The Green Organic Dutchman Holdings Ltd. (TGODF)
Q2 2022 Earnings Conference Call
August 31, 2022 10:00 AM ET
Company Participants
Shane Dungey - Vice President Investor Relations
Sean Bovingdon - Chief Executive Officer and Interim CFO
Conference Call Participants
Venkata Velagapudi - Research Capital
Presentation
Operator
Good morning, ladies and gentlemen. My name is Joanna, and I’ll be your conference operator today. Welcome to The Green Organic Dutchman’s Second Quarter 2022 Conference Call. To ensure an enjoyable experience for all participants, all lines have been placed on mute. Following the presentation, we will open the call for questions. [Operator Instructions]. This call is being recorded on Wednesday, August 31, 2022.
I would now like to turn the conference over to Shane Dungey, Vice President, Investor Relations. Please go ahead.
Shane Dungey
Thank you, Joanna. Good morning, and thank you all for joining us for our Q2 2022 conference call. Today, we'll provide comments on our performance as well as an update on our operations and how we're executing our plans. This call is being recorded and the audio recording will be available on the company website at tgod.ca. Joining me on the call this morning is Sean Bovingdon, Chief Executive Officer and Interim Chief Financial Officer.
Today's discussion includes forward-looking statements. We caution that such statements are based on management’s assumptions and beliefs, and are subject to uncertainties and other factors that cause actual results to different materially. I refer you to our news release and MD&A for more information on these assumptions and factors.
With that, I'll now turn the call over to Sean.
Sean Bovingdon
Thanks, Shane. And good morning, everyone. Thank you for joining us today. We continued our success from the first quarter into Q2 with a record month in June, hitting our target for breakeven adjusted EBITDA on a monthly basis. This quarterly revenue growth was driven by a further key account penetration and higher velocity for the mainstream Highly Dutch branded products. Continued yield improvement at our Ancaster facility and our first harvest from Valleyfield provided the company with more flower available for sale and has provided increased product available for sale into Q3 and beyond.
While it remains a highly challenging and competitive environment, we are focusing on opportunities to grow revenue and expand our retail distribution by investing in relationship with retail cannabis chains. Our focus on quality and consistency has continued to drive brand recognition. However, increased competition for shelf space necessitates additional marketing dollars to be allocated on the expansion of these key account relationships.
Operationally, we have continued to deliver quality product to consumers. Strong demand in Q2 was driven by increased SKUs and distribution across Canada for TGOD, Highly Dutch, and the Cruuzy brands. TGOD sales focused on three dried flower lines in particular, Organic Maple Kush, Organic Sugarbush and Organic Cherry Mints, while the Highly Dutch brand had increased penetration to a strong PR campaign around 4/20, and global media attention on the launch of the Highly Dutch Hotline.
Cannabis consumers are continuing to explore new products. And while we are confident in our flower, hash, pre-roll, vapes and other offerings, we are aware of the continual need to develop new strains and products to meet consumer demands.
In the second half of 2022, we will be adding to our high quality line with new strains, such as our Organic [Gold Butter MAC] and natural leaf pre-rolls. [Gold Butter MAC] is a TGOD original phenotype, while the natural leaf wrap is a 1 gram combination of the Gold Butter MAC wrapped in sustainably grown tender leaf. So we're excited to have those launch in the coming months.
As mentioned earlier, we had our first harvest from Valleyfield in Q2, enabling us to offer Quebec product grown or Quebec grown product to that market. With strong initial yields from Valleyfield and further improving yields from our flagship cultivation facility in Ancaster, we have sufficient product available for sale. In the back half of 2022, our focus will be on our strategic initiatives to drive further sales velocity. Thanks to our commitment to the TGOD promise to deliver consistent high quality, high THC products, our focus on growing key retail chain penetration and our dedicated sales model, Q2 continued the momentum we had from Q1.
And with that, I will now hand the call back over to Shane to take you through the financial results.
Shane Dungey
Thank you, Sean. We built on our momentum from Q1, which included another record month in June. We achieved record quarterly net revenues of $11.6 million, a 43% increase from Q2 2021, and a 10% increase from Q1 2022. The quarter-over-quarter increase in revenue can be mainly attributed to further penetration to the mainstream Highly Dutch brand, the launch of additional TGOD flower strains and launch of Pre-rolls. With direct store support, bud tender and consumer education in addition to the new listings accepted in key markets, the company achieved significant increased revenues.
Gross margin before changes in fair value adjustments in Q2 2022 was 21% versus 32% in Q2 2021, reflecting more Highly Dutch mainstream flower and hash sales mix in the quarter. On a year to date basis, as of June 30, gross margin before changes in fair value adjustments showed a marked improvement over the same period in the prior year at 28% versus 19%. We believe gross margin in Canada can be consistently between 35% to 40%, as our sales mix trends towards a higher mix of premium flower.
General and administrative expenses for the quarter were $4.9 million versus $5.3 million in Q2 2021. In the second half of 2022, we will continue to focus on costs and look for further reductions. In comparison to Q1 2022, G&A expenses increased $0.98 million primarily as a result of annual cost of living salary increases as well as net accrued vacation reversal and one-off non-recurring consulting and legal fees. Adjusted EBITDA loss was $4.27 million representing an 80% improvement of $17.19 million compared to Q2 2021. For more information on our adjusted EBITDA and non- GAAP performance measures please see our disclaimer in our Q2 press release.
In April 2022, we amended the secured revolving credit facility, increasing the total facility to $34 million, the term portion of the facility by $4 million to $24 million and relaxing certain covenants.
In May, we completed the sale of the Puslinch Facility building improvements for $3 million and in conjunction extinguished two shareholder promissory notes totaling $0.9 million. As of June 30, the company's cash position was $4.67 million, including $1.47 million of restricted cash. Working capital was negatively affected during the quarter, primarily due to the movement of the revolver loan to current liabilities from non-current. Cash on hand will be used primarily towards covering working capital requirements and operating costs as the company moves towards achieving a positive operating cash flow.
In closing, we are pleased with our progress in the first half of 2022, and we'll look to continue this moment in the back half of the year. We'll continue to focus on revenue generation while maintaining cost control to drive us toward profitability.
With that, I'll hand the call back to Sean.
Sean Bovingdon
Thanks, Shane. Before we move to any Q&A, let me leave you with these final thoughts.
We are pleased with the progress and momentum we've made in the first half of the year. Much of the progress as mentioned can be attributed to the launch of new products and our existing products gaining further traction. We grew at a faster pace than the market. Year to date net revenue as of June 30th was $22.2 million representing an impressive 65% increase on a year-over-year basis, clearly demonstrating the brand value we have created in a relatively short period of time.
So in the second half of the year, we are set to continue the expansion of our product offerings in all provinces, where we currently have listings, with a spotlight on key markets. New SKUs such as Organic Maple Kush, Cherry Mint Pre-rolls, and Amsterdam Rosin and Rotterdam n' Rosin vape and Strawberry Jerry 3.5 gram flower to name just a few.
We are focused on increasing distribution points through furthering key account relationships and expanding relationships with smaller chains and individual retailers. We are preparing for future growth in Canada while not losing our focus on cost discipline and execution. We are pleased with our operational success providing consumers with consistent high quality, high THC products. For example, our recent harvests have been very positive with three separate strains ranging between 29% to 31% THC levels. We look forward to sharing more on our growth strategies in the coming months.
So to conclude, I am proud of our continued growth quarter-over-quarter while building a strong sustainable organization and a brand that resonates with consumers. As always, I would like to thank our employees for their continued hard work and to all of our shareholders for their continued support.
With that operator, we are ready to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions] First question comes from [Venk V] at Research Capital. Please go ahead.
Venkata Velagapudi
Hi, Shane and Sean. So can you provide some guidance on your gross margin for next couple of quarters? We note that gross margin improved a bit in Q1, and again it's lower in Q2, because I know that it's partially driven by changing sales mix. When you have more sales from dried flower and hash, obviously it's going to impact the gross margin. But what exactly needs to happen to improve this gross margin back to 35% range? Thank you.
Sean Bovingdon
Thank you, Ven. And appreciate you joining us again. That's a very valid question and actually as we mentioned earlier, we do expect to achieve higher margins as we move to continue selling predominantly more TGOD premium flower with some of those new strains like the [Gold Butter MAC] coming on and Strawberry Jerry.
One thing I would note is that in the gross margin for Q2, it does actually include about $1.1 million impact in Q2 related to the impact of having reduced operating costs on the inventory there existed at the start of the quarter. This is a normal kind of accounting adjustments where we've actually reduced our cost per gram by about $0.14, $0.15 per gram compared to what it was at the end of Q1. And we had about 5 million grams of flower and finished product carrying forward through from the end of March through to the end of June, which got revalued down to the lower of costs, and that realizable value and being the current costs. So that actually had a kind of -- under the inventory accounting rules ended up with a $1.1 million impact into the production costs in Q2, which is actually -- accounts for about 10% gross margin or gross profit before the change in fair value of biological assets.
So adjusted for that, our actual cost per gram as we look at it now is really about a 31% gross profit before change in fair value of biological assets for Q2 compared to the 35% we had in Q1. So that really is all attributed just to the product mix.
The supply and energy cost issues may persist that we -- that people have been experiencing, but we're always pleased to see the kind of higher yields in the lower overall production cost per gram. And what that's going to do is results going forward, now we're down to that lower kind of cost per gram in our inventory, you'll see the impact of that particularly in the coming quarters, as there'll be a lower cost of production going forward that'll be realized with the production costs in Q3 and into Q4. And I think we'd be able to maintain, and if not at the 30% to 35% gross margin and -- but with more premium flower hoping to be at that 35% and above level coming into Q4 with those [Gold Butter MAC] and the other premium flower focused SKUs in the key markets.
Venkata Velagapudi
Nice. And can you throw color on operating expenses? Because -- is there any possibility to reduce operating expenses from the current level? I know that TGOD is in a growing -- growth phase and the revenue is growing, but capital markets are looking for companies making -- having a visibility towards positive free flow. So just wanted to understand when can TGOD reach positive operating flow?
Sean Bovingdon
Yes. As mentioned, we hit the revenue number for June to have that positive EBITDA -- adjusted EBITDA for the month of June. Coming into Q3 and Q4, we are always focused on costs. As Shane mentioned, there was -- and then the MD&A mentions is just under $1 million of one-time non-recurring costs in Q2 that were in the $4.9 million of G&A expenses. We will be continuing to spend the sales and marketing expenses at the similar level. And as revenues increase, you would expect to see a little bit more on the sales and marketing side. Whereas on the G&A, we are always looking for continued reductions and getting to a point in Q4 again of being at levels where we fully expect to and targeting positive adjusted EBITDA.
Shane Dungey
I'd also add Ven that there's a lot of questions around the market right now with what you're seeing happening in BC market and the issues in the OCS that are working their way through the quarter. We'll have more information on that as we kind of work through this quarter ourselves. The answers aren't quite there yet for how it's going to actually affect the industry as a whole.
Venkata Velagapudi
And also, can you comment on your current available total liquidity? I see that you ended the quarter with around $3.2 million cash. So what is the total liquidity available…?
Sean Bovingdon
Yes, so we actually have $3.2 million, plus the restricted cash and a good portion of that restricted cash came free, has come free already. It relates to part of the escrow account that was left over from construction from a couple of years ago. So a couple of hundred grand of that got released and the other cash goes into the normal part of the suite with the revolver is what it represents. So, really related to the current liabilities, it's a full $4.6 million of cash that was available at the end of June.
Going forward, we are expecting to close the sale of HemPoland in the coming weeks and certainly before the end of September. And that will certainly provide an inflow of additional funds. And we continue to look to monetize idled or unused assets to bolster our cash position. Primarily our focus is on increasing the sales to continue to work towards that positive EBITDA, as we maintain or reduce our cost base. It's about getting the sales and getting that distribution.
I mean, the industry as a whole has had a challenging in the last couple of months with the OCS warehouse issues and the strike at the SQDC back in July and some little bit of disruption here with the strike in BC, thankfully seems to being resolved. So it's -- the focus is getting those sales and the sales velocity up and continue to work towards that positive EBITDA based on the disciplined kind of costs we have and the lower production costs that I mentioned. We'll only consider other avenues if necessary. But the main focus is again getting that sales level and keeping and sustaining that sales level up, which will move us towards the positive EBITDA and cash flow.
End of Q&A
Operator
Thank you, ladies and gentlemen, there are no further questions. This will conclude your conference call for today. We thank you all for participating, and at this time you may disconnect your lines.
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The Green Organic Dutchman Holdings Ltd. (TGODF) Q2 2022 Earnings Call Transcript