Good morning, ladies and gentlemen. Welcome to Village Farms International First Quarter 2022 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31st, 2022.

That news release along with the company’s financial statements, are available on the company’s website at villagefarms.com under the Investors heading.

Please note that today’s call is being broadcast live over the Internet and will be achieved for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. Details of how to access the replays are available in today’s news release.

Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements.

A summary of these underlying assumptions, risks, and uncertainties is contained in the company’s various securities filings with the SEC and Canadian regulators, including its Form 10-K MD&A for the year ended December 31st, 2021 and Form 10-Q MD&A for the quarter ended March 31st, 2022, which is available on EDGAR.

These forward-looking statements are made as of today’s date and except as required by applicable security laws, we undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer at Village Farms International. Please go ahead, Mr. DeGiglio..

Thank you, Chris. Good morning everyone.

With me for today’s first quarter is Village Farms' Chief Financial Officer, Steve Ruffini and joining us is President and CEO of Pure Sunfarms, Mandesh Dosanjh, and for the first time, our recently appointed Executive VP Corporate Affairs, Ann Gillin Lefever The first quarter of 2022 saw continued strong execution and performance from our Canadian businesses, which was unfortunately somewhat offset by the macro challenges facing Village Farms' Fresh, our Produce business.

So, let me start with our Produce business. Those who have followed our quarters recently -- and for the last several years will know that a number of macro factors have impacted our Produce business, both positively and negatively since the onset of COVID. In Q1 of this year, several additional negative factors collided.

First, it's been a very good growing season for the industry, both greenhouse and field-grown, which contributed to an oversupply in all of our products across the market.

At the same time, inflationary pressures in freight, labor, packaging, growing inputs such as fertilizers as well as ongoing trucker shortages contributed to a very challenging cost environment. These cost increases were both profound and swift. The strong growing season actually hurt the industry.

The pricing power of our customers were further strengthened by the supply/demand imbalance. We have been trying, but have not been able to realize any material pricing increases with our retailers. This is a very difficult dynamic than cannabis.

Produce is a commoditized free trade market with product that ships across five to six international borders daily. As long as these inflationary pressures and oversupply continues, we will experience pressure on our Produce results. I've seen this before multiple times in the agriculture industry and we will respond.

We are evaluating new initiatives, including marketing partnerships to build more distribution scale, spread our costs, and diversify product offerings. And it's likely there will be produce grow attrition, which will help supply and balance longer term. We understand that reaction.

However, even in the currently negative EBITDA environment for all, we maintain the highest conviction that our US cultivation footprint, our assets or a powerhouse opportunity for legal recreational cannabis.

Our Texas assets have a replacement value of $350 million to $400 million with the capability of generating at least $1 billion or more cannabis revenue. We are working to get our fresh business back to on track as we assess our options to use our unmatched experience and assets for success in the US cannabis market when we can participate.

In the early days of the Canadian cannabis business, we were the only ones that had a strategy, the same strategy to leverage existing assets and cultivation DNA. Having done so successfully, we are convinced of our ability to replicate that success in the US, which brings me to the good news for the quarter.

Each of our Canadian and US cannabis businesses continued to perform very well operationally and financially, and improve their leadership in their respective consumer markets, even as they invest in future growth.

Both Canadian and US cannabis, again contributed positive adjusted EBITDA in Q1, as we continue to see the underlying power of the business. Our Canadian cannabis operations, Pure Sunfarms and ROSE LifeScience delivered its 14th consecutive quarter of positive EBITDA, unmatched in the industry.

Pure Sunfarms continued to maintain its market share leadership in the dry flower category, remaining the top-selling brand in Ontario, British Columbia and Alberta during the first quarter. And in Ontario in March, we achieved our best ever share in dried flower by volume sold at just under 16% in what was Ontario's best sales month in its history.

We are most grateful to the consumers and bud tenders to support our brands and give us ongoing feedback to continue to build market share. And kudos once again, to superb management and sales and marketing teams over the past several quarters, they have invested strategically to ensure that we are supported by our retailers across the country.

Our investment is clearly paying dividends. Our success has also generated attention among our peers. Last week, Pure Sunfarms announcement is partnered with NOYA to bring Cookies Sun-Grown flower to Canada.

Pure Sunfarms will grow and process cookies high-quality whole flower genetics for a range of SKUs with Pure Sunfarms as the LP of record with the provincial boards. This partnership with one of the few global cannabis brands as further validation of the quality of operations and the expertise of Pure Sunfarms and its team.

The first Cookies sun-grown products are now available for purchase in Ontario with more to follow. In the coming months, Pure Sunfarms team will begin announcing specifics of the next leg of strategic growth. The plan calls for a transition from a branded house to a house of brands. The question of brand expression has been asked of us many times.

We stood by the single brand approach for our first three years as we firmly believe in the everyday premium positioning in the first stages of the asset legal cannabis market in Canada. We wanted to prove our number one position, built organically with a single brand. It's been an incredible success.

As the legal market develops, consumer-led segmentation and their ability to differentiate, is evolving. We believe that there are distinct opportunities to address these consumer preferences with additional brand positions.

We are extremely excited to share more details as these launches are unveiled to customers and consumers in the very near future. Another area of near-term and long-term growth is export markets. Following receipt of EU GMP certification during Q1 of this year, Pure Sunfarms has been preparing for its first shipment to Europe and Israel.

I will note here that there are different paths to EU GMP certification. We intentionally chose to pursue certification in both the jurisdiction and country, Germany with the very highest standards, and we were successful. And to our knowledge, we are the first greenhouse operation in the world to be EU GMP certified.

Our best-in-class facilities have been built, trialed and invested in to support both legs internationally and domestic of our growth expansion. Production-wise, in Q1 Pure Sunfarms operated full capacity throughout the first quarter. That includes both Delta 3 and the commission first half of Delta 2, totaling 1.6 million square feet.

Quebec-based ROSE Life Sciences, which we acquired a 70% majority interest in November last year had an outstanding and to the year 2020 has continued into the first quarter of 2022 with new product rollouts throughout the first four months to meet the emerging demand for craft, locally grown product and strained variety, including 14 SKUs in Q1 of this year, ROSE has steadily gained market share in Quebec.

During Q1, ROSE launched its new brand in Quebec, Promenade and its 3.5 grams SKU, quickly became a top seller based on its excellent quality to price ratio. All this drove an 85% increase in ROSE's Q1 shipments of their own branded products compared to the fourth quarter of 2021.

And based on third-party data, we estimate that ROSE is now a top three licensed producer in Quebec. Production at ROSE is 55,000 square foot indoor facility in Quebec has expanded to meet this demand.

And as a reminder, in addition to its own brands, ROSE is also the exclusive distributor for a number of large third-party LPs, including Tilray, Sundial and Entourage. This momentum has continued into Q2, and we expect it to continue for the balance of 2022.

In our US cannabis operations, Q1 was the second full quarter of contribution from balance Health Botanicals and a quarter in line with our expectations. The quarter was once again highlighted by strong gross margin and positive adjusted EBITDA contribution.

Of particular note, operationally for Q1 was Balanced Health's launch of its Hemp Extracts with leading pet supplement brand, Zesty Paws. Our extract is now in more than 1,000 PetSmart stores in the US via this partnership. So the integration of Balanced Health into Village Farms family is progressing very well.

Over the next several weeks, the team will be gearing up for some innovative cannabinoid product launches. Before I turn the call over to Steve, a couple of additional updates. In the Netherlands, the government has again pushed back the launch of its legal cannabis production program until early 2023 as it finalizes all of the 10 license holders.

We are continuing to advance our plans and expect to be ready to go when the program starts. One final note, which relates to Village Farms Clean Energy, which I don't have the opportunities to speak about often.

You'll recall that in November 2020, we announced that we were transitioning this business to a more attractive long-term business model based on the conversion of landfill gas to renewable natural gas in partnership with US-based mass energy. Since that time, we've been working diligently to bring this product to fruition.

And I am pleased to say that we expect to have some positive news on this front very shortly. I'll now turn the call over to Steve to review the financials, and then I will return with some final thoughts.

Steve?.

Thanks, Mike. First, a reminder on the timing of our acquisitions and their impact on our first quarter 2022 results.

Q1 of this year reflects the full quarter's consolidation of Balanced Health Mechanicals, of which we acquired 100% partway in Q3 last year and the first quarter consolidation of ROSE LifeScience’s, which we acquired 7% in November of last year.

Consolidated sales for all of Village Farms, Canadian and US cannabis and Village Farms fresh produce for the first quarter increased 34% year-over-year to $70.2 million from $52.4 million for the first quarter of 2021.

The near $18 million increase was driven by higher sales from both Canadian cannabis and fresh produce, as well as the incremental contribution of US cannabis resulting from the Balanced Health acquisition.

Consolidated net loss for the quarter was $6.7 million or $0.07 per share compared to a net loss of $7.4 million or $0.10 per share for the same period last year. This quarter's net loss was driven almost entirely by the very challenging macro environment for the fresh produce business.

Consolidated adjusted EBITDA for the first quarter of 2022 was negative $6.1 million, compared to a positive adjusted EBITDA of $400,000 in the same period last year. The EBITDA loss this quarter was driven by fresh produce, partially offset by positive EBITDA contributions from both our Canadian and US operations.

Corporate costs were $2.5 million compared to $1.5 million, which was driven by incremental audit and Starbucks costs, partially due to the addition of Balanced Health and roads, as well as the expansion and support costs for our development projects, in particular, the Dutch coffee shop endeavor in the Netherlands.

Looking at our individual businesses, starting with cannabis. Net sales from our combined Canadian and US cannabis operations grew 65% year-over-year to $28.8 million from $17.5 million, with just over half of that growth driven by the acquisition of Balance Health and the remainder driven by growth in Canadian cannabis.

Our Q1 cannabis sales comprised of 41% of Village Farms total consolidated sales, up from 33% for the same period last year. Total cannabis adjusted EBITDA increased 5% year-over-year to $2.7 million from $2.5 million, with a slight decline in Canadian cannabis adjusted EBITDA being more than offset by the contribution of US cannabis.

The decline in Canadian cannabis was driven by the incremental increase in SG&A as a percentage of sales related to two factors, the addition of ROSE and the incremental investment in salaries, consulting and branding costs to support initiatives that have recently launched or have been announced like our EU GMP certification, which Mike mentioned in his remarks.

Canadian cannabis operations delivered another solid quarter with growth in sales of 25% year-over-year to US$21.8 million, driven largely by the addition of ROSE's branded sales and distribution management fees, as well as a year-on-year increase in non-branded sales.

I will note here that Pure Sunfarms and ROSE are each benefiting from the mutual sharing of operational and market expertise.

I'll review our Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of our period-to-period performance, as well as providing the reader the ability to more accurately compare to other Canadian LPs.

Our Canadian cannabis operations once again generated strong year-over-year growth in what has emerged as a seasonally softer sell-in quarter for provincial sales in the first quarter across the industry.

The early part of the first quarter as well as the latter part of the fourth quarter experienced a bit of a slowdown as compared to more normalized months. Net sales for Q1 increased 25% year-over-year to CAD27.6 million from CAD22.1 million.

Canadian net sales were comprised of 70% retail branded sales, 24% of non-branded sales and 4% of distribution fees and commissions generated at ROSE. 90% of our retail branded sales were dried flower, inclusive of pre-rolled products, with the remaining 10% being derivative products.

Gross margin for the Canadian cannabis for Q1 was 34%, firmly within our stated target of 30% to 40%. It was up from 29% in Q1 last year, the primary result of ongoing and strong cultivation efficiencies and production improvements at our Delta facilities.

Even having started out with a low cost of production, we have realized year-over-year improvements in Q1 2022 as compared to Q1 2021, which seasonally is a higher cost quarter for us due to our electricity throughout the quarter.

The lower year-on-year cost per gram is a result of our expanding footprint as well as improvements in yield and potency, and we achieved this amidst many of the same inflationary cost pressures that our produce business is facing. The operational results of our grow ops and manufacturing are impressive.

Production wise in Q1, Pure Sunfarms are operating at full capacity throughout the first quarter. That's both Delta 3 and the commission first half of Delta 2, totaling 1.6 million square feet. And we continue to operate full capacity today.

We remain comfortable with our current production levels, but will remain flexible to adjust production if need be. SG&A for the Canadian cannabis operations in Q1 was $8.8 million or 32% of sales, compared with $5.5 million or 23% in the same period last year. Over half of the $3.3 million increase was attributable to the acquisition of ROSE.

The remaining increase reflects planned strategic investments to drive market share and sales growth in the Canadian market and the incremental costs associated with the preparation for the start of exports.

I am proud to continue to report that our Canadian cannabis operations delivered positive adjusted EBITDA, our 14th consecutive quarter at $2.1 million. This compares with $2.5 million for Q1 of last year, with the decrease due primarily to our planned investment in SG&A that I just described.

Turning to our US cannabis operations, which I will now revert back to US dollars. Sales for Q1 were $7 million with a gross margin of 67% and positive adjusted EBITDA of $600,000. These results composed entirely of the operations of balanced health, which continues to perform in line with our expectations following the acquisition last year.

Turning now to Fresh Produce. As Mike noted, Q1 was a very challenging quarter from a macro perspective, although sales increased 19% for Q1 from last year, driven by higher volumes.

We have made -- we've been unable to pass on the higher freight and other input costs, Mike discussed to our big box customers due to an oversupply of Fresh Produce in the market, resulting in a negative gross margin of $4.1 million, which drove negative adjusted EBITDA of $6.2 million, compared to a negative adjusted EBITDA of $500,000 in Q1 of last year.

Turning now to cash flows and the balance sheet. At March 31, we had just over $41 million in cash and equivalents compared to $58 million at December 31st of last year. And we had approximately $60 million in working capital, excluding cash, compared with $52 million at December 31st. During the quarter, we had operating cash outflows of $9.6 million.

As you may recall, our largest produce greenhouse Delta 1 always is a large net working capital investment in our first quarter of every year, as it does not harvest medicine for late March, early April.

In Canadian cannabis historically, the Provincial Board's cash payments ramp up in the second and third quarter and back down in the fourth and third quarters. As a result, Village Farms cash flows are weighted to the second and third quarters. The result is we have seasonality in both our Canadian cannabis and produce revenues.

During the quarter, we invested just over $8.7 million. We spent $5.3 million in capital expenditures on our existing production facilities, primarily for the expansion of our Delta cannabis operations and another $3.4 million in the form of loans and the convertible note to benefit our initiatives outside of North America.

The vast majority of the CapEx required for the completion of the second half of Delta 2 is paid for with the primary cost remaining being the labor cost to complete construction.

Our capital position and forecast for improving -- for improving operating cash flows will allow us to self-fund our ongoing operations and budgeted, 2022 growth initiatives. And now I'll turn the call back to Mike..

Thanks, Steve. So Q1 is a solid start to a year that we believe turns the pages to Village Farms next chapter of success, as we pursue high-growth cannabinoid opportunities in North America and around the world.

From my position as CEO, but also, as Williston's largest shareholder with our execution each quarter, on both, our business operations and strategy opportunity.

I have more and more confidence in the future of our company to further extends our leadership in cannabis in North America and establish, a leadership position, in the international markets in which we choose to participate.

2022 promises to be a year of dramatic strategic initiatives across our businesses that will propel our growth and company in the next level. So with that, we will now open the call to questions, operator.

And as the operator polls questions from our analysts, we're going to take a couple of questions that came in via e-mail from our shareholders ahead of the call..

Question number one is, how is inflation impacting your overall cost? The impact of inflation in the U.S. is much greater than Canada for one labor shortages and labor costs are much more restrictive and severe in the U.S. than they are in Canada. The foreign labor program in Canada is much more superior to the one in the U.S.

And of course, the transportation, we're shipping much further in the U.S. than we are in Canada. That being said, Pure Sunfarms continues to drive costs down through better growing techniques, more advanced knowledge of cannabis crops and, of course, strain development as a as industry. There's a lot of improvement there.

And you can see that in our numbers. We continue to lower our costs going forward, wherein produce, the strains and varieties are much more mature hard to get an increase in yield. Growing techniques have been honed over 50 years. So that's a big difference there.

Second question, are you currently selling in to go back under the Pure Sunfarms label? Our current strategy is to help ROSE to achieve the number one position in the marketplace, once that's achieved then we'll reassess Pure Sunfarms brands entering the Quebec market as well. Operator, I'll turn it over to you..

Thank you. Your first question comes from Aaron Grey, Alliance Global Partners. Aaron, please go ahead..

Hi. Good morning. And thanks for the questions. And congrats on the Cookies partnership. So first question for me, just on the Canadian cannabis business, right? So I heard you guys talk about seasonality during the quarter. Retail was down about 18%. That included full quarter of rows.

So I just want to get some further color, because the retail data from Hifyre does show pretty strong sales sequentially.

So I wanted to know whether or not it was just some of the timing, whether or not you've seen some more improvement now quarter-to-date, because it does look like the sell-through at retail remained pretty strong, so it might have just been some of the provincial buying.

So I just want to get some more color in terms of some of that seasonality you're seeing, whether or not that's picked up heading into 2Q. Thank you..

Yes, I'll start that off and then I'll get some color from Mandesh on it. But we've reported in the past that there is seasonality, and we consistently see that each year. The difference even between the beginning of the first quarter and the end of the first quarter, show big differences as momentum was being gained.

The provincial boards are all at a different level of buying, depending on how their year is ending and their inventory levels. So I think that reinforced it, Aaron, again, this year, and now we see that momentum gaining it.

Mandesh, do you want to add?.

Absolutely. I think that's a great setup, Mike. And to your point, Aaron, there definitely is some buying patterns. Specifically, what we saw in British Columbia, as an example, is we had a really solid load-in of inventory in Q4, which suppressed some of our shipments in Q1.

But what you did see and your commenting on that is, really strong HiFyre sell-through. So, obviously, our sales are built on the sell-in and then what you see on HiFyre sell-through. So we feel really confident on that sell-through data. And obviously, the timing of the Board isn’t going to impact any of the sell-in, which is our revenue.

But, again, the momentum is great. We're seeing the share pickups, and we feel really pleased on the strategies we have in place to carry that momentum forward. And as we start to see the buying patterns normalize and stabilize over multiple quarters, we'll see that revenue pick up..

All right. Great. Thanks very much for that color. Second question for me, right? So you guys talked about moving now to more of a house of brands versus a branded house, starting with Pure Sunfarms everyday premium. It looks like you're going to expand upon that. I know more details are to come.

But just wondering if you could provide some color in terms of how you're thinking about it, versus, if particularly on the premium side, you do feel like what the current cultivation you have in the greenhouse, obviously, you've done a great job in the everyday premium.

Do you guys have the capabilities to kind of move up to a more premium on the flower side, or will just maybe find that elsewhere on the cultivation, or just how you guys are kind of thinking about leveraging the current asset base to limited different pricing tiers or whether or not you look to find something externally? Thank you..

Well, we'll answer the question the same way, I'll start it off. So, first, I want to say that we're very confident and excited about the direction. I personally am, I've been brief very extensively and the timing is perfect for us. The market's ready. We have thought about this for quite some time, and the timing couldn't be better going forward.

I don't want to give too much away. So I'll let Mandesh answer the rest of that question to give you some perspective, as far as he can go..

Thanks, Mike and I appreciate that. I definitely don't want to give too much away for the consumer base. But, Aaron, Mike alluded to, everyday premium has been the core of what Pure Sunfarms has started off with. And now the opportunity is there to think about customer segmentation and launch additional brands.

So we're going to be launching actually two additional THC brands this year, one pretty imminently in the next couple of months and then one later on in the year. And based on all the work we're doing across our growing as well as our processing, I've alluded to before that we're converting our facility to full hang dry, and we're on track for that.

So when you think about implementing a full hang dry on the whole plant drying when you think about implementing, hand manicuring really those premiumized processes onto the flower in addition to the fact that, we're launching close to over a dozen genetics this year across those three brands, Pure Sunfarms and the two new ones.

We really feel confident in our ability now to attack various parts of the – various segments of the market that the Pure Sunfarms everyday premium was not reaching. So we're going to leave it there, and just hopefully, you can understand that we want to hold some back.

But maybe I want to be very clear, our ability to attack different parts of the segment of the market, whether premium or not, we're definitely going to take advantage of that, and you're going to see some really exciting things come out of Pure Sunfarms and Canadian cannabis this year..

All right. Great. Look forward to hearing about it. I'll jump back in the queue..

Thanks, Aaron..

Your next question comes from Andrew Partheniou, Stifel. Andrew, please go ahead..

Hi. Good morning. Thank you for taking my questions. Maybe just starting off on the cannabis side of the business, could you discuss or if you could give a little bit more color on where you are with your production expansion, understanding that you mentioned you're comfortable with current production levels? And a follow-on to the question from Aaron.

You mentioned that you could expect to see a rebound in sequential direct cannabis sales, where could we see this going, given where you are in your production expansion? And what's the potential here?.

Well, I'll answer the first part of that. So we just – as you know, Delta 3 went into – has been in full production now since the end of last summer. And we started the conversion for Delta 2 50% of it in production at the end of last year. So by January it's fully in production that's 1.1 million square feet.

So roughly another 500,000 square feet that puts us at the $1.6 million fully in production, everything we're producing. We sell, as you know, we don't grow what we can't sell. So as Steve mentioned on his remarks, everything has been paid for, for finishing the second half of Delta 2, except the labor to just install the parts, everything is on site.

And we reserve doing that, based on the delays we've seen due to COVID on our EU GMP certification. We've talked about that last time that – that was delayed probably for about 1.5 years. So we wanted to be prudent with that. Now, that we've received that and we're making headway to start our first shipments in the near future, coupled with Israel.

And we started, as we said, shipping to Australia. That combined with further market share penetration in Canada and working with ROSE as well. We see our ability to gear up very quickly for another 25% increase in our current capacity over the – probably sometime in early to mid-2023.

And for the second part of that, Mandesh, do you want to take that second question?.

Yeah, Mike, there's not a whole lot to add. I think you framed it up really well in that. We've always matched our supply to our demand. And given what you just talked about with the European initiatives with the ROSE business, or shipping in biomass with the expansion into other provinces.

You earlier commented on the partnership with NOYA and then we just answered Aaron's question on the expanding brand capabilities. When you think about all those components coming together, we see a tremendous amount of upside and continued revenue growth. I'll flip it over to Steve if there's anything he wants to add.

I know we don't give guidance, but we feel very positive on the momentum we're building within Canada and in some of these international markets. And as Mike said, we'll time the other half of Delta 2 according to our plans and how that revenue growth grows goes.

But like we've said before, our revenue plans for this year, we have all the capacity that we need to achieve those targets in Delta 3.5, Delta 2. Okay.

Is that good Andrew?.

Sorry, I was. Thank you very much for the detailed answer. And maybe moving to a more holistic view, including produce. Wondering if you could give a little bit more color on the outlook here. As you mentioned, Canadian cannabis continues to contribute positively, but it seems to be offset at a very challenging market in the Produce segment.

You've been operating in this area for a very long time. And wondering what your thoughts are on when we could see some of these headwinds. And under the scenario where input cost inflation remains sticky for the remainder of the year, how you plan to combat that to return to positive gross margin..

Well, before I don't know if I want to -- Steve some comments specifically to what we see coming up for produce in the future. But I want to take it back to sort of 10,000 feet. We've communicated back as long as 2016 that it was time to shift to the third generation of our crop selection, cut flowers to produce to cannabis.

And that was the big pivot that Village Farms is going to make based on regulatory changes and legalization, both domestically and internationally. And that has gone extremely well in Canada.

I think we've proved out the business model as good as anyone out there, best-in-class in taking the approach of converting existing assets and the great depth of the management team side to those assets and then adding a great management team to take it into the end zone in Canada and internationally for shipment side of Canada, I think we've done that well.

So that optionality is the big enchilada for the company in the future. Now we probably sat here two years ago, looking at the political arena and felt that changes were going to happen in the U.S. quicker, if they haven't. So I think we have to keep our eye on a ball that where we're going is entering the largest potential cannabis market.

Now that may not happen this year or next. It's anybody's guess. But -- and I don't often want to talk about our competitors, but when I look at the amount of tens and hundreds of millions of dollars that our competitors are spending for optionality.

And there's many examples of that or just tens of millions of dollars in quarterly losses to try to hang in there. This has probably been the worst quarter we've had in produce for a while, but ultimately, it doesn't even compare to what our competitors are doing in order to navigate the current legislative theater.

So we will work hard, and we have communicated years ago, our goal was to breakeven waiting for changes in legislation. And that's not to say, we will be out of the produce industry, but we will balance that capacity with the emerging cannabis industry. And in the meantime, we have to work hard to do what we can to get to breakeven.

But I will say that if you really look at what's happening today, on top of COVID, as I mentioned, which kind of threw a monkey wrench in the last couple of years, we are in a commodity market. Inflation is a policy decision that has impacted us swiftly and everyone in agriculture. It's across the board.

And everyone is struggling, how do you deal with 40%, 50% increases in fertilizer classes and three times our diesel just hit the highest record ever in the United States. So these are items that are out of our control, and we will continue to find a way.

But at the end of the day, as I mentioned in my remarks, we will be transferring our assets and changing in this cannabis going forward at that time. It could be this year, it could be two years away, and we'll get there. If you want more specific, I have -- turn it over to Steve to add some color on that..

Yes. Andrew, we're not projecting or forecasting a positive EBITDA for ROSE until the fourth quarter of this year..

Thank you very much for that color. I will get back in the queue..

Thank you. Your next question comes from Pablo Zuanic, Cantor Fitzgerald. Pablo, please go ahead..

Hi. This is Matthew Baker on for Pablo. Thank you for taking our questions.

How would you characterize your performance in flower over the last 12 months in general, but more specifically in terms of your dependence on Pink Kush?.

Mandy, do you want to take that?.

Yes, absolutely. So we continue to be a top performer in the flower segment, which is the largest part, and we feel very confident in our ability to continue that. Pink Kush has been the number one selling strain since the legalization of cannabis. As of today, national market share just for that strain alone is close to 4%, which is unheard of.

It's sold more than double the number two best-selling flower SKU in the industry. So it's been quite a success story. We've always maintained that we will give the consumer base products and specifically, in this case, flower products that they want and sell-through.

And we definitely have seen Pink Kush skyrocket to its success last year and then start to taper off as the – as that products came on to the scene.

And we've adopted -- we've added Jet Fuel Gelato, which was the number one innovation SKU in Ontario in terms of -- since it was launched in October through Q1 in terms of kilos sold of all new strains that were launched in the Ontario Cannabis store.

And we continue to develop that pipeline of genetics and strains for Pure Sunfarms, for our additional brands as well as with our ROSE partnership. So we don't believe we're overly reliant upon Pink Kush. We have actually seen Pink Kush come back and actually grow over the last three months or four months, 20%, 30% kind of in share and total sales.

We're going to maintain that. It's a phenomenally profitable SKU. It's a phenomenally well light SKU and is quintessentially BC, but so there's no need to pivot off that.

However, with the large cultivation capacity that we have and all the new genetics that we've been trialing and experimenting, we are going to continue to keep innovating and putting on -- putting out great products for the Canadian cannabis consumer. So we don't believe there's any overreliance on Pink Kush.

We feel we're absolutely right-sized to continue to be the one and only Pink Kush that consumers continue to want and go back to your time and again..

Thank you for that answer.

For our second question, what would you say is a normalized gross margin on a percentage or a per gram basis for your flower business?.

Steve?.

Depending on the SKU itself, our gross margins for our pure flower, excluding pre-rolls is between 50% and 60% pretty consistently quarter-on-quarter..

All right. And just one last follow-up. How is delisting the stock from the TSX and only having the NASDAQ listing helped you, if in any way? And maybe just remind us of the rationale of the TSX delisting? Thank you..

Well, our short position. I'll start and give it to Steve a short position. As we monitored since January 1, has come down significantly. Canada has a naked short policy. We didn't like that and we are happy with that decision. Overall long term, we think it will play off.

Steve?.

Yes. The challenge – we had regulatory issues between the, let's say, NASDAQ is from a regulatory involvement in your business is regulatory light, believe it or not, for the US. And its tax is overbearing and very expensive. So, in the first quarter alone, we saved $200,000 by not being on TSX. Yes, our trading volume is down.

There's no question about that, but our short positions, Mike mentioned is down substantially and we're fine with the decision we made..

Yes. And it was hard to justify the value proposition when we're paying 4x more for TSX than NASDAQ since we were listed there. It was hard to justify that. So -- and we're all about profitability. So that was the decision and I think long term, especially tied to US legalization that will pay off for us..

Thank you for the answer..

Thank you. Your next question comes from Rahul Sarugaser, Raymond James. Rahul, please go ahead. .

Hey Mike, Steve, Mandesh. Thanks so much as always for taking my question. Mike, you asked a lot of my question around management of the produce business as you balance that against maintaining -- maintaining those assets and providing optionality in the US. I'd just like to drill a little bit further.

You mentioned those assets potentially driving about $1 billion in revenue.

Could you give us a little more color in terms of how you come to that number? But also, balance that optionality against the incremental cost that you are seeing for maintaining that asset, particularly relative to the current cash position and maintaining cash burn such that you maintain sufficient liquidity through this inflationary time?.

Yes. Well, I mean, if you look at the footprint of Texas, not saying that we would convert all, but the $1 billion comes from the fact that it's 3x of the footprint that we currently are in production in Canada, if not more. So, if you do the math and we know what our projections to 2023 say in Canada are, it's easily that $1 billion same numbers.

Secondly, what's really, really interesting is Texas. We've said that before, we look at it as a literate in the 49th space. If we -- our long-term plan besides -- if we look at states where we want to operate in, assuming legalization happens, I would say exit Florida at the top of list. Texas is where we have these assets.

There is no competition in Texas today. It's the second most populated state in the United States are growing rapidly. And I've used this term before, when the gates open, it will be a race to who's dominant in Texas, and we see ourselves after 30 years of operating there as being a major force in Texas.

And that is the most difficult state, yes, but our assets are there and it's a price we have to pay to continue. And from a cash flow perspective, yes, it will be an investment in the future. And that investment could be -- this year will probably be the greatest investment we made cash-wise.

But overall, the confidence we have in our other businesses delivering positive cash flow. We've made a decision that we're willing to take that spend not to lose that ability. Keep in mind, what's made us great in Canada among the terrific job that the management team has done is the DNA tied to the asset.

If we loom those assets, we lose the talent, and we're not willing to do that. The other thing is Perdue pays a lot of the way here. It's still -- this year, we'll see cannabis surpass produce as the number one contributor to revenue going forward, and that will happen this year. But it pays a lot of the bills.

If you look at these other competitors we have that are pure plays and they're publicly traded, there's a lot of costs associated with them. Produce pays our infrastructure. We have best-in-class finance and accounting team. This is at the corporate level.

The ability to operate in Europe in the Netherlands produce pays that underlying costs, and it's not really reflected when you solely look at cash flow and EBITDA. And without that, we'll have a burn to support our growth efforts internationally. So I hope that can provide sort of a better understanding of why and what the strategy is.

It's almost like the frustrating thing is I see competitors losing $50 million a quarter or $60 million, and it's almost acceptable because they're a pure play cannabis. But for us, that has this foundation legacy business, that is a great contributor. If it's off in a given year five or 10 in the scheme of things, we get heavily criticized for that.

That's my view..

All fair points and thanks very much for that color, Mike. So now congratulations on the continued performance of the Canadian cannabis business, and you had talked a little bit about international.

Historically, we've not seen international make much of a dent in many of your peers income, but really quite recently, we have seeing it start making a material impact.

So can you give us a little more color in terms of how you're looking at international revenue playing out for the remainder of 2022?.

Well, first of all, we didn't jump into the international other than start the EU GMP process. And by the way, as I mentioned in my remarks, we took the most difficult jurisdiction countries, the most difficult jurisdiction within the country because there are different levels of EU GMP certification, especially in Germany.

We are at the top of that food chain. So we can go anywhere. We've taken our time to do it right. The only greenhouse we know of that has achieved that level.

And if you look at what we've been able to achieve with our everyday pricing and cost structure in Canada, and you were to interpolate that to the EU, I think we're going to be sitting in a great position based on export when it starts.

And I would say that we didn't want to move into the EU till we had Canada sort of down and we feel that Canada -- we have a long way to go in Canada, but we are very confident in what we've accomplished.

So, we didn't take on the EU or Israel for an export -- for the export part of our business out of Pure Sunfarms, Vancouver till we were assured we were doing it right in Canada and we are.

And we hope to now start that process of exporting this year, hopefully, in the next quarter going into the third quarter, fourth quarter with both Germany to start in Israel. As you know, Switzerland now is starting a record experiment, France is starting medicinal.

We think we're going to be winners by far in the EU and very excited to start that process..

Thank you. Your next question comes from Doug Cooper, Beacon Securities. Doug, please go ahead..

Hi Doug..

Doug, your line is open..

Sorry about that. I was on mute, sorry about that. Thanks guys.

Most of my stuff has been asked already, but maybe just Steve, if you have it or you can disclose it, what was the contribution of ROSE in the quarter of the $21.5, I guess, million of cannabis revenue in Canada, how much was ROSE?.

We -- it's not how we're running the businesses, as Mandesh alluded to. There's biomass going between Pure Sunfarms and ROSE. So, that's all interrelated and one of the drivers of ROSE's success giving to -- based on the data that we see that I know Quebec does been published, but we see ourselves the number three brand in that provincial Board.

So, it's hard to -- it's not how we're running the business, that’s why I'm calling Canadian cannabis. They're not too distinct separate businesses between ROSE and Pure Sunfarms..

Okay.

So, when you say top three producers, how do you quantify that? Is that through sell-through of your own brands or how do you quantify that?.

Yes, sell-through..

Okay.

And that was in the quarter or that was in March, or what period was that in?.

That was in the quarter..

Okay. Just looking at the Canadian cannabis sales, just in general, at retail that are published, they're obviously down in January versus December and they were down in February versus January. So, I guess, that's the seasonality maybe you're referring to.

But generally, across certain provinces such as Alberta, revenue has been essentially flat for a year now. Ontario is probably the only place that's showing growth. Maybe Mandesh, do you have any comments about how you -- if the market is not growing particularly anymore, obviously, it becomes a market share gain.

So, the cookies and these other partnerships, maybe you can just talk about the strategy to gain share. And just maybe comment on the pricing environment out there, is it still continuing to decline average pricing? And that will be it for me..

Yes. All good questions, Doug. And I'll start with your first, kind of, hypothesis. We still -- we believe very strongly in the Canadian market.

We think the conversion from illicit to legal sources, we're confident in our work, and the signals we're getting from all levels of government on stamping out the illicit market, we think there's a huge opportunity there in Canada. Retail deserts still exist, when you look at British Columbia, some major municipalities as well as Ontario.

We think some of those factors will definitely drive overall growth. When I look at the market and the market share gains, absolutely everything we've done with the NOYA team or the Cookies launch as we alluded to earlier in the call, are additional brands that attack customer, consumer segments that Pure Sunfarms doesn't holistically play in.

Our ability for continued assortment expansion, what we're seeing now more than ever, Doug, is across the supply chain, whether it's a provincial board or a retail operator, they need consistency and reliability in the supply chain, in the product and in the pricing in order to keep winning at the retail front in a very dynamic and competitive market.

And I think one of the many bright spots we have is Canadian cannabis and Pure Sunfarms as we are that reliable partner. And so what -- I always feel really confident when I walk into stores and really pleased talking to bud tenders the affinity they have for our brands, for our products.

When I'm in Quebec and I see how the ROSE team is continuing to make amazing gains in that market. All of that gives us the ability to take market share -- and then on your pricing component, we continue to see competition in pricing. People are continuing to invest in pricing to their own detriment.

We actually improved branded margin quarter-over-quarter, year-over-year, even as we took price reductions. I'm going to say that again, we improved branded product margins in Canadian cannabis even as we took price reductions.

I think that speaks volumes to the points that Mike was making around, our ability to grow, our history in cultivation, but also the prowess we're bringing to the table on manufacturing. Reducing costs, reducing our wastage on pre-rolls, getting better efficiency in our vape lines and edible lines and some of the other components.

So I believe over the next couple of quarters, you're going to still see some erratic behavior on pricing. Again, one of the reasons why we're launching two new cannabis brands to attack either side of the everyday premium segments out there. So I think pricing will be competitive. I've always said I love our levers and our ability to compete.

And I think you're going to see us come out real strong with market share gains and pricing movement to attack various parts of the market. Hopefully, that answers your question, Doug. .

Yes. Thanks, Mandesh..

Thank you. Your next question comes from Eric Des Lauriers, Craig-Hallum Capital. Eric please go ahead..

Great. Thanks for taking my question Could you provide a bit more color or potentially quantify some of the rebound that you're seeing either in -- from provincial buyers from kind of late Q1 into Q2 or from the spot wholesale market as well. Is there any kind of indications of how those have been trending from late Q1 into Q2, it would be great.

Thanks..

Sure. Mandy, take that call – I mean the question..

Yes, you cut out there slightly the starting Eric.

Are you asking about volume or pricing, sorry, can you just repeat that?.

Just overall, looking just to get a bit more color on some of the dynamics in wholesale and then from provincial buyers.

You guys mentioned, obviously, that's sort of seasonally weak first part of Q1, and that's rebounded nicely at the end of the quarter and just looking for some color on how that's continued into Q2? And if you're able to quantify it all, that would be great..

Yes. So I'll take the wholesale B2B non-branded side first, and then I'll come back into the provincial side.

As Doug was actually mentioning in his question, about industry sales, I mean, they ebb and flow month-over-month as I think we're starting to getting into this cyclical quarter-over-quarter pattern you see, obviously leading in the summer and coming out very strong with everybody being a bit more social and then some of the colder months you kind of see some sales come down and be softness.

We see that same flow on the non-branded wholesale side. If sales are really ramping and markets are opening up or provinces start to expand, we get those calls off the hook. In other months, we have a consistent base of LPs and producers that we supply extra grade, inputs for their own products. So that ebb and flows throughout the year.

And so we'll always be active wherever there's opportunities. And again, our expansive cultivation capacity allows us to opportunistically look at those revenue channels or what those opportunities may be. The move into with the NOYA team, the move to our additional brands is all about looking at the best margin opportunities for our biomass.

And we've patiently waited with one brand under Pure Sunfarms, as we developed an extensive amount of genetic, sourced as well as proprietary, genetics that we've developed completely ourselves and one else has.

And then taking that – those genetics to launch into the market under Pure Sunfarms in our twp additional brands, as well as additional pre-roll capacity and other products that we're going to be bringing to the market. So I think you'll start to see a lot more of the business flow into the brand in side.

So I just wanted to give you that color to show you how we're thinking about wholesale. We'll always be active. We'll look at opportunities, but the plan has always been to start shifting some of that biomass into higher-margin opportunities in their own brands. So that's the branded side.

On the retail dynamics or the provincial buying – provincial boards and the buying behaviors, I alluded to it earlier, we're always going to see this ebb and flow. Every March, a lot of the boards go through their inventories and they're trying to manage kind of what they're counting and how they manage their distribution centers.

The listing process has been very efficient, and we feel really pleased on the ongoing products we get listed across the country inside and outside of Quebec, obviously with the ROSE team there and what we're getting from the financial buyers. And they want efficiency.

They want really good suppliers and licensed producers that deliver on their commitments that they can rely on. And I think everybody is continually looking at the sales, what the forecast, what products to carry, we're still in early innings.

So I think having a really strong relationship with the Board that we do is a very positive thing because they're still figuring out a lot of the dynamics on their side.

So I think you're going to see this ebb and flow, quarter-to-quarter, while it's sell-in, sell-through, but we believe in the trajectory of our revenue and our market share gains, and we believe on the path that we have set forth in Canadian cannabis for this year..

All right. Very helpful. I appreciate that color. Last one for me. Just on the produce side. Just wondering if you guys could expand a bit more on your ability to conserve costs, maybe kind of split it out between variable and fixed. And I'm assuming that sort of the ability to maybe mothball one of the facilities you guys have in Texas.

I'm assuming something like that is sort of out of the question, just given the labor there and whatnot and the sort of cost of restarting or whatnot.

But could you just perhaps give us a bit more of an understanding of sort of the levers that you guys have to pull to conserve costs there? And just overall, how we should kind of think about those costs, essentially. Thank you..

Sure. I mean, the business is a fixed cost business. 90% is fixed costs. Our inputs, we know what they are. Ahead of time, all that cost goes in. The only variable component is if you pick more as an example, you have more boxes, more freight, but that variable cost component is very small, very small percentage.

So when you face with these fixed costs, you have one hand tied behind your back. As far as cutting back, we are on the table like we have profitable varieties, profitable SKUs. So one of our varieties, we are the exclusive in North America. Nobody has that product.

It does very well and another one we're semi-exclusive with two others in North America does very well.

The issue though, is it becomes sort of a whack-a-mole, because if you take the SKU that's the most commoditized, which is the number one selling SKU by the retailers, that's their go-to product, then you need load factor, because you can't just ship two or four pallets to a retailer across the country. You need to fill the truck out.

So, now you have to look at how do I grow that additional commodity that is at the lowest cost or losing money to get the freight efficiencies I need, plus the fact that your retailer won't buy the other profitable products, if it doesn't have the commodities that it moves.

In our case, if you looked at TOV, which is Vino Divino, those are the old school legacy commodity type of products, but they are the highest volume ones. So as far as shutdowns, we are looking at that, but not a separate facility, half of one facility to maintain our key management team in base. And we can do that.

We did shut one down last year in Permian Basin. We put it back in production after COVID and we may do that again. And we're also looking at -- we're having a lot of conversations with certain competitors on working together on the marketing to reduce costs and get some scale on the fulfillment side.

So yeah, we are doing it and looking at that as well..

That's very helpful. Thank you, Mike..

Thank you. Your next question comes from Scott Fortune, ROTH Capital Partners. Scott, please go ahead..

Hey, good morning. You have Nick on for Scott here. Just first question around the derivative side, it looks like the derivatives segment in Canada was off sequentially as a percent of sales.

Could you just provide a little color around your growth strategy within that category and what you've seen in terms of pricing and end market demand within that segment? Thank you..

What was the product you were talking about, Scott, because you have a lot of background noise?.

Sorry, the 2.0, the derivatives segment within Canada, just it was off sequentially as the percentage....

Sure. Okay.

Mandesh, why don't you take that call on Q4?.

Absolutely. Good question. So derivatives, meaning vapes, edibles, any of those extracted products. So, I think when you look at that space, for sure, vapes is number two, three category in sales in almost every jurisdiction. It's a very important part of the sales trajectory. And we're going to continue to put new products.

We launched a new Minton few CBD Red Penn. We have some other high THC vapes coming on to the market. And it's an important part that we're going to continue to innovate, being where the consumer wants us to be at the price point, staying with edibles continuing to expand the portfolio and look at various formats and flavor profiles.

When I take a step back of 2.0, and we talked about the word commoditization, it's one of the words that I think about the most when I think about the 2.0 space. And Steve alluded earlier on our flower margins and how high and strongly, are which is the largest part of the market. So derivatives, is an important part of the market.

We'll continue to innovate and be there for the consumer and make sure we're offering the right assortment strategy for our Pure Sunfarms brand as well as our two new brands on THC that we're going to launch. But it's a highly commoditized space. I mean, the main input distillate is a commodity in a true sense.

And I think, we're going to continue to see massive price reduction – a lot of people who are going – to lower grade biomass into extracted products. And when I look at some of our competition and the money they're losing, it's clear that – that's the bet they've made on the 2.0 space.

So I think that's the way we look at the through the space, an important part to be in. We're definitely going to be flower first. But we're not going to lose focus on how we innovate and understand what the key trends are and where our product assortment needs to be in that space..

Got it. I appreciate that color. And then a follow-up for me on the US CBD side, it looks like Balanced Health was slightly off quarter-over-quarter in terms of revenue, but still profitable.

Can you just provide an update on your growth strategy there within US CBD and how you're looking at potential M&A versus new SKU introductions, retail expansions, et cetera, to drive that growth? Thank you..

Well, we're pleased with their performance. That is – we have a multipronged strategy for high THC in the US and Balanced Health is the center piece for that, as an incredible team, and we're going to utilize that organization to go much further in high THC when we can.

That's aligned on a parallel track with our plans in Texas as a cultivator as well and other maybe M&A opportunities at that point. But for looking at the CBD, pure-play CBD in the US for M&A, I can tell you that, we all look at that on an ongoing basis, and there's nothing resonating.

No one is making profit except, so we can tell publicly traded BHP, kudos to that team for constantly doing that. Their margins are exceptional, which means, if we see erosion in the quarter on revenue in light of the current economic times, I mean, CBD and cannabinoid products are important, but they're not eggs and milk.

That may happen over the course of this inflationary period. That said, we're pretty pleased but yeah, we would look at opportunities to expand that. It's just that we love accretive deals, and we don't like to take on other people's mesh just to shut them down, which seems to be a big play in the M&A space. So we're going to be patient there.

Right now, cash is king. And when we utilize our capital, we want to be very prudent and very sure we're going to win here, and it's going to be accretive. We have to compare those current opportunities in the current US market to the international opportunities as well..

Got it. I appreciate the color..

All right. Well, thank you, operator, and thanks for everybody hanging in this long. We appreciate everyone hanging on the phone. And we look forward to reporting on our next quarter..

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines..