the space got out over their skis and they're correcting now, while we were being a little bit more strategically aggressive albeit moving forward.
Andrew Partheniou, Analyst
Thanks for that. Is there any particular vertical that this facility helps fortify in your portfolio?
Tyler Robson, CEO
I would say that there are a few for sure. So I think the edible space is going to be one we’ll see a center fairly quickly. And then health and wellness. We’re not going to touch too much more on that, but I hinted before at bath bombs, soaps, lip balms, just a few different verticals. Again, we think are being underserved. If you look at some of the growth verticals in the U.S., there are some unique opportunities to position ourselves ahead of time. You'll see that in the next few quarters coming up.
Neal Gilmer, Analyst
Yes. Thanks very much and good morning. Maybe just to follow-on your previous comments, Tyler. As we look at Q4 and then 2021, I sort of get the impression you saw significant SKU growth in Q3. We probably don't see too much more in Q4, just so you guys focus on market share capture and penetration, and then as K2 gets approved and comes online, then we'll start to see that SKU count continue to increase in fiscal 2021. Is that a correct takeaway from those comments?
Tyler Robson, CEO
Yes. Neal, you're 100% correct. One thing, too, when we're working with some of the provinces directly as we continue to expand that portfolio. Some of the purchase orders were smaller, whether they were 1,000 cases moving to 3,000, moving to 8,000, we're seeing continued growth. So I don't think you're going to see too much of an expansion in SKUs, but just sheer volume as we get our name out there, and again, expand on some of the existing relationships. Part of it was just grabbing market share right now and being a little bit more strategic when and how we launch products. There's a ton of new 2.0 products where there's 58 distillate pens, there's 58 winterized pens, so again, setting ourselves apart, bringing a little bit more of a technology or IP place, and really showcasing our talents of what we've been working on for so long.
Neal Gilmer, Analyst
Great. Thanks, Tyler. My second question was somewhat of a follow-up as well. With this Croptober and lots of expected supply coming onto the market, I'm going to look at it from a different perspective, maybe on your gross margin profile and what you can sort of insight you can provide there. So can you use some of that supply that's going to be out there for your own feedstock? And could that potentially lower your overall cost structure and provide a little bit of an increase in gross margins going forward?
Tyler Robson, CEO
Definitely, I can speak to that. So, we’re definitely watching what's available in the market, making sure that we're sourcing products that are going to drive strong margins going into the future, knowing where we see flower prices going over the next couple of quarters. We are definitely positioning ourselves to capitalize on that. This will translate into growth through the gross margin profile of our products that we're taking to market.
Patrick Sullivan, Analyst
Good morning, guys, and congrats on the quarter. I just had a couple of quick ones here. I guess, when you talk about the Cannabis 3.0 products, and specifically the live resin pens and the rosin and hash, what percentage do you think that makes up of the overall cannabis market longer term? Is it a 5%, 10% 3%? Any color that'd be great?
Chris Buysen, CFO
Sure, I can jump in on this one. So if you look at the concentrated market, at present, it stands at 1.9% of Cannabis today as of July. If you look at the U.S. data that we have on some of the five kind of mature states, it's 9.5% of the market. So it's the fastest growing category from what we can see. Even if you see our Crumble, even from just launching kind of mid to end of September, it’s already fifth in SKU, and we're seeing great sales velocity on it. I think that as we broaden that to live resin, waxes, different rosins, I think that'll grow specifically. When you look at the U.S., it's really live resin and waxes that dominate the markets. But as Tyler mentioned, there's innovative products that are making high growth and sales velocities in California and Colorado. Given that we have key capabilities being one of the largest mass manufacturers of it, I see it in the next few quarters as going from 1.9% today to potentially 6% or 7% next year and possibly a steady state of 10% of the market long-term.
Patrick Sullivan, Analyst
Great. That's awesome. And do you think that there's any regulatory impediments in the Canadian marketplace right now that would make it more difficult for you to achieve that? Or for these products to achieve that 9% long-term? Is there anything different that you may not be able to do in Canada that they are able to do in those markets like Colorado with these products?
Chris Buysen, CFO
I would say, that's a loaded question. Because are there some bottlenecks or challenges in Canada? The answer is yes, there are, but not for Valens. When you look at our product portfolio and what we've done, we did a lot of the legwork that no one else has, whether it's shelf stability, consistency, or oxidization rates. When you look at the U.S. and how they're launching products, they have no standardization, they have no consistency, there’s no trust in their product. So when you look at degradation over time, there's no consistency, there are no again, no trust. We've been a little bit more methodical, a little bit more meticulous. When we’re bringing those what we’ll call 3.0 hydrocarbon products to market or even 2.0, you can be assured that we are extremely comfortable with the products we're launching and how we're launching them. So we won't be impeded, but I think a few other Canadian companies will be.
Patrick Sullivan, Analyst
Okay, great. And one final one here. So with the new expansions coming online, K2 and GTA, how much people addition? How much scale up on the like G&A? Are you expecting to see, or is it a lot of things automated? I guess, I'm trying to figure out how the EBITDA margin may look in the near term? It'll be hurt in the short term before those things is like you higher before things come online or just a little bit more around that would be great?
Chris Buysen, CFO
Yes, I can speak to that, sure. In the short term, we'll see some scale up in our cost profile. But I think the other thing really to focus on as we transition to next door and as Tyler mentioned, getting that additional space, we're really going to be able to achieve significant efficiencies through our processes. So, as much as we're expanding our footprint, I think our overall cost structure is going to become more efficient once we're up and running. So short term, there'll be some scale up likely, but as we kind of dial in add to our processes and are able to take advantage of the efficiencies that we'll be able to gain with the additional space. I think that'll definitely show through strengthen in our EBITDA margins mid to longer term.
Tyler Robson, CEO
I just want to add that the logistical challenges our team faces at our initial facility are likely underrepresented in the market. I'm continually amazed by the work they do to manage operations and achieve high volumes. We're really looking forward to the opportunities that will arise when K2 becomes operational. As Chris mentioned, there are numerous efficiency improvements we can expect from this expansion.
Patrick Sullivan, Analyst
Thank you. That's all for me.
Paul Piotrowski, Analyst
Hey. Good morning, guys. Congrats on the improvements this quarter. Can you talk about the ordering trends you're seeing with the provinces? And have there been any recent upticks you can talk about?
Chris Buysen, CFO
Sure. Maybe I'll start, and then Tyler, you can add on after. So, as Tyler was saying initially, the initial volumes are generally quite low as they sort of test the market with the products. But as these products move quickly, the provinces are very fast to up their orders. Subsequent orders increase when they become more trusted partners in the products because they sell well week-over-week. It's really about establishing relationships and the quality of your product and the scalability of your product in the market, which as you can see from our results is really starting to take shape on our side. Tyler?
Tyler Robson, CEO
Yes. I think you hit the nail on the head. I think there will certainly be an uptick in all of our verticals we're currently playing in and then we're adding new ones. Part of it is just not even proof-of-concept but consistency and the level of comfort. I don't think a lot of people understand the backwards that provinces have to do to get you registered. So they're very hesitant to bring on new partners. Essentially, you launch once you prove yourself, then you launch two, then four, then eight. Now that our relationships are growing exponentially, we're extremely comfortable in seeing an uptick not only in the provinces we’re selling in today, but the ones we’re bringing online relatively shortly.
Chris Buysen, CFO
Yep, absolutely.
Tyler Robson, CEO
So not only are we seeing adult rec in Canada, but we're seeing the health and wellness space start to unfold. And then we’re seeing the medical internationally. Because we're a little bit more focused in some of our industry peers, we're not really chasing medical today, because the opportunity isn't there. There's a ton of low-hanging fruit and revenue to be made in Canada today. But we're not taking our focus off moving more internationally in medical in time. We want to stay focused and competent in the Canadian U.S. market. As more retail stores are opening week after week, month after month, again, the opportunity is endless in Canada right now. Thank you operator and thank you to everyone for your time today. A few things I just want to hammer home to make sure we're all aligned. A few things that really resonate with me are everyone seems to keep calling us an extractor. And I'm not really sure I understand why anymore. That's like calling myself a fingernail, because I have a finger now. We have extraction, but we also have innovation, with different technologies, different IP distribution, and we've launched a significant amount of SKU. So I think we need to shift the focus away from extraction to product distribution and product manufacturing. And you'll see in the upcoming quarters how we continue to grab market share and execute exactly as we planned. One of the things too, everyone seems to talk about the toll processing going down. I don't see that as a negative. When I started the company back in the early 2012-2013 era, the long-term plan wasn't to be an extractor third party, it was to get into product manufacturing. There was just a ton of low hanging fruit that we saw was fundamentally sound to grab. It drove revenue; it put us in a well-positioned opportunity to execute. And that's exactly what we did. Another thing we really need to focus on is the different verticals. Everyone seems to take out of record is the Holy Grail. That is one of three, what we're really seeing in Valens. Not only are we seeing adult rec in Canada, but we’re seeing the health and wellness space start to unfold. And then we’re seeing the medical at the international level. Again, because we're a little bit more focused in some of our industry peers, we're not really chasing medical today because the opportunity isn't there. There's a ton of low-hanging fruit and revenue to be made in Canada today. And you'll continue to see us grab market share and bring new products and new verticals. Another one I think we really need to hammer home is to trust in the consistency of our products. Because we have that Thermo Fisher partnership, a lot of people aren't giving us enough credit. We've never had a recall, nor have we even come close to doing anything like that because we have more information, more data, and a greater level of comfort. When we're talking to all of these CPG relationships we have, that's one thing I really think people need to pay attention to is that this trust takes years to build and seconds to lose. I think some of our industry peers have lost trust very quickly. This means opportunities are opening up that I never thought would be there. It is an exciting time at Valens. To downplay some of the challenges we've seen with COVID wouldn't be doing it justice. We have faced some headwinds. But again, I believe we've turned the corner, moving away from extraction really and moving into manufacturing. I’m super excited about where we're going and how far we've come in such a short order. Thank you everyone, and with that, I’ll ask the operator to close the call.
Operator, Operator
Thank you. This concludes today's call. Thank you for your participation. You may disconnect your lines at this time and have a great day.