Valens Company Inc (VLNS) 2022 Q1 法說會逐字稿

Hello, and welcome to the Valens Company's First Quarter 2022 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. Welcome to the Valens Company's First Quarter Fiscal 2022 Financial Results Conference Call for the period ended February 28, 2022. A replay of this call will be archived on the Investor Relations section of the Valens website at thevalenscompany.com/investors. Before we begin, please let me remind you that during the course of this conference call, the Valens management may make certain 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 securities laws and are based on assumptions, expectations, estimates and projections as of the date hereof. Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions and anticipated courses of action.

For more information on the company's risks and uncertainties related to forward-looking statements, please refer to our latest Annual Information form or our latest Management Discussion and Analysis, each filed with the securities regulatory authorities at sedar.com or on EDGAR at www.sec.gov or on the Valens Company's website at thevalenscompany.com and which are hereby incorporated by reference herein.

Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on current available information available to management at the date hereof, we cannot be certain that the actual results will be consistent with the forward-looking statements in future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures measured and discussed, please consult our latest MD&A as filed on SEDAR and EDGAR.

Now, joining me on the call today are Mr. Tyler Robson, Chief Executive Officer; Mr. Sunil Gandhi, Chief Financial Officer; and Mr. Fallows, President. Mr. Adam Shea, Chief Commercial Officer, will also be available for questions. You can now follow along with the presentation on our website at thevalenscompany.com/investors. With that, I would now like to hand the call over to Tyler.

Tyler, please go ahead.

Thank you, Everett, and welcome to everyone that has joined our earnings call to discuss our results from the first quarter of fiscal 2022. We really want to start off with kind of three main points before we jump into it. Number one, revenue growth. We're back. We grew over 26% from Q1 -- in Q1 from Q4. We said it was coming, it's now here, but it could not be possible with other pieces we put into place in 2021. With that, we -- with what we're seeing this far in Q2, we're expecting double-digit revenue growth to continue into Q2. I want to touch on costs. They have been higher than what we want them to be.

Some are out of our control as we went through on our Investor Day and some of them are in our control as we had to invest in new brand launches to set them up for success as we integrate the acquisitions. However, with the financials, we do not show the progress we have made in our integration initiatives that we will really pay off in the back half of the year. The third one, the long-term position of the company has not changed. In the public markets, we are measured from day-to-day, but the true value of the company is measured in years. The cannabis space is no different.

And 2022 is going to be a difficult year for many reasons. And the money we have raised earlier this month makes us positioned to drive innovation, profitable revenue growth and realize the benefits of our integration initiatives we have planned. I will go to slide 6 to really dive into a few more things that were kind of going on behind the scenes, and we're really going to grade ourselves on what we've done in the last quarter. So the first one, grow adult rec market share in Canada. I would say we're meeting expectations. This is clearly the bright spot in the quarter.

We are one of the fastest-growing companies in Canada, cannabis rec growing 36% quarter-over-quarter, and now we have over 3% market share as of February 2022. But the most impressive part is we achieved this despite the Canadian sales declining 4.6% in Q1 relative to Q4 based on Hifyre estimates. The second one, our U.S. business in Green Roads. It's progressing -- progress is improving. Despite a decline in Green Roads revenue due to seasonal trends, we were able to launch new products as part of our Own the Day campaign as new product formats appeal to the mass market in conjunction with our Own the Day brand campaign, which has seen great momentum.

The third one, achieving positive EBITDA by Q4, progress is improving. We are making progress towards the goal by having action in 95% of the first CAD 10 million in cost efficiencies. While this is not yet reflected in our financials, we do expect to see an impact over time, especially in the back half of the year. Number four, reducing cash burn through improvements in EBITDA, working capital management and monetization of noncore assets. This needs improvement. And to be frank, this is getting most of our attention.

With our integration initiatives only beginning in February, they were largely not reflected in the quarter. But as I mentioned, we are quickly making progress. Just over four months in the Citizen Stash acquisition, we are now fully integrated into their operations in Kelowna and we're looking to monetize the facility. This was always the plan. We know we have work to do here and its happening.

Financials are backward looking, and we have made progress since the quarter end. Let's chat in the coming quarters. Number five, on developing our U.S. THC strategy as permissible, progress is improving. To be clear, with the back half of the initiative, we continue to make progress on developing a plan of attack that will not add any cash burn. We will discuss more in the upcoming quarters.

With that, I'll turn it over to Jeff Fallows.

Thanks, Tyler. Moving on to slide 7 with our quarterly highlights; we've made significant progress in Q1 with net revenue increasing 26.1%, primarily driven by strong growth in provincial sales, which increased 36.7% in the quarter. Importantly, our Canadian recreational market share also expanded, growing from 2.4% to 3.1% from November to February as the products listed in 2021 began to meaningfully contribute to both market share and revenue gains. This is a particularly strong showing given that the market contracted 4.6% over the same period according to Hifyre data.

Given the strong growth in recreational market share, we have now become a top 10 licensed producer in Canada and expect to continue our momentum on the back of the launch of our Versus and Contraband brands, which have already met with strong provincial demand as well as our newly acquired Citizen Stash brand, which is now benefiting from our stronger and more efficient fulfillment capabilities.

We have also seen an inflection point in our B2B sales, and we expect to see continued strength in this segment. Our Green Roads U.S. CBD business was the outlier this quarter in terms of revenue growth as December is a seasonally weak month and changes in new programs were not launched until later in the quarter. The quarter also saw several operational achievements, including a listing on NASDAQ, new commercial contracts and the initiation of commercial beverage production at the Pommies facility. Lastly, we completed a CAD 32.3 million capital raise subsequent to quarter end, adding strength to our balance sheet. Our tangible book value per share now sits at CAD 1.57 against a market price of CAD 1.65 as of last night's close.

Tyler, I'll pass it back to you to go through provincial sales.

Thanks, Jeff. Obviously, provincial sales has been a highlight of this quarter. With the exposure to over 80% of the Canadian market, we're working to deepen our relationships with that and really work closer with some retailers, which you guys can see. Again, we do expect double-digit growth in Q2 as we're basically halfway through, so pretty excited to continue to push. And I think there's a lot of opportunity in adult rec alone. Getting back into it, we're really now a top 10 player with 3.1% market share. And when you do look at the top 10, some of those positions are up for grabs as we continue to dominate adult rec and grow faster than the majority of our other players, while they're losing market share.

Just to hit on some of the successes we've had BC God Bud is the number one best-selling SKU across all product categories in Alberta, Ontario and British Columbia and Saskatchewan during the first three months of 2022. This speaks to the momentum we're truly having. I'll go to slide 9 and talk about provincial sales. Good progress on provincial sales but its low-hanging fruit still remains. We got to penetrate more stores and the key to success is distribution. We have been successful with the select few SKUs like BC God Bud in store penetration. We believe this success will continue to strengthen our penetration across our broader portfolio of brands in the upcoming quarters.

Innovation; we continue to have one of the highest acceptance rates of new products, which directly goes through to the provincial boards and then down to distribution platforms. This speaks to our innovation and the great pipeline of products that's still to come. We really want to touch on innovation, and I think we've gone over it a few times in the past on what innovation means and I've made a few bold claims, which are coming to fruition now. I truly believe in the infused pre-rolls and the adaptability of our platform to really take advantage of that.

So what you'll see in the upcoming quarters, which you can see on the slide today; we are winning adult rec not only as provincial boards, but winning distribution. So as we continue to drive profitable growth with key innovation like infused pre-rolls, we do believe that we are going to continue to move forward. Also with our platform, I still believe we have the most versatile and flexible platform in adult rec, and you'll see it with this list of not only infused gummies, beverages and different vape pens coming to market. B2B, right before we move on to Jeff. We obviously grew. I kind of said it, and Neal, the analyst from Haywood straight up asked me what to expect, and I said growth.

We grew 53%. So as we still move through the fewer, bigger, better strategy, we are hitting our stride, but we do expect it could be, I would say, choppy as we're meeting the demand plans of other licensed producers, which we're working through and cannabis is a volatile market, not only in the stock market, also with provincial boards and players. So as we continue to move through, we do believe it will stabilize, but we are comfortable with where we're going.

With that, I'll turn it back to Jeff Fallows.

Thanks, Tyler. Now moving back to slide 11, as discussed previously, Green Roads decreased quarter-over-quarter by approximately 10.5%. The decrease was attributable to the December slowdown, which is expected to persist from year-to-year as Black Friday deals pulled demand forward into November and consumer spending shifts away from good-for-you health and wellness products in favor of more indulgent consumer products.

In addition, the launch of our brand campaign delayed the launch of other online programs, and we faced additional competition for online advertising and other consumer acquisition strategies as our competitors have started to pursue unsustainable spending strategies to attract new customers. While this has created some short-term challenges for us, longer term, we believe it will provide a tailwind for us in the market as our competitors strain their capital reserves due to higher customer acquisition costs or choose to divert funds from innovation, R&D and other necessary investments with longer-term consequences.

On the Investor Day, we discussed our product rationalization efforts aimed at simplifying buying decisions and creating a proper channel alignment strategy to ensure we had the right products in the right formats in the right channels at the right price point. To that end, we have and will be launching approximately 39 new products and an additional 20 reformatted products under our six solution categories, which include sleep, pain relief, relaxation, performance, stress relief and pet. One example of a new product is our arthritis pain relief product, which has become a top-selling product for us after only being in market for a few weeks.

Moving to slide 12; Green Roads operates three distinct business segments in the U.S., online direct-to-consumer, brick-and-mortar retail, and white label and international. As discussed in our Investor Day, we continue to see a transition of the business to the online direct-to-consumer channel, which now accounts for 54% of revenues. We expect to see continued growth in online revenues as the brand campaign launched in January, continues to take hold and as our sophisticated e-commerce platform continues to support a rapid scale up.

The retail business has seen and will continue to see the most changes given the post-COVID environment and as we complete our team realignment and build-out, which is focused on deepening our penetration in existing channels, expanding our relationships with existing customers and launching Green Roads products into new channels. Finally, progress is being made on our white label and international business as cross-selling to existing Valens customers begins to bear fruit and drive volumes to our Green roads manufacturing facility in Florida.

Now, I'll turn the call over to Sunil. Sunil?

Thanks, Jeff. So let me first start by saying that our operating environment continues to have some challenges, specifically with ongoing inflationary cost pressure, a very volatile supply chain and retail price compression in the Canadian market, given the highly fragmented state of the industry. As a result, we are taking action to rightsize our cost structure and streamline our operational processes. which I will discuss in more detail later in the call. That being said, we do expect that from an industry perspective, 2022 will be a challenging environment for undercapitalized companies with further financial failures anticipated across the marketplace.

Despite this tough operating environment, we are beginning to see the benefits of trading on NASDAQ with overall liquidity in our stock improving by 55.5% quarter-over-quarter. The management team continues to believe that the long-term benefits of trading on NASDAQ will outweigh the short-term volatility that we've experienced in our share price in the first three months of 2022. Now moving to slide 14, as Jeff mentioned, our Q1 2022 results demonstrate that the underlying business has passed an inflection point. Consolidated revenues increased by 26.1% to CAD 23.2 million in Q1 2022, benefiting from strong Canadian operations, which represented 74% of total sales in Q1.

Provincial sales increased by 36.7% to CAD 10.8 million, and this was primarily driven by a combination of the consolidation of the first full quarter of Citizen Stash as well as the launch of our Versus and Contraband brands in Canada. We are pleased to see that the B2B segment returned to growth in the quarter, and the increase was driven by some onboarding of new customers as well as specific sales, which allowed us to move through higher-priced inventory. Moving on to our Green Roads U.S. CBD business, which saw revenues decline by 10.5% quarter-over-quarter to CAD 5.1 million. This was due to detailed trends with December being the closed month of the year, as Jeff mentioned earlier.

Now moving on to slide 15; adjusted gross profit was CAD 3.8 million or 14.6% of net revenue in Q1 2022. The decline in adjusted gross profit was attributable to a change in sales mix, including lower sales from our higher margin Green Roads business and an increased sales contribution from our lower margin B2B relationship. In addition, adjusted gross profit was negatively impacted by the monetization of higher priced inventory through our B2B channel to better align our inventory with future requirements as well as higher transportation and raw material costs stemming from the ongoing supply chain challenges.

Despite the sequential decline in adjusted gross profit, we were encouraged to see gross margin improvement in provincial sales, which saw an increase of 229 basis points over Q4 2021 as provincial sales reaped the initial benefits of cost efficiency gains in spite of the retail price compression in the Canadian market. Now moving on to slide 16; adjusted EBITDA was CAD 17.6 million in Q1 compared to negative -- excuse me, CAD 13.3 million in Q4 2021. The reduction in EBITDA was primarily related to the lower adjusted gross margin and an increase in A&P spend that was associated with the new brand launches both in Canada and the U.S.

Otherwise, our operating costs and SG&A profile remained flat from the previous quarter, and this was in spite of onboarding and consolidating the Citizen Stash business for the first time, which is a demonstration of some of our cost control initiatives starting to take place. Subsequent to quarter end, we announced a shutdown -- we announced the decision to shut down the Citizen Stash facility and shift all production to our Kelowna campus. This is expected to positively impact EBITDA in future quarters after the realization of one-time costs.

Now moving on to slide 17; this waterfall shows the main sources and uses of cash since the end of Q4. In December, we raised CAD 40 million in debt financing and subsequently repaid previous existing debt. Working capital also represented a CAD 3.6 million drag on cash in Q1 as we positioned our operations to support the launches of Versus and Contraband in Canada, while ensuring our entire adult rec portfolio wouldn't experience stock out during our period of rapid growth in provincial sales. Working capital investments are expected to moderate and flip to positive contribution in the future quarters, especially in the last half of the latter part of the fiscal year.

As the quarter represented a heavy investment of cash, we took on the additional equity raise for gross proceeds of CAD 32.3 million, which closed in early April. The negative adjusted EBITDA profile of our business represents our primary focus as we move through 2022. Key elements on the pathway to achieving positive adjusted EBITDA include the following: one, integration initiatives that we've already launched where we've actioned CAD 9.5 million on an annualized basis have already been actioned with another CAD 10.5 million coming.

Further savings in procurement and biomass sourcing as contract borrowing arrangements begin to provide product; three, revenue growth, as Tyler and Jeff have both mentioned previously. And fourth, we expect reduced one-time costs associated with things like brand launches and acquisitions moving forward. I'd like to touch on an illustrative example of our cash conversion cycle on page 18, and it will provide some perspective. It takes about 90 to 95 days to complete and move through the drivers behind what actually causes an increased investment in working capital. So as we walk through this example, first, on day 1, we purchased flower from third parties, generally with standard payment terms of net 30 days.

By day 30 to 35, we process and package the flower into a finished product and starting to ship it to the provincial boards, where we recognize would not collect the revenue yet. At this point, payment for the raw flower has already been due and made. Another 30 days forward, which is by day 60 to 65, we are required to pay the excise tax to the CRI on the sale that has already occurred a month previous. It's important to note that the excise tax on flower products can amount to as high 30% to 50% of the gross revenue of the product. Moving forward, by day 90 to 95, we then finally collect the gross revenue from the provincial board.

The OCF, our largest customer, offers net 60-day payment terms after taking delivery of the product. So while this is a simplistic illustration, it's not necessarily representative of all product types. It's important to note that as we have rapidly growing provincial sales come significant demand on working capital associated with sourcing inventory, excise taxes and receivables management from the provincial boards. As at February 28, 2022, the company had approximately CAD 43.5 million of inventory on hand compared to CAD 42 million as at November 30, 2021.

This increase in inventory was mainly attributable to the dry cannabis inventory as well as packaging and supplies in preparation of new product launches across Versus, Contraband and Citizen Stash. In addition, the company has had to increase safety stock levels due to the disruptive supply chain environment. This was offset by a decline in finished goods inventory and extracted cannabis as we move through higher price inventory to our B2B channel.

The upfront investment in inventory has been a drag on our cash flow this quarter as we begin to rapidly scale provincial sales. As we have launched new brands, add new products, it has cost and it is expected to continue to cause some near-term volatility inventory balances. However, as previously indicated on our Investment Day, we expect this investment in inventory to stabilize by Q4 2022, as consumer demand and purchase orders of our products achieve a more normalized level of sell-through and lead to tighter inventory management.

Now, from an accounts receivable perspective, at February 28, 2022, the company had CAD 35.6 million of trade and other receivables compared to CAD 28.7 million as at November 30, 2021. As at February 28, 2022, the company had CAD 13.8 million in trade receivables balance in over 60 days compared to CAD 6.8 million as at the previous quarter end. Some of the increase in receivables was also driven by the timing of shipments. And since quarter end, the company has subsequently collected has offsetting trade payable balances or provided for 81% of the balance that was outstanding as at quarter end.

Now, I'd like to move to slide 19. We've made significant progress on the first wave of our integration initiatives as we have now executed approximately 95% of our first CAD 10 million in cost efficiency through operational and organizational changes. Out of the CAD 9.5 million has been actioned, approximately two-thirds or CAD 6.4 million of the cost savings are coming through the SG&A side, of which almost half are driven through M&A synergies, while the remaining half were related to organizational realignment at Valens.

This is expected to positively impact SG&A in future quarters after accounting for the one-time cost. The remaining one-third or 33% or CAD 3.1 million was driven by operational efficiency, including automation, process standardization and supplier optimization, which is expected to positively impact margins in the second half of the year. We remain on track to achieve an overall total of CAD 20 million in annualized cost savings run rate by the end of fourth quarter 2022.

With that, I will now turn the call over to the operator to open the line for the Q&A session.

(Operator Instructions) And our first question comes from the line of Aaron Grey Alliance Global Partners.

Quarter end the market share trends that you guys are having there. First question for me, just in terms of some of the arrangements you guys are having for the contracts going forward. I just want to get a better sense in terms of -- obviously, one thing you guys focus on in terms of the strains you've done a good job in terms of gaining market share in the flower and pre-roll category. So I want to get a bit sensitive, as you're looking at these contracts, how you guys are still looking to be able to stay nimble enough to be able to take advantage of buying more longer-term contracts, but also making sure you guys have the right alignment to meet consumer demand?

Yeah, it's a great question. I'll answer that one. So depending on what brand we use we have different strategies. So obviously, we're spot buying for some stuff and then we're contract growing others. So what we are, we're basically planning our product road ramp for the next two years, and we're going to be sunsetting some strains in genetics and bringing in new ones. So there's always something new to try, something always exciting. And what we did, it was very intentional.

When we looked at the Citizen Stash platform, we always knew there was a tremendous amount of synergies not only in headcount, but also contract growth. So as we maneuver through the brands and different products, we've strategically placed them with certain growers at certain scale. So what you're going to see out of the Valens platform is a reduction of cost per gram, new innovation and new genetics coming in that we're not tied to anything. So again, I want to be very clear and intentional in how I'm saying this.

Valens does not grow cannabis. We have contracts to purchase it. But if it doesn't meet a specific Valens standard, we're not obligated to buy anything. So we have the most versatile platform in cannabis, and there's a ton of exciting genetics coming down the pipe, not only for the new contraband launch but also for the Citizen Stash launch. And then Versus we're going to continue to be the lowest-cost biomass in Canada to the point where we actually try to push it lower and some of the provincial boards are worried about our competitors and trying to hold the floor. So we can get more aggressive. And as we move towards profitable growth, you're going to see a lot of that come to fruition.

Okay, great. That's really helpful color. Second question for me, and then I'll jump back into the queue. Just a higher level one. So when you look at the Canadian market in terms of shifts in format, most of the gains have been with pre-roll over the past year or so, shifting from flower to pre-roll less so for the 2.0 products such as vapes and edibles. So just given the historical focus of Valens as an extractor and kind of having some expertise in that -- in those categories, what do you think is really going to be needed to kind of see a bigger market share gain from the 2.0 categories?

Do you feel like as we move out of COVID and get more and more brick-and-mortar shopping that will offer opportunity to see an increase, especially amid some of the pricing pressure that you're seeing in the vape category? So really just how you're looking at the 2.0 categories, vapes and edibles over the next 12 months and when are you seeing opportunity for market share gains there.

Yeah, that's a great question. So I'll start with that one and then Adam, I'm going to kick it to you. When you look at the platform in Canada, I would say, one is competitive to start. But two, because we are the most versatile company in the space, I think we can take advantage of that. So not only are we not tied Gen X, we're not tied to certain products. And we can push innovation harder, quicker than some of our larger industry peers. So when we really look at consumer trends, I called it a year ago, where I do believe infused pre-rolls is going to outgrow the pre-roll category by year-end.

We are starting to see some trends in the market coming that way. And then overall product development and/or distribution of 2.0 products. I really think there's two challenges, the marketing limitation and education, which is industry-wide, but also pricing. So with compression, we do expect it to come down, but we also expect to combat that with higher-margin products and different brands, so really pushing quality and consistency over than some of the lowest-priced stuff. Adam, feel free to comment.

Yeah. Hi Tyler. I'll add just two points to what Tyler said specifically around the brand portfolio that we've now laid out gives us the flexibility to access and provide consumers 2.0 products at a range of price points, whether that's an opening price point or whether that's a more premium price point, whether it's across edibles, beverages, vape category, etcetera. Our agility on being able to offer the quality and the price point across a whole range of consumer buying patterns really will allow us to accelerate innovation and take a disproportionate amount of share of the 2.0 category, so lots to come from us on this front in the quarters ahead. Thank you for the question.

And our next question comes from the line of Frederico Gomes with ATB Capital.

Just on your provincial sales this quarter, you showed some good growth sequentially. In the slides, you mentioned an increase in gross margins in that segment, but your overall gross margin did decline this quarter due to sales mix. So I'm just curious, can you give more color on your margin in Canadian rec? And are you having to compete on price to gain share? Obviously, you had some good market share gains recently. What gives you confidence that you can expand margins in that segment, just considering that the market is very fragmented and very competitive.

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

Yeah, sure. Just to build off what Tyler mentioned. I mean, first of all, yes, I mean, I think it goes out saying that the Canadian adult rec market is extremely price competitive. You can't deny that. I think what we've shown is between category management and our brand strategies combined with our operational efficiencies, we're still gaining margin like over the coming quarters, and we would expect that to outpace the challenges in the market.

I apologize. It seems as if we have lost the speaker line of The Valens Company. I'll see if I can go ahead and get to them back. Okay, Valens Company speakers, you may proceed.

Yeah. Sorry, this is Jeff. Maybe Sunil, you can just recap what you said there. I'm not sure when the call broke up.

Yeah, sure. Apologies for the technical difficulties there. We got cut off inadvertently. So speaking to gross margin, build on what Tyler said, between our category management and our brand strategy, we are expecting to overcome with operational efficiencies, some of the retail price impression challenges in the Canadian market. So yes, it's a headwind. We obviously have to be conscious of the prices in the market, but we are outpacing the category and building margin profile with it.

From an overall standpoint, as a company, where we would expect to see some positives and negatives on the margin side is like Green Roads will continue to contribute a meaningful share of our business as we presented on Investor Day. As that grows, we would anticipate our overall margin profile to grow. Where things become a little bit less predictable from one quarter to the next is on the B2B side, which sets out more volatility in the margin segment. So I would just say the long-term trajectory is the right trajectory we're on between the combination of Green Roads and Adult Rec segment with some near-term volatility caused by the B2B side.

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

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

Yeah, sure. So, appreciate the question. Obviously, when you implement changes in a business and as you can see by some of the numbers, 39 new products, 20 product format changes, etcetera, launching of a brand campaign, realigning and reinvigorating team structures, etcetera. These things take time. So yes, we're seeing some positive signs. And as I said in my prescribed remarks, things like the launch of our -- one of our first new products in the arthritis product has been very, very successful in terms of capturing the demand and the revenue profile we were targeting when we launched it.

So we're strongly encouraged by product launches like that. Also, the conversations that we're having and the new distribution partners we're having conversations with and the orders that are starting to come in on the retail channel are also encouraging. So Frederico, we believe we are on the right track with our U.S. business. We believe that the solution selling that we've moved the business towards was the right move, and we believe the products that we have in our development pipeline are the ones the market is looking for. And so we are encouraged by what we see.

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

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

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

Thanks, Tyler. Beverage is unquestionably going to be a significant unlock in 2.0. It's going to be a terrific way for us to bring new consumers into the category. The changes recently announced, I think, only allow us to amplify what we're already doing, which is offering a range of beverages, a range of both high THC and sessionable beverages. The portfolio will play in, again, an accessible price point, adding lots of value with high-quality products. So this will unquestionably be a very significant growth driver for us as we move forward in this year and the years to come.

And our next question comes from the line of Nik Faes with Bryan Garnier.

You did a CAD 22.5 million bought deal a couple of weeks ago. And by doing so, you destroyed about CAD 100 million in shareholder value. So what was so urgent for you to do this deal? And when can you -- when will shareholders expect some positive returns from that?

Yeah. That's a good question. And Sunil, I'll probably kick it over to you and Everett. But I will comment, with the bought deal, we needed to solidify the future of the business and end with a very turbulent market. What we couldn't do is be unpredictable. So we were extremely intentional. And on any bought deal, it always trades down after. So it was to be expected, but it will recover in time.

And again, we are making tough decisions as a large shareholder myself. We are acting in the best interest of all shareholders. And we believe it was very intentional and needed to make sure that we could achieve the profitable growth that we expect in the coming years. And tomorrow isn't promised. We have no idea what's going on in the world. You look at supply chain, you look at interest rates, you look at what's going on in Ukraine. We needed to basically solidify the platform that we did. So Sunil, feel free to comment.

Yes. I think Tyler has covered it very well. I'll just maybe just build on what he said. I think while I can appreciate the short-term implications, obviously, didn't look that great. The reality is, as a business, we had -- we felt it was very important that we had the capital position of the company to get through the storm of 2022 that we see in the sector and quite frankly, combined with what's happening in the global markets on a macro level for the reasons that Tyler mentioned, political unrest, global uncertainty around interest rates, etcetera, you can't predict what will happen tomorrow next week or next month. And so we felt we saw the opportunity. We saw strong interest from our investor base to make the move that we did to solidify our future.

Yeah, I'd say just to add on that, Nik, as well, is that if you look at all the integration initiatives, that happened at the end of Q1 and into Q2, right? The reality of those changes we'll see vastly in Q3 and Q4, but we wanted the right financial footing to be flexible in this environment just to Sunil and Tyler's comments.

And sorry, Nik, maybe if I can add one different perspective to this whole thing, wearing a former banker's hat here. First and foremost, you never try to time the market. The windows come when they come. And quite frankly, you don't want to be the last through it. So we had an opportunity. We believed it will strengthen our balance sheet, and we believe we made the right choice in pursuing the financing when we did.

It was all just about paying back debt and not to do anything new.

Not sure I understand the question. Sunil, Everett. Maybe you did?

No, I think we -- if you could just repeat it, if you don't mind, we didn't quite catch it.

Yeah. Yeah. Well, to be honest, I don't really understand your answers neither. So it's all about paying back debt and not to do anything new, expensive for the company.

Go ahead, Everett. No, I would say, Nik, we -- as we put in the press release, we have very clear pathway of what we're spending on. This is not to repay debt, right? As we've been through very thoroughly on the presentation, it's to managing the working capital and cash outflows of the business as the integration initiatives are still in process as there's a lot of one-time costs associated with it. So we believe this is value-added to the operations today, and this is not to pay back debt. It's to keep the balance sheet flexible and make sure that we can thrive in the back half of the year.

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

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

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

Any additional change in market share that you want to share with us?

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

Our next question comes from the line of Aidan Giangregorio with Stifel.

This is Aidan speaking on half of Andrew Partheniou. First of all, congrats on the quarter guys. Just curious on Quebec. Do you guys have any updates on your progress there kind of moving into the Quebec market that you could share with us?

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

No, I think you hit it spot on, Tyler. We've got a very, very methodical plan that we're trying to execute with the Quebec provincial board. And for us, any significant progress that comes in the quarters ahead in Quebec will be incremental to the existing plan we have in place. So we feel very good about the progress we're making. And to Tyler's point, it's all about doubling down on Alberta, British Columbia and Ontario through a whole series of new distribution strategies. So lots to come in the coming weeks.

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

So congratulations on the provincial sales ramp that certainly has been impressive, given the broader environment. So I wanted to drill down a little bit on the B2B sales. You've had a 50% sequential growth there. Some of it, however, has been, of course, because of selling through some of this higher priced inventory. So given that, that was potentially a blip in this quarter, how should we be thinking about those B2B sales going forward? And also what that margin profile will look like as you eventually get through this selling through this higher-priced inventory?

Absolutely. That's a great question. And Sunil, I'll probably leave the margin question for you. But as we continue to execute our strategy of fewer, bigger, better, that has worked, and it was very intentional. We do continue to stabilize. And what we're seeing right now is the unpredictability from some of our partners where they're doing some wishful thinking. So as we stabilize quarter-to-quarter, it's not that we're not getting the revenue. It just might be bloated in some quarters over others. And as we continue to stabilize and have a bright stock inventory, we can pack out when we get the POs in hand so we do expect it to stabilize and be a more consistent, sustainable trajectory going forward. That being said, we do expect our B2B segment to continue to grow. But Sunil, why don't you touch on margin and B2B?

Yeah. I think the margin is actually going to follow some of that -- what Tyler mentioned on the sales side in terms of that choppiness because depending on which actual contracted relationships materialize the revenue in that given quarter. And we are relying on others and their needs in the market. That's where it can lead to slightly different profile from one quarter to the next. Obviously, the long-term trajectory, we expect sales and margin to be consistently moving forward. But from one quarter to the next, it's hard to give guidance in that type of area because we are relying on the needs of other LPs.

Okay, great. That's really helpful. And then my follow-up is on Green Roads. You identified that December was a weaker month seasonally. However, we've seen a couple slightly weaker quarters from Green Roads compared to the -- at least the macro annual historical number provided during the acquisition recognizing, of course, that U.S. CBD space is hypercompetitive and pretty messy at the moment. What are some of the sort of bigger strategic things that you and the Green Road's team are doing to sort of consolidate and trying to drive that revenue back up to historical and beyond?

Yeah, that is a great question. Jeff, why don't you start and then I'll kind of add on to the end?

Yes. Thanks, Rahul. I think it's actually a great question. So as we looked at the U.S. CBD space and as we took over at Green Roads, there had been a big shift in the way the market was viewing CBD and the channels under which consumers were going to get access to CBD. And so when we saw that change occurring, we looked at the product portfolio. We looked at the ways that we were selling and we looked at the team and structures that we have in place, and that's really all of the conversation we've been having around realigning the channel strategy, making sure we have the right products and the right channels and quite frankly, making sure that when we were in those channels, we were not just saying, hey, we have a CBD for sale.

It's actually about products that offer different solutions for consumers. So basically selling a differentiated product and not just selling "CBD". Obviously, this process takes time. We would have loved to be able to just to turn it on a quarter ago. But what I can say is having the majority of that work complete and as April is a big month for launching for us a number of those new products, we're excited about the performance we're going to be able to bring to the market in future quarters, but I think that's primarily it. It's -- we needed an updated product portfolio. We needed new channels and new ways to sell those products in those channels. We believe we've got that and we're ready to roll.

Yeah, Rahul, just to kind of comment on that. I think Jeff did a pretty good job of illustrating it. It's really redefining the portfolio and putting it in the appropriate channel, whether it's smoke in vape, whether it's C store, whether it's retail or convenience. It's really about redefining the portfolio, repricing a few things and even different format sizes. So what we're seeing is consumer trends change depending on the location. So really just trying to listen to the consumer and take advantage of that.

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

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

Thank you and have a good day.