The Green Organic Dutchman Holdings Ltd. (OTCQX:TGODF) Q4 2021 Earnings Conference Call April 6, 2022 10:00 AM ET
Company Participants
Shane Dungey – Vice President, Investor Relations
Sean Bovingdon – Chief Executive Officer
Nichola Thompson – Chief Financial Officer
Conference Call Participants
Tamy Chen – BMO Capital Market
Venkata Velagapudi – Research Capital
Operator
Good morning, ladies and gentlemen. My name is Anas, and I’ll be your conference operator today. Welcome to The Green Organic Dutchman Fourth Quarter and Fiscal Year 2021 Conference Call. To ensure an enjoyable experience for all participants, all lines have been placed on mute. Following the presentation, we will open the call for questions. [Operator Instructions]
This call is being recorded on Wednesday, April 6, 2022. I would now like to turn the conference over to Shane Dungey, Vice President, Investor Relations. Please go ahead.
Shane Dungey
Thank you, Anas. Good morning. And thank you all for joining us for our fourth quarter and year end conference — 2021 conference call. Today we’ll provide comments on our performance, as well as an update on our operations and how we’re executing our plans. This call is being recorded and the audio recording will be available on the company website at tgod.ca.
Joining me on the call this morning are Sean Bovingdon, Chief Executive Officer; and Nichola Thompson, Chief Financial Officer at The Green Organic Dutchman.
Today’s discussion includes forward-looking statements. We caution that such statements are based on management’s assumptions and beliefs, and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors.
With that, I will now turn the call over to Sean.
Sean Bovingdon
Thanks, Shane, and good morning, everyone. Thank you for joining us today. While we close out 2021 with strong momentum, as we saw significant growth quarter-over-quarter, reflecting continued execution of our strategic plan as we remain focused on quality and consistency. We also began the process of integrating the Galaxie Brands acquisition in the fourth quarter, and we should see the benefits of that transaction throughout 2022.
Most recently, and from that Galaxie acquisition, we added TGOD’s executive bench strength with appointing Nichola Thompson to the Chief Financial Officer position. Nicola is a highly skilled finance executive and brings extensive cannabis experience to the TGOD team and she will walk you through the financial results later in this call.
We posted significant growth in our Canadian adult recreational revenues this last quarter, despite the highly competitive environment. We have built on our momentum from Q3 and gain significant traction for our Sativa and Indica flower products, while also adding innovative SKUs to meet consumer demand.
Nichola will add further color around our financial results, noting our record 2021 annual revenue, our record Q4 quarterly revenue and a record December monthly revenue, which served as a solid base for us to accelerate our growth into 2022.
It’s important to note that we have not grown at the expense of price. Our pricing has remained relatively consistent with consumers gravitating towards the higher quality, high THC flower with strong terpene profiles, such as is found in our Sugar Bush and Maple Kush strains.
Our continued growth can be attributed to three strategic initiatives; firstly, the continued commitment to the TGOD products to deliver consistent high quality, high THC products; second, our focus on growing key retail chain penetration; and thirdly, the strategic decision in November has to transition to a dedicated sales model.
TGOD products are now in more than 1,500 stores across the country, as we continue to increase distribution, including going from zero locations to over 370 locations in the key retail chains in 2021. Our new dedicated salesforce has been successful in driving sales velocity through in-store visits and continuing budtender education.
In 2022 we’ve also expanded our production base to meet increasing consumer demand by adding cultivation at the Valleyfield facility in Québec. We expect Valleyfield to add approximately 2100 kilos of flower in the coming year, with an annual capacity of 2800 for a full year, while it remains our production facility for our sought after hash products.
We were proud to launch our Highly Dutch six-month Oak Barrel Aged Hash to the Québec market early this year, with expanded availability to the Ontario market coming in May and it’s receiving great reviews.
On an operational basis, our Chief Operating Officer, Michel Gagne and his team are doing an outstanding job, delivering consistent results of high quality product. Our yields have been consistently between 80 grams per plant and 100 grams per plant, and our most recent Maple Kush Indica harvest yielded a remarkable 130 grams per plant. As per our TGOD promise, the THC is consistently over 22%, with our latest Maple Kush product in Ontario at 28.7%, with terpenes at an impressive 3.9%.
We also expanded our international footprint in the year as we completed our first commercial shipments for the Australian and South African medical cannabis markets. We expect to introduce more cannabis products to those markets later in this year.
There continues to be many opportunities to accelerate this growth. Our product portfolio is focused and innovative, our geographic footprint continues to expand, and we’ve made the required adjustments to our distribution network to continue to grow on our successes.
In conclusion here, we are pleased with our progress, and we remain focused on execution and financial discipline, while continuing to transfer TGOD towards a profitable, sustainable and agile cannabis company that is growing faster than the legal market is in Canada.
With that, I’ll now like to hand the call over to Nichola to take you through the financial results.
Nichola Thompson
Thank you, Sean. Today I will go over our fourth quarter and year end results and highlight the progress we have made. Fiscal 2021 gross revenue was $39.2 million, an increase of 149% from fiscal year 2020, with net revenue of $30.2 million, an increase of 137%, which was largely attributed to the launch of the Highly Dutch brand and the growth of the premium flower and hash offerings.
As Sean mentioned, we ended 2021 on a strong note, with a record Q4 and a record month in December. The company posted a net revenue of $9.5 million in Q4, an increase of $2.2 million or 30% quarter-over-quarter. Our sales and medical cannabis product also gains momentum, increasing 79% during Q4 to $1 million versus $1.55 million in Q3.
Gross margin before changes in fair value adjustments improved in Q4 2021 to 32%, an improvement of 3% quarter-over-quarter. This improvement reflects production efficiencies and higher net revenues with lower excise duties than the previous quarter due to product mix. We believe gross margin and net revenue in Canada will continue to increase as we sell proportionately more premium flower, which should result in achieving break even adjusted EBITDA.
We’ve also continued to keep a close eye on costs, further driving down general and administrative expenses 28% quarter-over-quarter to $4.6 million, a decrease of $1.8 million. As we continue to optimize the integrated operations and capitalize on synergies, we expect to realize lower costs in the coming quarters.
Loss from operations improved in Q4 2021 to $5.7 million, an improvement of $3.5 million from Q3 2021. Loss from operations was $28.7 million for the year ended December 31, 2021, compared to $41 million as of December 31, 2020, primarily due to the improvement in revenues, gross margin and the reduction of general and administrative expenses.
As of December 31, 2021, the company had positive working capital of $25.7 million. The total cash and near-term receivables were $12.9 million. The cash and the access to cash from the revolver was primarily — will primarily be used towards covering working capital requirements and operating costs as the company moves towards achieving positive operating cash flow.
Subsequent to the quarter we announced an amendment to the credit agreement. Amongst other things, the amendments included an increase in the revolver facility by $5 million to $30 million, permitting certain eligible inventory to be included in the calculation of the borrowing base and relax certain covenants set forth in the credit agreement. We are driving continued financial progress in 2022 and I look forward to reporting on that next month.
With that, I will hand the call back to Sean.
Sean Bovingdon
Thanks, Nichola. Subsequent to the year end, the company has hit some significant milestones. According to the sales data from the Ontario Cannabis Store, the OCS, in February TGOD’s Organic Cherry Mints was the third best selling 3.5 gram flower in the premium flower category, while Organic Maple Kush was sixth and Organic Sugar Bush was the 11th best seller.
Cruuzy led the way in the Resin and Rosin category coming in second with our Supercharged Duubyz infused pre-rolls. And Highly Dutch Amsterdam Sativa was a sixth best seller in Ontario in the 280gram flower format, while it remains one of the leaders in Québec. They’re just some examples of the growth in market share we’ve been achieving.
With Galaxie as the exclusive producer of Wyld edibles in Canada, we are also seeing expansion for listings of Wylds across the country. Currently sitting at 25 listings across the country, the Wyld will continue to add additional SKUs and distribution points through 2022, with confirmed listings already approved.
With recent product launches and over 20 new SKUs of TGOD and Cruuzy products approved for listing, we are poised for substantial growth in 2022. We are rapidly expanding our presence in retail stores across the country and have driven sales velocity through our key retail chain strategy and the dedicated boots on the ground. Since early December, our dedicated salesforce has achieved more than 5,800 store visits and we continue to expand distribution in the key growth markets such as Ontario and now BC.
In closing, we are extremely pleased with the company’s recent progress and the team is working hard to bring the company to positive cash flow with many strategic initiatives and a continued focus on discipline.
The management team and the Board are committed to the long-term success of TGOD. I’d like to thank our employees for the continued hard work and to all our shareholders for your continued support.
With that, Operator, we are ready to take any questions.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] Your first question comes from Tamy Chen with BMO Capital Market. Please go ahead.
Tamy Chen
Hi. Good morning. Thanks for the questions. First one is, are you able to disclose how much revenue contribution Galaxie had in the fourth quarter?
Sean Bovingdon
Yeah. It was — it — being November the 17th is the acquisition date, it was relatively small amount into December — in December. And as I said, in the earlier, we expect to see more of that growth in 2022, with the listings that came on in January and further listings coming on in April, the Wyld really launched January the 1st. They had some a couple 100,000 in December, but it’s really this 2022 where we’re looking to see the impact of that acquisition.
Tamy Chen
Got it. Okay. And I’m just wondering, I think, in the press release, you are continuing to target for positive EBITDA by the second quarter of this year. So I’m just wondering, do you see that there’s still more room to cut on cost, whether it’s in COGS or SG&A or is that target for positive EBITDA all about sales growth?
Sean Bovingdon
It’s a combination of both, Tamy, and not only are we having the growth of as these. As we said, we look to get to the target of net revenue of around $5 million a month to hit that breakeven EBITDA target, but it’s also the mix of the products. We’re selling more and more 1.0 flower as a portion of a mix and that is, as you see, in Q4, you saw the increase in gross margin and that improves the gross margin from that revenue.
In addition, we have made additional synergies on the cost side, on the G&A side and expect to have those to be realized more so in Q2 than Q1, obviously, with the transition and the integration of Galaxie and the bodies there. There’s some additional cost savings on the G&A as well. So it’s a combination of the discipline and focus across the Board, as well as the continued revenue growth.
Tamy Chen
Got it. And so, sorry, just to confirm, you’re saying when your mix of sales is more in the flower, that’s actually what improved your margin?
Sean Bovingdon
That’s a big portion of what’s improved our flower, because the — our — as we’re producing flower in — with the yields we’re getting out of Ancaster now and with Valleyfield coming on in Q2, we still sell about 70% of our revenue is from flower, but an increasing mix of that moving from Highly Dutch towards the premium flower improves the margin. And we saw a 3% increase in margin in Q4 and we expect to go into Q1 and Q2 for that gross margin to go towards the 35% level. So that helps with the contribution towards that positive EBITDA as well.
Tamy Chen
I see. Okay. Understood. And last one for me is, do you have any sense or like a target that you’re sort of trying to aim for to get to positive cash flow?
Sean Bovingdon
In terms of Q2 or do you mean that EBITDA number?
Tamy Chen
Well, from a cash flow perspective, so I know you’re saying, Q2 is positive EBITDA, but just when you’re factoring a working capital, anything else onto the cash flow side? Are you also anticipating Q2 is when that will happen or that we’ll have a bit after that?
Sean Bovingdon
No. On a monthly basis by — within Q2 we expect to be positive operating cash flow.
Tamy Chen
Got it. Okay. Thank you.
Operator
Thank you. Your next question comes from Venkata Velagapudi with Research Capital. Please go ahead.
Venkata Velagapudi
Thanks, guys, for taking my question. So I want to understand the impact of your dedicated sales model on your revenue diversification. Do you have any data related to the percentage of revenue from key provinces like Ontario and BC in Q4?
Sean Bovingdon
Yes. Yes, Ven. Thank you for that. So Ontario is now, actually in Q1, we’re getting close to being that 35% to 40% of overall revenue for Q1 of this year. If we look at Q4, it was around 25%, which was up from when we had a — we didn’t have a dedicated salesforce like Q1 last year, it was only 8% to 10% of our total sales. So it’s been a dramatic increase in Q4 and into Q1 even further because of that dedicated sales force being able to really get into the stores in Ontario. That’s a big portion of it.
How much of it is their dedication in their store visits as opposed to the introduction of the Cherry Mints and the Amsterdam Sativa Highly Dutch, as well as the new products on the Maple Kush, which has been very popular. The split between how much is new product and how much is just them doing the calls is hard to identify.
But I think on a whole lot — the holistic whole is led to that increase in Ontario up to now being about 35% to 40% of our total sales, while Québec still remains around 35% of our product portfolio.
Venkata Velagapudi
Okay. That helps. Thanks. And do you have any data related to number of SKU submissions to OCS this year?
Sean Bovingdon
I mentioned there’s been over 20 of the TGOD and Cruuzy products that have already been approved. There’s another window here for the OCS at April 22nd. I think this is the date that it has to be submitted for the Q4 of this year and we’ll be submitting another eight SKUs, I think, approximately for that period as well.
Venkata Velagapudi
Okay. Perfect.
Sean Bovingdon
And that just kind of mainly Ontario and on top of that there’s a couple more for Québec and at least half a dozen in Q3 that are coming online in Alberta.
Venkata Velagapudi
Okay. Understood. Thanks. And how should we think about seasonality in Q1 this year?
Sean Bovingdon
Yeah. The market has seen a little quiet at time in January and February. We were kind of flat, but then March is really another record month for us above where we were for December. So that’s helped significantly and that trend continues on. We didn’t see the drop off in overall revenue that some of our peers have seen. We still have an increase quarter-over-quarter, Q1 compared to Q4 of last year.
Venkata Velagapudi
Okay. Great. And last question from me, can we see any kind of trigger related to European market this year like EU GMP or sale of HemPoland or anything? Can we expect anything?
Sean Bovingdon
Yeah. That’s a great question. The EU GMP, as we talked about last time, we’re waiting for the inspector to be able to come and visit, which he couldn’t do from COVID and he was expecting Q2. I think we’re waiting for a final date on that, whether it’s June or July. We’re waiting for that final date. But that’s the final step for the EU GMP.
For Germany, we do already have a distribution agreement lined up for Germany to kick off as soon as he signs off on that. So that will be done up in the summer. With regards to HemPoland, we’re actively involved, actually today there’s a group visiting the facility in HemPoland. So, with that in mind, we’re actively involved still in that sales process for HemPoland.
Venkata Velagapudi
Okay. That’s great to know. Thanks a lot and all the best for next quarter.
Sean Bovingdon
Thank you, Ven.
Operator
Thank you. There are no questions at this time. Mr. Bovingdon, you may proceed.
Sean Bovingdon
So, yeah, thank you very much indeed for everybody attending and we look forward to talking to you again at the end of next month with our Q1 results, which we’re looking forward to sharing with you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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