Valens Company Inc (VLNS) 2021 Q2 法說會逐字稿

Hello, and welcome to The Valens Company's Second Quarter Fiscal 2021 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Everett Knight, Executive Vice President of Corporate Development and Capital Markets of The Valens Company. Everett, please go ahead.

Thank you, operator. Good morning, and welcome to The Valens Company's Second Quarter 2021 Financial Results Conference Call for the period ended May 31, 2021. A replay of this call will be archived on the Investor Relations section of our website at 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 other than statements of historical fact constitute forward-looking information or forward-looking statements within the meaning of the applicable security laws and are based on expectations, estimates and projections as of the date hereof.

Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions and anticipated courses of action. 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 forward-looking statements please refer to the latest annual information form and our latest management discussion and analysis, otherwise known as the MD&A, each as filed with the Canadian securities regulatory authorities at sedar.com, or on The Valens Company's website at thevalenscompany.com.

The risks described in the annual information form, which may cause the actual financial results, performance or achievements of The Valens Company to materially differently (sic -- differ) 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 to management as of the date hereof, we cannot be certain of (sic -- that) the actual results will be consistent with the forward-looking statements in the future. We caution you not to place undue reliance upon such forward-looking results.

For any reconciliation of non-IFRS measures measured and discussed, please consult our latest MD&A as filed on SEDAR. Now joining me on the call today are Mr. Tyler Robson, Chief Executive Officer; Mr. Sunil Gandhi, our new Chief Financial Officer; and Mr. Jeff Fallows, President. With that, I would now like to hand the call over to Tyler. Tyler, please go ahead.

Thank you, Everett, and welcome to everyone that has joined our earnings call to discuss our results for the second quarter ended May 31, 2021. I'll start by giving a recap of our most recent highlights before Jeff goes into more detail on our operational and strategic accomplishments from the quarter, and Everett discusses our capital markets activities.

I'd also like to welcome Sunil Gandhi, our newly appointed Chief Financial Officer, who will give an overview of financial results for the quarter. Sunil brings strong corporate and operational finance experience to Valens, and we're very fortunate to have him on board as we move through the second half of our fiscal year and continue to execute our growth plans.

But before I kind of jump into my part, I want to be fully transparent with everybody. That was a tough financial quarter, but I think there's some very good things that came out of it that we'll dive into later today. When you really look at how we entered the quarter to how we exited, it's night and day, really jumping into our philosophy of fewer, bigger, better. I truly believe we're executing that.

And one thing I want to bring to light is the very clear distinction between what is a manufactured SKU and what is a listing at the provincial board. So we only added 4 new manufacturing processes to drive velocity and depletion rates at the provincial boards. But what we did was take a lot of our products to the other provinces for faster depletions, more operational efficiencies that will increase our gross margin long term.

So when you really look at what we've done, it's really an operational win for a quarter, even though the financial results lagged. Getting into it, we really created a winning portfolio of products, having such great selling success and working with the provincial boards, strengthening our sales and marketing team. And again, going back to velocity and depletion rates, which we're seeing month-over-month, week-over-week.

Another thing we really did in the second quarter was operationalized pre-rolls. When you look at our efficiencies that we get with pre-rolls, taking those to the provincial boards, we're going to succeed, and we're going to win the pre-roll category.

Across new categories, we've also launched new edibles, launched a number of baked goods. The Verse Double Chocolate Brownie in addition to one of our bath products, the nuance Soothing Eucalyptus CBD Bath Bomb in Ontario, and we're hearing great things.

Another thing we did this quarter was really start to turn on the innovation of rare and strategic cannabinoids. When you look at the CBNs, CBGs and Delta 8s in Canada, very few people have the ability to commercialize those. We've had great success, which you guys will see some of those in the latter half of the year.

With that overview, I'll now turn the call over to Jeff Fallows, President of Valens Company, to dive deeper into the operational achievements and strategic initiatives for 2021.

Thank you, Tyler. While our second quarter financial results were impacted by the effects of retail closures and both inventory rightsizing and administrative listing delays at the provincial level, we made significant operational strides at all three of our facilities and believe our strategy continued to demonstrate its effectiveness as we gained significant market penetration in a difficult market environment. This was demonstrated by a 76% increase in countrywide provincial listings to 132, compared to 75 SKU listings in the first quarter of 2021.

We attribute our SKU listing success to the product development and commercialization strategy we introduced at the beginning of the fiscal year. This strategy is broken down into 3 core phases: launch, grow, optimize. More specifically, we are now moving firmly to our launch phase and our manufacturing, and gaining listings for products across all cannabis categories.

Our primary focus in the launch phase is to commercialize a core product portfolio with the largest possible addressable market, which is why we decided to enter the flower, pre-rolls and topical markets, in addition to making the acquisitions necessary to accelerate our edibles footprint and expand our offering in the health and wellness vertical in Canada and the U.S.

Our recent launches in these 4 new categories complements our existing product offering and nicely rounds out a complete offering of cannabis products. Although the cost required to scale up and commercialize these new products led to a decrease in gross margin and adjusted EBITDA in the second quarter, we expect to drive margin growth in future quarters as we improve efficiency, optimize utilization levels and expand volumes across the country with these unique new offerings.

In the second quarter, Valens manufactured 57 SKUs across all cannabis categories, only an 8% increase in comparison to 53 SKUs in Q1 2021, keeping in line with our "fewer, bigger, better" approach, the significant increase in provincial SKU listings was accomplished with only a minor increase in our total SKU count.

Further, the aggressive SKU launching in previous quarters is transitioning into a portfolio management exercise, which is focused on identifying and discontinuing underperforming SKUs, focusing resources on successful SKUs and strategically launching new and innovative SKUs into targeted market segments.

We have -- we believe we have done an excellent job of preempting consumer demand thus far. And as the market matures, we will continue to closely monitor our portfolio offering and the popularity of all our products in order to optimize our productive capacity, adapt to market trends, gain market share in targeted segments and drive continued overall revenue growth.

Looking to the next several quarters, we will look to enter our growth phase where we expect to continue our listing success, grow volumes on our existing listings, launch selective new and innovative products in targeted market segments and expand our provincial reach to all markets in Canada.

Since the end of Q2 2021, 9 additional listings were achieved and another 40 listings have been accepted by provincial distributors with the first shipments expected in Q3 2021 or early Q4 2021. Of the 132 SKUs mentioned earlier, 32 were listed at the end of the quarter, with sales expected to be recognized in the Valens' third quarter results.

This means our momentum is only beginning and offers a clear indication that our products are winning. In short, provincial boards are recognizing that retailers and consumers are looking for our products.

To further increase Valens' ability to capture market share in Canada, we expanded our Canadian distribution network to supply Manitoba, New Brunswick and Yukon Territory with Valens' manufactured products. The company is now in 6 provinces and 1 territory, including Alberta, British Columbia, Ontario and Saskatchewan and nationally through Medical Cannabis by Shoppers platform.

Valens will bring its latest innovative products to consumers in all regions of Canada with these latest network expansions, and we expect to include more Eastern provinces in the second half of fiscal 2021, with Quebec remaining a top priority. By the end of fiscal 2021, we expect to be in all provinces and territorial markets in Canada.

Once we have fully established our Canadian distribution network, we will be in a position to enter our optimized phase where we will work to further drive margin and efficiencies on popular winning SKUs, which we'll measure by market share, consumer and retail feedback and market sales trends.

Quarter-over-quarter, our estimated share of the growing extract-based market remained stable at 5% in Alberta, British Columbia and Ontario in Q2 2021, based on Hifyre data and not including B2B LP manufacturing. We expect this number to increase as we expand our portfolio of products and as we increase our partnership network over the course of the year.

Our estimated share of the cannabis-infused beverage category grew to 8% in Q2 2021 from 5.5% in Q1 in Alberta, British Columbia and Ontario, based on Hifyre data with only one customer in this category to date. Cannabis-infused beverages accounted for approximately 1.7% share of the Canadian cannabis market in April, remaining stable since the beginning of the calendar year, according to Hifyre data.

Valens expects to contribute to category variety and market share in the coming quarters when the GTA facility comes online and we can begin to engage with more partners for source-based beverage manufacturing.

We are expecting to report strong results in the second half of the year as we grow our leadership position in the Canadian cannabis product manufacturing market and crucially execute our U.S. strategy now that we have closed the Green Roads acquisition.

Over the second quarter, we transformed our future prospects by breaking into the U.S. market with the acquisition of Green Roads for USD 40 million. This valuation equates to approximately 1.8x 2020 revenue with a maximum earnout of $20 million, subject to achieving certain EBITDA milestones in 2022, which if fully achieved implies approximately 4.5x fiscal 2022 EBITDA.

Valens now has significant presence in the largest cannabinoid market in the world, which is a monumental step in our international expansion strategy. Additionally, the acquisition strengthens our capabilities to supply global markets with an expanded product offering and increases our speed to market with a U.S.-based manufacturing and co-manufacturing platform.

The integration of the 2 companies is ahead of schedule, and we expect international shipments to continue to grow with the combination. Collectively, Valens and Green Roads products are sold in 11 countries and discussions continue regarding various international distribution opportunities in Latin America, Asia Pacific and Europe.

Additionally, Valens plans to invest approximately $10 million into Green Roads to strengthen the company's resources across various business lines, including sales and marketing, to capitalize on strategic opportunities expected to rise as the U.S. market matures.

Our Canadian distribution -- excuse me, our Canadian domestic footprint remains one of the strongest in the country with our expanded capacity from our K2 facility, the newly acquired LYF facility, which is scaling quickly, and the GTA facility, which will focus on the formulation, co-packing and manufacturing of cannabis-infused beverages and other customized 2.0 and 3.0 products using SōRSE by Valens emulsion technology.

I'm pleased to say that the GTA facility has recently received the last few pieces of major equipment. And with our Health Canada license expected imminently, we expect to begin manufacturing, commercializing and shipping products from the facility in the second half of fiscal 2021.

Our manufacturing expertise is unparalleled, and our sophisticated platform is best positioned to capitalize on the future of the cannabis industry, everyday extract-based consumer packaged goods. Over the remainder of 2021, we will continue to expand into new markets, strengthen our partnership network and bring our acclaimed products to new customers. I'll now turn the call over to Everett to discuss industry trends and market updates.

Thank you, Jeff. As Tyler and Jeff have made clear, we believe we have maneuvered Valens to provide a platform to seek to capitalize on huge opportunities ahead of us as the Canadian market matures, and we'll continue to aggressively position the company for strategic opportunities as global markets begin to open up and large CPG players continue to enter the space through strategic avenues.

The importance of this is more apparent as we shift toward a more favorable regulatory landscape in the U.S. as just yesterday, Senator Chuck Schumer introduced a draft of the Cannabis Administration and Opportunity Act, which could deschedule, regulate and tax cannabis in the United States in addition to other social justice measures, although we cannot predict with certainty if or when cannabis will be federally legal in the U.S.

Our balance sheet remains strong as we successfully raised an additional financing from our bought deal transaction for proceeds of $46 million, which closed on June 1. This opportunistic equity raise provides the company with the ability to continue to pursue its strategic initiatives, specifically by taking an opportunistic approach to additional accretive acquisitions and to further secure our entrance into additional Cannabis 2.0 and 3.0 product verticals on a global scale.

This quarter, we were busy and launched a range of innovative products in 4 new categories, including edibles, topicals, flower and pre-rolls. Since closing the acquisition of LYF, The Valens Company has formulated, manufactured and distributed over 50 new edibles products with various partners in a wide variety of formats, including chocolate, soft chews and baked goods.

This includes unique chocolate offerings, including such as milk chocolate coffee quinoa with no added sugar, toffee crunch, ice cream sandwich chocolate bites, acai berry chocolate, cherry milk chocolate fruit juice, chocolate truffles and the newly launched double chocolate brownie from Verse Cannabis, one of the first confectionery products of its kind to hit the Canadian recreational market.

Additionally, consumers can find soft chews in a wide variety of fruit flavors, including pineapple coconut, lemonade, cherry, watermelon, blackberry acai, blue raspberry and green apple.

We've also entered the growing topicals market with our products that are crafted with all-natural plant-derived essential oils and infused with 100 milligrams of premium CBD. The nūance CBD Bath Bomb is the first Valens-manufactured topical product, and we are proud to say currently largest bath bomb available in the Canadian market.

In partnership with Verse Cannabis, The Valens Company also introduced a variety of flower and pre-roll products under the Verse Originals line, including BC God Bud Flower, Dreamweaver Pre-Rolls and Amp Pre-Rolls, the first flower products sourced and manufactured by Valens to enter the Canadian marketplace. Since launch, Valens has experienced strong selling through this line of products across its Canada-wide distribution network.

As you can see, our low-cost innovative and adaptable product manufacturing platform has facilitated the efficient expansion of our operation and entry into new product verticals. Even with the new product launches, we were able to get finished products to consumers in a record time, which allowed us to grow our SKU listings quarter-over-quarter significantly.

As Jeff mentioned, our product development and manufacturing capabilities now span all cannabis categories, increasing Valens' total addressable market and market share capture ability. The company expects to launch a range of new innovative products in the second half of 2021 in various formats, as well as introducing Green Roads' award-winning CBD products to the Canadian market, offering consumers a wider range of products in the health and wellness segment.

In parallel, we are strengthening our licensed producer partnership network with the addition of 2 leading Canadian producers. Valens will provide extraction and custom manufacturing for Rubicon Organics and pre-roll manufacturing and distribution services for Citizens Stash Cannabis Corp, otherwise previously known as Experion Biotechnologies, with the potential to expand these agreements to include additional product development and manufacturing services as the relationship strengthens.

After the quarter, we entered into a custom manufacturing agreement with Gallery Brands to manufacture both beverages and edibles for two of their flagship brands, Blessed and flir. Alongside these operational achievements, we remain keenly focused on completing our listing on the NASDAQ, which has been fortified by our U.S. entry. These initiatives will be instrumental in advancing our global opportunities and are expected to lead to Valens accomplishing its strategic and operational growth objectives, which we believe will be transformational for the company.

We expect to be trading on the NASDAQ capital market in the third quarter of 2021 calendar year and have been working diligently to complete all requirements necessary prior to listing. We expect to provide more information to the market in the next few months. We believe this will be a large step in the right direction for access to institutions and a greater liquidity, which seems to have dried up among small-cap companies globally during the summer as COVID restrictions have lifted.

We believe an anticipated NASDAQ listing, U.S. operations, growing market share and entry into the flower category has justified a further narrowing of the multiple gap between us and our peer group. And we intend to continue to execute on our business plan to show the market that we'll be leaving 2021 as a very different company than we started.

With that, I'll now turn the call over to Sunil Gandhi, CFO, to run through financial results for the second quarter of fiscal 2021. Sunil recently joined Valens and has already taken the reins and is demonstrating that he will be a great value add to the team. He brings over 25 years of corporate and operational finance experience largely in the consumer packaged goods and beverage industries.

Most recently, he was Chief Financial Officer of Trophy Foods, a leading supplier of nut-based snacks, baking and confectionery products with operations in Canada and the U.S. He's going to be a great asset, and we are very pleased to have him with us on this journey. With that, I'll turn the call over to Sunil.

Thank you for the kind introduction, Everett. I'd like to extend my thanks to the entire Valens team for their warm welcome and for their support in bringing me up to speed in my new role as the CFO of the company.

There is no doubt that Valens is one of the most innovative manufacturers in the cannabis industry, and I'm pleased to join at such an exciting time in its evolution with the recent and important actions in terms of strategic acquisitions launching various new products and creating one of the most adaptable product manufacturing platforms in the Canadian market.

I hope to leverage my financial operational experience across the consumer packaged goods space to build upon the strategic plan that Valens has set in motion towards becoming a multibillion-dollar global leader in the cannabis space.

Now moving on to our second quarter 2021 financial results. Net revenue increased by 6.5% to $18.8 million for the 3 months ended May 31, 2021, compared to $17.6 million in the same period of fiscal 2020. The increase in revenue was driven by cannabis operations revenue and, more specifically, by an increase of $7 million or 70.5% in product sales as a result of a scale-up of Valens' platform to develop and commercialize a range of new and innovative product formats including vapes, beverages, drink drops, edibles, bath bombs, flower, pre-rolls, hash and crumble in addition to sourcing both winterized and distillate oil for our partner products.

Offsetting this increase was a $5.8 million decline in revenue associated with total extraction and co-packing services, which is reflective of our transition away from our previous focus on toll processing. Valens also incurred a reduction in shipments of biomass from extraction partners as they continue to adjust their workforce and operations to manage through the uncertainty created by the pandemic.

Compared to the previous quarter ended February 28, 2021, net revenue decreased by $1.3 million or 6.2% for the 3 months ended May 31, 2021, which was compared to $20 million in the previous quarter. This decline was mainly driven by a $1 million decrease in revenue from product sales due to decreased activity from cannabis partners sourcing bulk and winterized -- sourcing bulk, winterized and distillate oil, combined with administrative delays of provincial boards and sourcing and listing Cannabis 2.0 and 3.0 products, as all parties continue to work through the effects of the COVID-19 pandemic, with ongoing brick-and-mortar store limitations and closures.

We are optimistic that the bottlenecks are being alleviated as pandemic restrictions ease in many regions of Canada, as is demonstrated by the number of incremental listings we achieved towards the end of the second quarter. Listings increased by 76% to 132 compared to 75 listings only in 2020 -- in Q1, excuse me, of 2021, with only a modest increase in the physical number of SKU count.

Of greater significance is the fact that 32 listings were achieved at the end of the quarter in key categories such as concentrates, pre-rolled, flower, topicals and beverages, with sales starting to be recognized in Valens' third and fourth quarter fiscal year results.

Gross profit for the second quarter was 22% compared to 24% in the first quarter of 2021 and 35.8% in -- for the same quarter in the prior year. In addition to the factors impacting net revenues, gross profit was negatively impacted as the company experienced inherent inefficiencies associated with new product launches and the transition away from the historical focus on toll processing, to the current strategic focus on product development and manufacturing. It is expected that gross profit will improve over time as production volumes increase.

Operating expenses for the quarter were approximately $15 million compared to $10 million in the same period last year. $1.3 million of the increased expenses were driven by professional fees associated with specific transactions, such as the acquisitions of Green Roads and LYF.

In addition, the company experienced higher advertising and promotion expenses, depreciation and amortization, and the overall general and administrative costs associated with the build-out of the organization to aggressively execute our product development and manufacturing growth strategy.

Valens ended the quarter -- the second quarter of 2021 with adjusted EBITDA of negative $5 million compared to negative $2.2 million for the quarter ended February 2021. The decrease in adjusted EBITDA can be attributed to increased cost to innovate and produce unique products with lower utilization. However, as Valens continues to focus on capturing market share and increase provincial listings, we expect to achieve higher utilization and anticipated recurring revenue of these products that is expected to drive value for quarters to come.

Additionally, the integration of LYF contributed to a small decrease in adjusted EBITDA. We remain confident that our continued business transformation to the product development and manufacturing platform and our acquisitions of Green Roads and LYF Food Technologies will allow us to experience positive EBITDA performance in future quarters.

We are also excited about the rest of 2021, where we will continue to leverage our updated business model, recent acquisitions and expansion to create long-term sustainable value for all shareholders and stakeholders.

Valens continues to monitor inventory levels and balances outstanding with our partners to ensure a strong financial balance sheet position. As at May 31, 2021, we had $38.8 million in accounts receivable and expected loss rate for overdue balances of $0.8 million based on subsequent collections and various discussions with associated partners and an analysis of creditworthiness.

Valens has subsequently collected and has trade accounts payable outstanding with the same partners or has recorded an impairment loss provision, representing almost half of the total accounts receivable balance, which is outstanding at May 31, 2021.

It is acknowledged that this balance is higher than in previous quarters due to a combination of factors, such as two significant balances with core customers, which had extended payment terms coming in -- coming due in Q3 and the relative timing of shipments in Q2. In the coming quarters, we expect our accounts receivable balance to decrease as provincial sales increase and more revenue is collected from provincial boards who have more efficient and favorable payment processes in place.

Valens had $23.9 million of cash as of May 31, 2021, compared to $20.3 million as at November 30, 2020, which includes gross proceeds from the various bought deal financing from 2020 and the first quarter of 2021. As of June 1, Valens closed a bought deal financing in which we issued 13.9 million units valued at $46 million, which were comprised of 1 common share of the company and 1/2 share purchase warrant. Each full share purchase warrant is exercisable at a price of $4.15 per share for a period of 36 months from the date of closing.

With that, I will turn the call over to the operator to open the line for the question-and-answer session.

(Operator Instructions) Our first question comes from the line of David Kideckel with ATB Capital Markets.

Congratulations on the quarter. I just want to go back to some of your prepared remarks here. So you've put in the market now 132 SKUs this quarter, which is about 75% quarter-over-quarter growth. By our back of the napkin math, that's right up there with just about any of the Canadian LPs in general.

My question for you guys is, how have you been able to achieve this, especially with Ontario Cannabis Store, for example, the OCS pulling back and rightsizing inventory? How have you been able to achieve this to that level? But also just from a consumer perspective, how confident are you guys that these are the SKUs that are really going to be important for consumer preference?

Yes. Thanks, David. Obviously, Tyler here. A couple of things to unwind there because there's a few ones. Do we remain confident? Yes, absolutely, we remain confident we've picked the right SKUs. And kind of internally, I'll say men lie, women lie, numbers don't. The SKUs we've gone forward with, we've achieved the listings. So when we have the listings in the provinces, they're very different than the SKUs manufactured.

And clearly, they're winning for multiple reasons. One, we bring a value proposition to the table no one else does. And one -- or number two, I guess, is we have cannabis IP that no one else has. So when you look at the form factors, the different delivery methods, no one can touch our platform, whether it's in edibles or even concentrates, beverages, we bring something to the table no one else does.

And yes, our listing SKUs are starting to compete with some of the Tier 1 LPs with multibillion-dollar market caps. But at the end of the day, numbers won't lie. And you'll see quarter-over-quarter growth with some of these depletion rates. And that's one thing that a lot of people aren't talking about. Yes, great to have a lot of listed items at the provincial boards, but let's chat depletion rate, let's chat inventory health and see how fast those SKUs are moving the velocity.

So when we really put our best foot forward with these SKUs, which we did win everything we wanted to, you'll see it in the next couple of quarters.

And David, sorry, this is Jeff. I just want to add one quick thing to that. We want to be very clear, the difference between a SKU manufactured and a SKU listed. The SKU manufactured has only increased by 4 SKUs, that's 57 SKUs or 57 products that we make. The 132 was the number of listings those 57 products may cost across the company.

Yes. That's really great color. Okay. Moving along as well, just to your pre-roll and flower category, it seems like you're doubling down to some extent on that area.

I'm just wondering from gross margins here, not EBITDA margins, but gross margins, how do you view that as impacting your overall business, increased or decreased gross margins, mainly because given you guys are in the 2.0 and 3.0 product category, and those already command the highest margins in the space.

So in other words, do you see the pre-roll and flower categories actually being a negative to your overall margin profile or neutral or positive for that matter?

David, this is Jeff. I'll take this one to start. So yes, so we're the largest buyer of biomass in the Canadian market. So we get favorable pricing and are able to be very selective on the SKUs and the flower profile that we bring in-house.

But that said, these SKU offerings or these product offerings for our customers are really designed to help them round out their brand portfolio. For example, the launch of the Verse SKUs, really, their target for them was to round out their product portfolio so they could own the shelf, so to speak, in the value-focused category.

From a Valens perspective, the gross margin for us on that would be lower than, say, other products where our IP and technology has been added, say, a source-based product. It's true, but we're very comfortable with the overall gross margin profile that adding those to our product set gives us.

Okay. And if I can just squeeze in one more here. Just with your U.S. strategy -- and congratulations, by the way, for closing Green Roads. Besides Green Roads on the CBD side, is there any other opportunities that you're openly considering, whether this be in, say, an MSO space or manufacturing or partnering space?

Or how should we think of your U.S. strategy in general? Is it stopping right now, at least -- or starting, I should say, with Green Roads and potentially down the road, you'll look to something further.

Yes. I guess this one is more to me again, David. So from a Green Roads perspective, that is really the first piece of the puzzle. I think in 12 months, David, we're going to be talking about what a great transaction and opportunity that was for the Valens platform as we are actively looking to increase not only our B2B business through the Green Roads platform, but also expand that business throughout the U.S.

So yes, we expect to be active. Yes, it's the first step of many. And we think that we've got the team and the brand portfolio out at Green Roads that we can do that.

Our next question comes from the line of Gerald Pascarelli with Cowen and Company.

This is Harrison Vivas on for Gerald today. So with the Green Roads acquisition now closed, we just wanted to get your thoughts on the U.S. CBD backdrop. In particular, at the brick-and-mortar retail level now that the economy is reopening and at a pace broadly faster than expected.

And given discretionary income should also now benefit from some tax credits, which started today. So any thoughts on potential momentum to the category, and how has this evolved over the past few months, that would be great.

Yes, Everett, why don't you talk to that one?

Sure. Well, thanks for the question. Yes, I think we're finally seeing an inflection point, not only in Canada with COVID, but in the U.S. as well, where you're finally seeing these mom-and-pop shops that got hit so hard that were selling CBD, now start coming back online, where you can actually get those distribution channels that we had previously in 2019 or Green Roads previously had in 2019, and really focus on the online network, too.

With people going out and actually doing things and being more active and getting out, really that health and wellness segment really is a part of that, and really benefits from it. So if you look even at the conferences, we're having our first conferences with Green Roads, which really drive that revenue and what we haven't been able to do to drive that brand to those next level and mom-and-pop shops and new consumers.

With that said though, the benefit of Green Roads is really the online network, where if you look at the return on advertising spend and cost of customer acquisitions comparatively to other companies, I think they've been very strong in that category. And regardless of -- I think the net benefit is now just another positive on that B2B side, but the overall online network continues to chug along very well.

Got it. That's super helpful. And I guess just to squeeze in a follow-up on that. Can you just talk about what you're seeing in terms of the pricing environment in U.S. CBD? Last year we saw a lot of the large publicly traded companies take 15%, 20% price reduction to manage through a pretty deflationary environment? So as it stands today, do you believe the U.S. CBD landscape is -- the pricing landscape is rational? And are you comfortable with your relative price [grabs]?

Yes, maybe I can answer this one, Everett. Feel free to comment after. Extremely comfortable with where it's at. We've looked at everybody. We've talked to everybody. We have a good understanding of where things are at. And price doesn't care -- or quality doesn't care about price.

When you look at a bottle of wine in a liquor store, not everything is priced the same. People are willing to pay more for a premium product. That's tested. And the one thing on the Green Roads platform that very few people in the U.S. are doing is standardized testing across the board where you can actually see a COA.

So -- what we're seeing right now is the price per gram is higher than our industry competition right now because it's transparent. Everett, go ahead.

Yes. On that note, on that COA, Green Roads is one of the only companies in the U.S. where a consumer can actually scan the bar code and go and find that COA. I think it's about trust for the consumer. And in the CBD space, really into 2018 with the Farm Bill going, everyone and their dog was trying to start a CBD brand.

And what the consumer hasn't really had is that trust. The reason we thought Green Roads was the right partner for us is because it has that trust with the consumer. And it shows with their price point being higher than a lot of others.

And I would -- what I'd look for your third-party data is how stable Green Roads' pricing has been comparatively to others. And if you look at the different price channels, the other reason that Green Roads is advantaged, the online channel really has a better margin profile on pricing, and that's where it's really more sophisticated.

So the more revenue you can do on that online segment, which consumers [still] to like the best, is really a margin enhancer. And you can have more price protection on that.

Our next question comes from the line of Andrew Partheniou with Stifel.

Maybe just a follow-on on your flower and pre-roll offerings coming out of the gate, obviously, very strong here in terms of positioning. Could you give us a little bit more color on your overall strategy? Why is it that you chose to launch your first products in this fashion? And how do you see yourselves different from your peers?

Yes. I appreciate the question. Happy to touch on that. So yes, we did have a successful pre-roll and flower launch, but I want to be very clear. We left a lot of money on the table in this quarter with supply chain issues. And it's almost like we're in a fight with one arm tied behind our back. We couldn't get tins for the pre-roll units in time. So we have open provincial orders that we couldn't fulfill in time that we had to bump.

So it's one of those things where it's just -- it's a product of the environment that we're currently in, and we will clean those up. And as the world comes back around from the pandemic, supply chains will tighten up, and we'll be able to get access to materials that we need.

It [slows] the product offering, how we're going to be competitive. The best way to think about the Valens strategy for flower is we're here to be a challenger. We're not going to be the biggest, but we're going to be a value proposition that no one can touch.

And what sets us apart is we're not tied to a specific genetic. If you look at company X that's cultivating for 120 days, they're tied to whatever genetic or whatever biomass comes down at the end of the harvest. We're buying selective strains, selective terpene profiles and we're launching products for different value propositions. And again, being the largest purchaser of biomass and the lowest cost producer, we can add value where no one else can touch us.

We're currently buying way lower than people are producing it for, and I'll call it strategic. We buy from different people at different time, and we play quarters. So depending on who has a quarter coming up, if they're trying to meet their top line revenue, we'll grab biomass that we're looking for at a significant discount to market. So the best way to think about our flower strategy today is we're going to be a challenger in this space.

And maybe switching gears, correct me if I'm wrong, but -- It seems like you have a pro forma cash balance sheet now of around $50 million. $10 million of that is going to the Green Roads, building out the presence there.

Could you talk a little bit more about what you guys plan to use the rest of your war chest for? Any color around strategy behind M&A, what you're looking for, where you're looking for things and what you find attractive?

Yes. Jeff, why don't you talk to this one?

Sure. So first important part to talk about is the CapEx that we needed to finish to get our K2 Facility up and running, CapEx at LYF to get that running the way we want it and then also Pommies. So the majority of that is largely done.

And as we said when we did the bought deal financing, we were continuing to see opportunities, both north and south of the border, that meant that we should have a balance sheet that allow us to be flexible and opportunistic in achieving those.

So the vast majority of that war chest, as you call it, that's a good way to put it. That's how we view that balance sheet, we brought it on board to be strategic and to further our strategy. And that includes, in a large sense, opportunistic acquisitions in key market segments.

Okay. And maybe if I can squeeze one more in here. Could you talk about where you are in terms of facility utilization or capacity utilization throughout your footprint in Canada?

Yes. Sure. Happy to tackle that. So I'd say -- I mean, we're largely still getting started. So as you know, our K2 facility just came on at the end of November, and we've been scaling up that facility. So if I was to -- it's a little bit challenging to say because we'd have to go almost product by product in terms of capacity.

But I'd say if push comes to shove, I'd say we're maybe sitting around 40% today in our capacity. And it's still the best days ahead of us in terms of filling out that capacity and driving those operational efficiencies.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

This is Andrew Bond on the line for Aaron Grey. You have a number of new SKUs listings being launched, and we've been hearing more about increased difficulty in getting SKUs listed. So I know you touched on your increased SKU listings earlier in the call. But just curious on how your conversations have gone with provincial buyers. And are you seeing any difficulty in getting listings in some of the more saturated categories?

Yes. Absolutely. Maybe I'll tackle this and, Everett, feel free to comment. We are having zero issues with the provincial board and the dialogue is very, very warm. We're more of an ally than an enemy in this space.

So we're very collaborative with a lot of the provincial boards asking what's working, what isn't, what price points are moving velocity going back to our strategy of fewer, bigger, better. We're using a sniper rifle rather than a shotgun. So we're not even having conversations around something we really want to get behind at this point and the provinces are extremely open.

Again, pricing, we can be more competitive than a lot of our industry peers. So the provinces understand that. And now they're coming to us with ideas like, hey, guys, have you ever thought about doing X, Y or Z. We believe there's white space. We're talking to retailers directly. Our provincial board strategy has to be one of the better ones in the entire space. So zero issues with maneuvering at the provincial board.

Our next question comes from the line of John Chu with Desjardins Capital Markets.

Just wanted to touch on the listing here. And so in a very simplistic way, if you have 57 SKUs that you're manufacturing, and you've got 6 provinces. And hypothetically, you list every one of those SKUs in those 6 provinces then technically, you would have over 300 listings, I guess, is the basic way of understanding that.

So -- but obviously, you're not going to have every single SKU listed in every single province. But as you're adding 4 more provinces by year-end, as what was stated earlier, and then some new products coming along as well, maybe help us understand what's a normalized listing number that you might expect to see, once all the provinces are added to your distribution list. Now that you have the 57 SKUs, what would be kind of a more normal looking listing across Canada? Is that something you can give us a handle on?

I can't really touch on that because it's almost impossible. Every provincial board is so different. And what we're seeing win in BC might not win on Ontario. So we're tailoring our approach for the specific provinces.

And if you look at beverage, for example, if you look at where we're at currently in BC and Alberta, we're not quite there in Ontario because Ontario doesn't have the same beverage depletion rates or inventory health. And if you look at how they went to click and collect, obviously, beverages aren't as popular in Ontario as of today.

So it's really impossible. We're going to tailor each provincial board to the consumer needs and wants. And then again, optimize as we go in time. So I don't think I can give you a specific number in that. And again, when you look at Saskatchewan and Manitoba, sometimes less is more. So we're really getting behind core SKUs in some of the smaller markets to, again, just drive operational efficiencies.

So if you look at our core product offerings under Verse, for example, you'll see whole flower, pre-rolls, Sunset Peach, baked [penne] and tropical lemon in every market, but we're being very concise and strategic on some of the other SKUs we're launching. And again, almost proof of concept, so we'll launch it in specific markets for specific reasons. And then once we have that data and once we're comfortable and really getting behind a product, then we'll launch it in other markets.

Okay. So just to follow up on that then. So as you get more data, and obviously, some of these products are very new, very unique, and so that might take some time for some of the provinces to get on board. But is it safe to say that there's potentially some significant upside to the 132 listing, because some of these products are -- like brownies and bath bombs are just so new, so there is potential for significant upside for more listings?

Yes. I don't want to be over promotional, but there is significant upside, and there's blatantly huge upside in what we're doing. Again, we've been very concise and a lot of people think we've been in the provincial boards longer than we have. It hasn't even been 12 months since we've been listing on provincial boards, and we're winning.

And I know our financial results might not show that today. But when you go back and look at February, March, April on some of the milestones we've achieved with the product calls that don't go live until August, September, October, it's going to be a completely different story going forward.

And we're winning the provincial listings, a ton of upside left on the board. And again, I'll touch back on some of the open POs. Supply chain has been an issue, and we're not hiding behind it by any means. We'll take it on the chin if need be. But we're fighting with one arm tied behind our back right now, and we will win the provincial board listings and continue to drive depletion rates, and you'll see that in the future.

Okay. And then just -- I wanted to touch a little bit more on the flower and the pre-roll angle here. By our estimates, that's 70% of industry sales. And so you getting into that market just really increases that addressable market, so we like that move.

But if you can give us just a bit more color, because it just sounds like you've just been in the early stages of launching some of these Verse products. So are there more flower strains and SKUs coming in pre-rolls as well? And is there an opportunity for another third-party partner to come in on top of -- in addition to Verse?

Yes, John, this is Jeff. Verse was the first. And really, the impetus when they came to us and asked us to render their portfolio to dig deeper in and analyze the opportunity. So that's the first.

I mean what's going on, obviously, from a B2B side, which is not in these numbers, it's not something we've talked about yet, I'd say the feedback and the opportunity for us to support our LP partners is great.

So the demand we've seen, the pull we've seen, the opportunity to fulfill volumes and fill our machines -- I mean we started with one machine, we've already had to buy a second. So we think the opportunity in pre-rolls in particular, is very, very strong. And you're not going to see that from a B2B perspective.

Okay. Great. And maybe just last question here. You've introduced some fairly unique new form factors recently. And obviously, the store restrictions, I'm guessing hampered some of those sales because presumably they're going to want to take a look at it in person versus buying something online, sight unseen for something new.

So is that a fair statement that some of these new form factors, whether it's bath bombs or baked goods, you really need the stores to be open to really start to generate, meaning more hype behind that?

Yes, you're 100% right. And Everett, feel free to jump in. The online platform is very different than the brick-and-mortar physical locations. And a lot of our products are priced accordingly to be an add-on at the end of a transaction.

So if you look at hypothetically a pre-roll or bath bomb, you're going in there for 2 beverages and a brownie, you add on that at the point of sale when you're at the physical retail location, but not on e-commerce.

So we've seen trends shift away from some products, and we're already seeing depletion rates pick up now that Ontario is open. So yes, you're 100% right. The market is just different for e-commerce or brick-and-mortar stores.

And John, what I'd add on to that is if you look at the innovative products, these products are brand new to the Canadian market. You know what really helps is that storefront environment to give that consumer education.

And frankly, at the end of our quarter, as of May 31, more -- most of those storefronts were click and collect. So I think that after that, what we're seeing is a tailwind in the third quarter where you're seeing that stores open and also that consumer education happens. So for 2.0 products, there's obviously a correlation to store fronts open, and greater demand in those product categories. And that's not new. You can see that on the Hifyre data and in the U.S.

Our next question comes from the line of Rahul Sarugaser with Raymond James.

Just wanted to focus on the Green Roads acquisition [kind of] getting that closed. So on the call after the acquisition, you talked a little bit about synergies expected. Maybe you can give us a little bit of an update on how the synergies are expected to roll out, how that strategy is evolving? And in particular, how the Green Roads management specifically is influencing the broader strategy of Valens?

Yes, absolutely. Everett, why don't you start? And then Jeff and I'll jump in.

Sure. So Rahul, as you said, it closed in the third quarter. So we don't have any Green Roads results. So we'll have partial results coming in that third quarter, as well as the management team being a bigger part of the corporation. So if you look at Dale Baker, he's now our President of The Valens Company U.S. And I think it's going to be a key part of that strategy.

From an integration standpoint today, we're well ahead of schedule. I think where we really hit the ground running was on international where we're now utilizing that CBD platform for international sales, Rahul. And now what we're doing is focusing on cost structure. Even just leveraging Tyler's relationships, we've already been able to lessen the cost of goods sold on isolate. So we've found a decrease in prices.

As well as one thing that the Green Roads team isn't in today, they're really sophisticated, as you know, on that online platform, but they haven't got into the MSO retailer, right, and some of these other retail relationships. So that's really the concentration right now and getting that up to speed. And we're well into our 100-day integration plan, and we'll give updates to the market in due time and as well as, I would say, just kind of update on the overall kind of market.

The nice thing to see is the questions earlier, is we're seeing kind of an inflection point in kind of Canada and the U.S. where openings are happening. So Green Roads will be going to its first conference here since, which really can drive that brand recognition sales to new B2B channels, where they're already sophisticated on that B2C side. So that's a key thing is opening up on that front. And I'm sure Dale can tell you about that in future quarters.

Sorry, I'll maybe add one more element to that conversation as well. So we're already seeing -- and when we say in our prescribed remarks that we're ahead of schedule in terms of integration. We sort of outlined 3 phases of -- and we did this in our public communication, 3 phases of our synergies. One of the key areas is on the B2B side, and we're already seeing two important parts.

Number one, some of our existing partners coming to us or to handle U.S.-focused manufacturing, number one. And number two, already involved in discussions to help facilitate big-box store shelf listings with Green Roads products. So 2 key areas for big, big volume improvements already well underway. And it's only been, what, 3 weeks since we closed.

Terrific. I think you just answered my second question. So I'll take another second question then. So now extrapolating those relationships, particularly you highlighted Tyler's relationships, again, on the call last time and of Green Roads being able to leverage that in the U.S.

How about internationally? Can you give us a little bit more -- just like you did in sort of clarity there in terms of the U.S. structures and verticals you're going after. Anything more specific you can share about the international trajectory?

Yes. I think it wouldn't be a surprise to you, Rahul, to note that potentially Green Roads was focusing on some markets where we were focusing as well. So one of the first things we realized as we had a conversation was, "Hey, wait a minute, we're both having different avenues or different inroads into this. Let's combine the efforts and formalize." Where Green Roads was ahead, how can we leverage that to funnel more Valens products through? And where Valens was ahead, how can we maneuver to get more Green Roads opportunities there?

Those conversations have already started to happen and are already formulating. So that's from an international perspective. I think that's an avenue where you're going to see a lot of integration between the approaches about saying like -- from a U.S. market perspective, obviously, Green Roads starts from a great base and, left to its own devices, will do great for us with little integration aside from these synergies that we're talking about. But from an international perspective, the combined effort, there really 1 plus 1 is 4 or 5.

And Rahul, maybe expand, too, is from a strategy standpoint, now we have manufacturing hub in Canada for the medical markets that we can distribute and obviously into Australia and other markets. But then also -- and we have a more flexible platform at Green Roads with their cGMP facility there going through the CBD channels, right, internationally.

So I think that together, we're seeing the synergies and saying, okay, some markets, we can ship through our facility, some we can ship through theirs. And it has some unique synergies. So we'll keep you updated on that, as that expands.

Our next question comes from the line of Scott Fortune with ROTH Capital Partners.

A lot have been answered. But just a real quick follow through on the Green Roads up in Canada, kind of the opportunity there to build CBD and their distributions to kind of focus on the timing. And it doesn't seem like a lot are going after that market and a big opportunity for Green Roads, just kind of step us through the Canada opportunity for it and timing-wise.

Yes. I think we -- this is Jeff. Thanks for your question. We do think that there's an opportunity for Green Roads products in Canada. We're already starting that conversation. Key will be around the portfolio that we bring to market. Again, we're focused on volume and efficiency. Fewer, bigger, better is our mantra here.

So there are some key Green Roads products that we will be looking to bring up in target market segments, but we have also a lot of our custom manufacturing partners who are also coming through Valens to bring specific products to market, and we will manage all those relationships on an overall portfolio basis to make sure that we're driving volumes in all SKUs.

Timing and then -- timing on really kind of the Canada market for CBD opening up and inflecting here?

So the key difference from the Canadian market, obviously, is that the sale of CBD products is regulated the same as THC, right?

So from a -- when you say the market opening up from a CBD perspective, I'd say two things: number one, CBD products are out there and are selling through the dispensary and provincial channels; but number two, you have a big opportunity yet to be realized opportunity, particularly for companies like Valens, relates to the health and wellness side of the equation.

And that's what many of the products that we've launched, and we'll continue to launch are focused on that health and wellness market. That's predominantly a CBD-based market. And so we are pushing that agenda and that -- attacking that market segment with our partners in Canada.

If you're talking specifically about when CBD will be deregulated from THC environments and sold in, say, over-the-counter in like a Loblaw or Shoppers or some of those channels, when that time line is going to occur, we don't -- we're not clear. We are encouraged with some of the conversations ongoing that it's within our sights, but we don't make a call on specifically when that's going to happen.

There are no more questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you, operator, and thank you to everyone who's joined. Obviously, we had a tough quarter, not the financial results we wanted. But operationally, we came out stronger than we went in. We're confident in our ability to deliver, and I think you're going to see that in the listings of the SKUs we had already manufactured, and you're going to see greater distribution in Canada. And one of the things you'll see is greater distribution in the U.S. post integration of Green Roads.

Our fundamentals are strong and everything is kind of coming together operationally, and we will deliver. We're looking forward to our Q3 call and providing more updates. With that, I'll ask the operator to close the call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.