CA - Delta 9 Cannabis Inc. (DLTNF) Q4 2022 Earnings Call Transcript

2023-04-03 12:22:03 ET

Delta 9 Cannabis Inc. (DLTNF)

Q4 2022 Earnings Conference Call

April 3, 2023 10:00 AM ET

Company Participants

Alexa Goertzen - Senior Executive Assistant

John Arbuthnot - Chief Executive Officer

Conference Call Participants

Venkata Velagapudi - Research Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Delta 9 Q4 2022 Financial Results Conference Call. [Operator Instructions] This call is being recorded today April 3, 2023.

I would now like to turn the conference over to Alexa Goertzen. Please go ahead.

Alexa Goertzen

Good morning, everyone, and welcome to the Delta 9 Cannabis Year-End and Q4 2022 Earnings Call. At this time, all participants have been placed in listen-only mode. Following the presentation, we will open the line for a question-and-answer session for financial analysts.

Delta 9 would like to remind listeners that today's call may contain forward-looking statements that reflect the company's current views with respect to future events. Any such statements are subject to risks and uncertainties, which could cause results to differ materially from those projected in the forward-looking statements. For more information regarding risks and forward-looking statements, please refer to the Delta 9 Cannabis Inc. public filings, which are available on SEDAR.

I would now like to turn the call over to Delta 9s Chief Executive Officer, John Arbuthnot. Please go ahead, John.

John Arbuthnot

Thank you, Alexa, and good morning, everyone. Thank you for taking the time to join us for Delta 9s year-end and Q4 2022 earnings call. With me this morning is the company's Chief Financial Officer, Jim Lawson and our VP of Corporate Affairs, Ian Chadsey. Our earnings press release year-end 2022 financial statements, annual information filing and management discussion and analysis have now been made available on SEDAR and our company website.

And with that, let's begin. In 2022, the Canadian cannabis industry has continued to deal with challenges relating to an oversupply of cannabis products, compress Canada's wholesale margins and efficiencies of provincial crown distributors, over saturation the number of operating retail stores and overall capital markets volatility.

In the past year, outside of these challenges, the Canadian cannabis industry sales have continued to expand posting monthly retail cannabis sales of $426 million in December 2022 based on the most recent data from Stats Can. Annualized retail cannabis sales now exceed $5.1 billion on an annualized basis. And with the market continuing to grow at over 10% on a average year-over-year basis, we anticipate that over the next five to seven years, the Canadian cannabis industry will double in terms of retail cannabis revenues by the end of this decade.

Recently, we saw progress in the United States market in terms of material cannabis reforms at the federal level. In October 2022, President Biden announced that he would pardon certain individuals convicted with criminal records for cannabis possession and at the same time, announcing a sweeping review of the scheduling of cannabis under the Controlled Substances Act. The Federal rescheduling of cannabis is seen as a gating item to allow firms like Delta 9 to participate in the Unites States cannabis market.

In other international markets Germany and the Netherlands have made material progress on federal adult-use legalization initiatives targeting an early 2024 launch. In international markets such as Israel, Australia, Asia-Pacific and various countries in the EU continue to make progress on advancing more progressive medical and recreational use cannabis laws. We continue to believe that the growth rate in the Canadian cannabis market and the global reform of cannabis laws represents a generational market opportunity for companies like Delta 9 to grow and unlock value for investors.

I'm pleased today to be presenting you with Delta 9's year-end and Q4 2022 financial and operating results. These results include the third full quarter of operating results from our acquisition of our Uncle Sam's and discounted cannabis stores in Q1 last year and our first full quarter of operating results from our Garden Variety acquisition, which closed in September last year.

We have many positive takeaways from today's results, which we will highlight as well as analyzing our misses, the challenges we've encountered and the changes we're making to continue to grow and create shareholder value. We'll begin with a discussion of operations and material milestones for the company over the reported period.

On the cannabis cultivation and processing side of our business, we'll begin with an update of activities at our Delta 9 facilities in Winnipeg. The primary purpose of these facilities is to cultivate, process and manufacture high quality cannabis products. The company's proprietary cannabis production methodology is based around a modular, scalable and stackable production unit, that we call are Grow Pod.

And as at the end of last year, the company had 297 of these Grow Pods licensed by Health Canada and in operation within our facilities. Over the past several quarters we’ve operated these assets at or above the design capacity of our facilities, producing in the area of 10,000 kilos of cannabis annually, and have invested in continuous improvement initiatives to optimize the number of harvest rotations per year, average grams per harvest and overall potency in order to maximize returns from these assets.

We've identified three main growth drivers, which we feel will allow us to maximize the profitability of these assets over the long-term. The first is refining our cultivation and processing techniques to maximize THC potency and other quality features of our cannabis products. As cannabis consumers have become more discerning in their purchasing decisions over the past few years in the Canadian market, we know the success of our cannabis cultivation business will rest on our ability to produce the highest potency and quality cannabis products. We've made strides in the past 12-months in improving average THC potency in our harvested cannabis flower products, and we'll continue to push our cultivation team to pursue excellence in terms of production outcomes.

Second, in January of 2023 we announced that we completed a project to automate our pre-roll manufacturing. Over the past 12 months, pre-roll SKUs have become Delta 9's best-selling products in terms of units sold across numerous provincial markets. However, over 2022 we have been bottlenecked on our ability to produce these products internally and have often had to source third-party manufacturing. Automating this manufacturing process will allow the company to realize over $0.75 per gram in incremental contribution margin from our pre-rolled product offering and will contribute excess capacity to this important product category.

Third, the company has and over the long-term begun a gradual retrofit and upgrade of our older technology lighting systems to new state-of-the-art LED systems, which the company has developed with its international lighting suppliers over the last two years. These lighting system upgrades would increase the capacity of our Winnipeg facilities to over 20,000 kilos per year from our current capacity of approximately 10,000 kilos annualized. These upgrades are also anticipated to improve average THC potency and overall cannabis flower quality in line with our first key growth driver initiatives. We feel that this increased potency, quality and capacity metrics will not only increase our average selling prices and contribution margins from cannabis wholesale sales, but should also assist in driving cost efficiencies and lower our cost per gram of production, again as we invest in these initiatives over the long-term.

Over the near-term we note that on January 9, 2023 the company did announce a number of cost cutting measures as a part of our 2023 strategic plan with the goal of producing positive cash flow from operations over the near-term. This included reducing our production output capacity at our Delta 9 facilities by approximately 40%, taking our kilos produced annually down to 6,000 kilos and temporarily laying off approximately 40 employees. This plan was developed such that there is no material impact on our wholesale revenues or on shipments to our wholesale and retail customers, we anticipate that these cost saving measures will result in approximately $4 million in annualized cost savings in 2023 and again assist the company in its goal of driving to positive cash flow from operations.

We will continue to update the market on the progress of these cost cutting measures, as well as these key growth drivers as the company further develops its forward-looking plans through the balance of 2023.

On our portfolio of cannabis products for the past four quarters Delta 9 has been narrowing the scope of our cannabis cultivars and production to only those that are in high demand and at the high-end of the potency range. We currently produce approximately 15 different genetic strains of cannabis each with its own unique chemical cannabinoid content, terpene and flavonoid profiles, and we continue to maintain over 100 additional strains being stored on-site at a seed bank to provide for product optionality into the future.

We are continuing with our production pivot towards higher potency cannabis strains, which are the highest demand segment with the retail consumer. Over the past 24 months, we have increased our average THC in our cannabis flower to over 20% in 2022 from less than 15% in the prior year.

In Q3 2022 Delta 9 launched its new SCOOP Cultivar across key provincial markets such as Ontario and Alberta, and we have seen encouraging success in our newer higher potency, higher quality products. In 2023, Delta 9 launched our new Candy Chrome cultivar, as well as limited time offers in our Cupid's Private Stash and Paddy’s Private Stash for Valentine's Day in St. Patrick's. The product innovation pipeline will launch a new cultivator in early Q2, 2023 alongside limited time offers for the April 20 4/20 Cannabis holiday we are planning multiple new high potency product launches over the next 12-months.

In pre-rolls, Canada's pre-rolls have become an increasingly important category in the Canadian cannabis market as consumers have moved to smaller packaging sizes and see convenience in a pre-rolled setting. The company's pre-rolled products currently account for approximately 15% of our overall product offering with our Bliss and Twist pre-rolls making up two of our top 20 selling products in Delta 9 retail stores. Early last year, Delta 9 released a new 0.25 gram pre-roll offering Canadian consumers a convenient personal use setting in the pre-roll category.

In Q2 last year, Delta 9 launched a new infused pre-roll incorporating high potency cannabis distillate into our pre-roll lineup. As noted, the company has now completed our pre-roll automation project and plans to introduce multiple new pre-rolled products and settings in 2023 to increase sales from this important category.

On the oils, extracts and derivative products, over 2022 Delta 9 saw a successful initial sell-through across our provincial markets for our 2.0 products, including ingestible oils, vape cartridges and cannabis concentrates. In later 2022, we launched all of these new 2.0 product lines, including new products, new and improved formulations and leveraging partnership with the industry's leading white label suppliers to drive margin improvements. Our full 2.0 product portfolio includes three formulations of ingestible cannabis oils, three formulations of 510 vape carts, cannabis kief and pressed hash in the concentrates format category. It is our belief that these categories will continue to become an increasingly important component of the medical and recreational use markets into the future.

In our retail stores, Delta 9 carries the full complement of 2.0 and derivative cannabis products from the industry's leading manufacturers. We believe that through our retail unit, we will be able to extract valuable intel on which of these new product formats are having a positive impact with the consumer and be able to pivot to capitalize on these new product opportunities as they emerge.

From a distribution standpoint, we believe that the domestic market for recreational use cannabis presents our most major growth opportunity for the company over the next several years. Wholesale revenues from the sale of recreational use cannabis products are expected to make up a large component of the company's overall business. The company has undertaken a strategy to add new distribution markets incrementally as our increased supply capacity has come online over the last number of years, in order to reach our ultimate goal of becoming a national and international distributor of recreational use and medical use cannabis products.

At the end of Q4 last year, Delta 9 was licensed for distribution in Manitoba, Saskatchewan, Alberta, British Columbia, Ontario and Newfoundland, with these six provincial markets representing well over 50% of the Canadian population. In Q1 2023, the company made it’s first shipment into the Quebec market -- through a Quebec based processor and plans additional product launches in the Quebec markets throughout 2023. The company also expects to be listed in the territories of Nunavut and the Yukon in the near future.

Delta 9 also made strides in Q1 2023 in its first international shipments, announcing on February 13 of this year that we completed our first wholesale shipments of cannabis to a customer in Australia. The company has also received seven additional export permits from Health Canada for shipments into the Australian market. We intend to complete multiple shipments during the first and second quarter of 2023. We anticipate these shipments will total upwards of 100 kilos of dried cannabis flour and over 6 kilos of cannabis distillate cereal. We expect to announce expanded export activity in the near future, as the company continues to pursue its international export expansion.

On vertical integration and cannabis retail sales, for the past 36-months, Delta 9 has made significant progress in expanding its retail footprint. Delta 9 started the year 2020 with only four operating stores in the Province of Manitoba. We fast forward to early 2022 and Delta 9 opened our 17th cannabis retail location in the City of Winnipeg. From here Delta 9 undertook a rapid expansion in 2022. In late Q1, the company announced a transformative retail acquisition to acquire all of the assets of Uncle Sam's Cannabis Limited, in connection with their 17 operating stores based in the Province of Alberta and operating under the Uncle Sam's Cannabis and discounted cannabis brands. The combination of Uncle Sam's cannabis stores and Delta 9s existing store network has made Delta 9 a leading multi-banner retailer of cannabis products in Canada.

In September last year Delta 9 announced the closing of our acquisition of three Garden Variety cannabis stores in Manitoba, a $3.25 million all-stock transaction is anticipated to add approximately $8 million in annualized retail revenues and we anticipate the deal will be immediately accretive to EBITDA. Delta 9 opened our 39th cannabis retail store in December 2022 in Dauphin, Manitoba followed by our 40th cannabis retail store in the City of Winnipeg. We opened our 41st Cannabis store on February 7th on Sargent Avenue, Winnipeg. The company has and will continue to employ an aggressive growth strategy to actively acquire cannabis retail stores and will provide meaningful revenue growth and positive adjusted EBITDA.

We are actively pursuing retail expansion opportunities across all Canadian provinces, which allow for privatized retail cannabis sales and will continue to expand on our vertical integration into the retail segment.

On business-to-business opportunities, the company derives a portion of our overall revenue from sales of cannabis genetics, sales of grow pods and from licensing and consulting activities provided to other licensed and pre-licensed cannabis companies. We believe that these opportunities provide the company a number of benefits, including a complementary business vertical, which produces diversified and high margin revenue streams, a third-party validation of the company's proprietary grow pod platform, valuable partnerships with other pre-license and licensed cannabis companies and the opportunity for international expansion in non-cannabis revenue streams.

To-date, Delta 9 has licensed over two dozen third-party facilities, representing approximately 250 of our grow pods for our micro cultivation partners across North America. We will continue to pursue and expand on these B2B revenue opportunities over the coming year. We are also continuing our pivot to expand our sales and marketing efforts in the United States and other international markets and we anticipate to see larger growth from our U.S. and international B2B sales in 2023 and beyond, because this pivot begins to take effect.

Now onto the financial results, we’ll begin with an assessment of the balance sheet. During 2022, the company undertook multiple financing and refinancing transactions to strengthen our balance sheet and continue to fund growth. The first is the company's closing of a $32 million credit facility from Connect First Credit Union in Q1 2022. These credit facilities include a $23 million commercial mortgage facility, a $5 million acquisition facility used for the Uncle Sam's acquisition transaction and a $4 million authorized overdraft facility.

These facilities mature over five years and amortize over a 12-year term. The interest rate under the credit facilities is a five-year fixed rate of 4.55%. And as noted in our press release early last year, these facilities provide an attractive and industry-leading interest rate, annualized interest and principal repayments savings over our previous credit facility and expansion in operating capital through the acquisition and working capital facilities.

The second major financing initiative for the company was closing a $10 million strategic financing for Sundial Growers in the form of a three-year $10 million secured convertible debenture. Later in Q2 2022, the company announced a $5 million non-dilutive shareholder loan, as well as a $2 million overnight marketed offering of equity units.

The company ended the year with $3.5 million in cash on its balance sheet, inclusive of the company's drawn its operating line of credit, and showed a working capital deficiency of approximately $20 million, due to the reclassification of our CFCU loans as current. We note that as of December 31 last year, the company was showing a breach of its debt service coverage ratio covenant for its credit facility with Connect First Credit Union, which require the classification of this debt as current on its balance sheet. The company continues to make required interest and principal repayments on all of its existing credit obligations and does not anticipate any deterioration of its credit condition. The company intends to secure additional or expanded waivers or amendments to its credit facilities as necessary as we work to improve our adjusted EBITDA results and bring all of our financial covenants back into compliance.

Total assets as of the end of the year totaled $89.5 million, up from $78.7 million as of the end of the previous year. We believe the company is currently well capitalized to continue to execute on its expansion plans and can act opportunistically where assets become available which can expedite expansion, provide strategic value and improve the financial and operating performance of the company.

On key performance indicators, in Q4 2022, the company produced approximately 2.2 million grams of dried cannabis, up from 1.9 million grams in Q3. We anticipate harvest quantities to be similar in Q1 2023 before production cuts as a result of cost cutting initiatives begin to take effect. Production cost per gram decreased to $0.53 versus $0.76 in Q3, we would highlight that these production cost figures are quite competitive even comparing to our largest competitors in the context of the current cannabis flower market. As the company continues to refine its production techniques, we anticipate that our economical cost base will be essential to improving gross profitability in the upcoming quarters.

Total grams sold increased to approximately 1.7 million grams, an increase from 1.4 million grams in Q3. We note that overall grams sold in the past four quarters represent a significant improvement over the previous four quarters. The company's average selling price per gram decreased $1.69 per gram, down from $2.06 in Q3 last year. With the past several quarters showing overall weakness in average wholesale selling prices. We will continue to push to maximize production efficiencies to ensure the company and be competitive in the current market environment.

Continuing to address the company's wholesale business and improving overall grams sold and average selling price will continue to be a focus for us moving forward. The company saw a record $387,000 retail transactions in Q4 2022, up from $376,000 in Q3, with strong contributions from our newly acquired Uncle Sam's, Discounted Cannabis and Garden Variety stores. Average transaction size trended higher during the Q4 holiday shopping season.

On revenue and revenue segmentation, total net revenues for the three month period ending December 31 were a record $17.6 million, an increase of 3% year-over-year and up 12% from $15.7 million in the third quarter last year. From a segmentation standpoint, retail revenues hit $15.3 million versus $11.1 million for the same period last year. Wholesale cannabis revenues were $2.8 million versus $4.5 million in the same period last year and B2B revenue was $65,000 versus $1.9 million for the same period last year.

The company saw relative strength in its retail segment in Q4 this year, while price and margin compression continue to impact cannabis wholesale revenues, due to over competition in the Canadian cannabis industry. Our B2B segment continues to see volatility relating to revenue recognition due to an uncertain overall business environment, which we have seen impacting business sentiment and capital investment.

For the full-year 2022, the company recorded $63.2 million in net revenues and increased 2% year-over-year versus $62.3 million last year. In the upcoming quarters, we will focus on three main initiatives to drive revenue growth: the first is the continued expansion of our retail store chain, including further organic store build outs and acquisitions as the company continues to execute its retail rollout strategy. We've spoken about key improvements and investments that the company has planned in its cultivation and processing business, which we feel will help us drive momentum, increased revenue and improve margins in our cannabis wholesale segment with a focus on expanding product distribution in our six existing provincial markets, adding new provincial markets through new listings, as well as through bulk wholesale agreements with other licensed cannabis companies.

And we will continue to expand our B2B revenues through a focus on creating relationships in the Canadian micro cultivation industry and expanding into emerging markets, such as Europe and the United States. We continue to believe that given the relative novelty and uncertainty of the global cannabis industry that company's diversified revenue and vertical integration approaches we’ll allow it to better react to market challenges than our competitors with single business strategies.

Gross profit before accounting for changes in the fair value of biological assets for the three month period ended December 31 was $3.4 million or 19% gross margin versus $4.9 million or a 28% gross margin in same period last year. We would attribute the decrease in overall gross profit to overall price and margin compression again in our wholesale and B2B segments. Gross profitability for the three month period was impacted by one-time items as well, including product impairment costs and write-downs totaling $1.1 million.

Gross profit in the retail and wholesale cannabis segments declined for the three month period ending December 31 as a result of one-time items, product impairment costs, and write-downs. Gross profit across the company's core businesses have been impacted over 2022 by lower gross margins, due to increased competition in the Canadian cannabis market, increasing costs due to inflation and decreased consumer spending based on macroeconomic uncertainty.

We expect that as our production cost per gram continues to trend downwards and with the introduction of -- in sales of higher margin cannabis products in 2023 that the company will experience a general improvement in gross profitability from our wholesale cannabis segment. The company has seen relative stability in our retail cannabis segment over the past few quarters and will continue to address KPIs such as average transaction size, average units sold per transaction, and opportunities for higher margin product sales to continue to improve retail margins. We would also highlight that once the company's B2B segment begins to produce more meaningful revenue contributions the company's overall consolidated gross margin is expected to improve.

Operating expenses for the three month period ending December 31 last year were $8.2 million versus $6.2 million in the previous year. The most notable increases in operating expenses were in amortization expense, personnel expenses and legal professional and IR-related expenses. The increase in overall operating expenses is largely due to the increase in the number of operating retail stores versus the previous year.

The company's loss from operations for the three month period was $7.7 million versus a loss from operations of $3.5 million in the previous year. We are confident that our renewed focus on revenue growth, gross profitability and the aforementioned cost controls and cost cuts will return the company to profitability over the coming quarters.

The company's adjusted EBITDA loss for the three month period ending December 31 was $1.5 million versus an adjusted EBITDA of $613,000 for the same period the previous year. This also compares with the adjusted EBITDA loss of $1.7 million for the third quarter, so modest improvement showing versus the third quarter.

Again, we attribute the adjusted EBITDA loss in the period to lower than anticipated margins. We are confident that our recent acquisitions and renewed focus on revenue growth, as well as cost cutting initiatives will return the company to a positive adjusted EBITDA position over the coming quarters.

Now as we look forward to the 2023 operating year, we feel that the company is well positioned to continue to execute on its vertical integration and growth strategies. In our production and wholesale segment, the company will continue to push forward to maximize the utility and efficiency of our existing assets, pushing to operating cash flow positive on the back of our recently announced cost cutting initiatives and increase our ability to supply volumes of cannabis across all of our markets.

In our retail segment, we will add to our retail and distribution capacity by adding new stores to our existing chain. We will continue to position as retailer of choice for both retail customers, as well as our suppliers seeking the best locations and positioning as the most competitive LPO in retailer in the Canadian cannabis space.

And in our B2B segment, we will continue to cultivate long-term and value-added relationships with our B2B customers as we deliver on grow pod projects across the country and around the world, while deploying resources into international markets to position our non-plant touching businesses to realize growth and the ever growing cannabis opportunity global.

I want to thank everyone for taking the time to join our call this morning. So with that, I will turn the call back over to the operator for any question we may have.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Ven V at Research Capital. Please go ahead.

Venkata Velagapudi

Thanks for taking my question. Hi, John. Congrats on Q4, you spoke about the three factors, which drive the profitability up over the next couple of quarters. And your current adjusted gross margin for Q4 is 28.9% after adjusting for changes in fair value for inventory and biological assets? So just wanted to understand how much upside is left from this level based on the three factors you spoke about in the call?

John Arbuthnot

Yes, no good question, Ven and again the $1.1 million in negative adjustments that you're seeing within the fourth quarter virtually entirely impacting our wholesale and B2B segments. I think our real goal and on a forward basis is to see that business-to-business segment normalize back into its historical 40% to 50% gross margin level. And with our wholesale business targeting again are more historical or adjusted averages in the, call it, 35% range.

So on a consolidated basis, and when we did see a strong rebound within the fourth quarter in terms of our retail margins, one-time items impacting -- our third quarter last year had driven retail margins into the 20% range, we saw again a strong rebound in the fourth quarter up to about 24% from retail. So as we look to improve on our wholesale and B2B segments, which again, have seen the bulk of the one-time item impacts throughout 2022, as well as incremental improvements, I would anticipate somewhere in the area of 3% to 5% in our retail segment through calendar ‘23. I can feel that there's modest improvements across all of these segments, but on a consolidated basis, should drive us into the well north of 30% on an adjusted gross margin basis for ‘23.

Venkata Velagapudi

Okay. That's good. So I have a couple of questions on operating expenses, so this quarter, there is a spike in sales and marketing expenses, usually some portion of it is attributed to seasonality. Q4 is stronger, so sales and marketing expenses are higher. But is there any other reason for the spike in sales and marketing? And, also you guys mentioned about cost cutting measures in the beginning of January. So just wanted to know the timing of the impact when those -- the impact of cost cutting measures can be seen on your operating expenses?

John Arbuthnot

Yes. So sales and marketing expenses and just from an expense categorization perspective, you're going to be seeing within that category expenses relating to our retail operations. So those would be included in sales and marketing. So a portion of what you're seeing and actually if you're looking year-over-year within the full-year financial statements, you will see rather material increases in sales and marketing expenses. Again, across key categories like personnel expenditures, as well as amortization that is relating to the rapid expansion of the retail chain throughout our several acquisitions through 2022. So again, much of the year-over-year increases relating to sales and marketing expenses you're seeing from retail acquisitions.

There will be a degree of seasonality there as you noted for the fourth quarter just overall increased retail activities and expenditures on marketing initiatives through the holidays. But again, the bulk of those increases would be reflected in simply amortization and personnel expenditures.

In terms of the cost cutting initiatives, while they were announced early January, they were actually beginning to be implemented in December 2022. We will see, I would say, not the full impact of these cost cutting measures in Q1 2023 as there are some one-time items attributable where employees, who've been laid off have not been hired back.

That being said, we would anticipate material improvements in our operating expense structure in the first quarter of 2023 with the full impact to be realized into the second quarter and beyond throughout the year. And again, as we've looked to guide in any public announcements around those cost cutting initiatives, we do not feel that there will be any material impact to our ability to generate revenues across our core businesses. This is simply really taking a fine look at those operating expense categories and making a strong push through to operating free cash flows for the company.

Venkata Velagapudi

Okay, that's good. And my final question is about positive free cash flow, so you guys have a guidance to achieve positive cash -- operating cash flow in 2023. So can we assume it to be in the later half of 2023? Or do you think it can be hit even sooner than that?

John Arbuthnot

You know, again, I think the first quarter is going to be quite telling in terms of the progress that the company has been able to make. Keeping in mind that Q1 is typically a seasonally weak quarter for -- well for retail sectors across the board, but in particular for Canadian cannabis retail as we see a slowdown in January, February sales volumes. But even against that seasonal slowdown, we should see a meaningful improvement in overall profitability and operating cash flows within the first quarter of this year, we would anticipate again that as we start to see degree of seasonality and improve sales over the spring/summer months and then again into the holiday shopping season in Q4 that, that is where you will see the most meaningful impacts in terms of driving positive operating cash flow. But again, would guide that there will certainly be some anticipated improvements in the first quarter here.

Venkata Velagapudi

Okay, that's it. Thanks a lot for taking my questions. All the best for next quarter, John.

John Arbuthnot

Thank you, Van.

Operator

[Operator Instructions] There are no further questions from the phone lines. I would like to turn the conference back to John Arbuthnot for any closing remarks.

John Arbuthnot

If there are no further questions, I just want to thank everyone again for taking the time to join us this morning. And we'll turn things back over to the operator to wrap up.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.

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