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Edited Transcript of JTR.V earnings conference call or presentation 23-Aug-19 12:30pm GMT

Q1 2020 Greenspace Brands Inc Earnings Call

TORONTO Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Greenspace Brands Inc earnings conference call or presentation Friday, August 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Andrew von Teichman Logischen

GreenSpace Brands Inc. - Chairman, President & CEO

* Stuart Pasternak

GreenSpace Brands Inc. - CFO

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Conference Call Participants

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* Kyle McPhee

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Robert Gibson

PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the GreenSpace Brands Inc. First Quarter of Fiscal 2020 Conference Call. (Operator Instructions)

Before we begin, we would like to remind you that certain forward-looking statements may be made on this call, including statements regarding possible future business and growth prospects. You are cautioned that such forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Many factors could cause actual results or performance to be different from those expressed by such forward-looking statements.

GreenSpace does not undertake to update any forward-looking statements made by itself or on its behalf, except in accordance with applicable securities laws. This call is being recorded on August 23 at 8:30 a.m. Eastern.

Now it's my pleasure to turn the call over to Matthew von Teichman, President and Chief Executive Officer. Please go ahead, sir.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [2]

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All right. Thank you, Jessica. Good morning, everyone. Thanks for taking the time to join us to hear about our first quarter of fiscal 2020.

During the call, we'll provide you with updates on our near-term outlook, and at the end of the call, we will be glad to open the lines and take your questions.

I'm joined on the call today by Stuart Pasternak, our CFO. As you all seen from the results we posted last night, Q1 demonstrated our first move back towards profitability that we've had in over a year. There were a lot of different reasons for the positive momentum, including better sales, better margins and most importantly, I think, in this discussion, significantly improved SG&A expenses. Q1 had only 1.5 months of contribution from Kiju, which we sold in May and, obviously, had no representation from the brands that we sold or discontinued prior to that.

The fact that we had a stronger quarter in terms of sales than Q4, even though Kiju was only represented for half the time, demonstrates that our core brands continue to accelerate, particularly Love Child. Both Love Child and Go Veggie continue to be strong contributors to the business, with Love Child growing very quickly and Go Veggie remaining very steady with some excellent opportunities for growth ahead. Love Child, in particular, had an excellent quarter with some new distribution wins and generally strong velocity.

Gross margins also rebounded in the quarter over the previous quarter. Some of this was due to improved margins at the product level and some was due to a reduction in trade spend versus the prior quarter. We still are very focused on achieving better gross margins than we saw in this quarter or in the previous few quarters. With gross margin initiatives well underway, our expectation is they will continue to improve.

We have been overinvesting in trade spend as a percentage of revenue in order to help work through our previous working capital challenges and keep retailers happy as well as because of the choice to move some of our marketing dollars away from external advertising and into marketing promotion in-store.

There was a lot to be pleased about when looking at the SG&A situation in Q1 as well, particularly you can see the effect of the restructuring in almost all line items. G&A as a percentage of revenue has come down significantly; salaries and benefits as a percent of revenue has come down significantly; advertising and promotion is lower as a percentage of revenue, although we are spending more in-store at the moment, meaning our trade spend numbers are higher than normal.

All in all, the quarter had a lot of very positive signs for the business, especially considering we saw significant shorts prior to recovering our working capital position with the sale of Kiju. We have a lot of work to do still, particularly getting our gross margins up to a more sustainable level, but the quarter definitely showed that what a rationalized operating structure can deliver in the way of adjusted EBITDA.

Stuart will now take a little bit more time to go through the numbers, and then I'll follow up with a little more commentary afterwards. Stuart, over to you.

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Stuart Pasternak, GreenSpace Brands Inc. - CFO [3]

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Good morning, everybody, and welcome to the call. Thank you, Matt. Q1 saw a vast improvement in financial performance over the Q4 2019. Gross revenue for Q1 was $16.4 million, representing a 2% increase over the prior quarter even though Kiju brand was sold in May of 2019. Compared to Q1 of 2019, gross revenue declined 22%, primarily due to the exclusion of revenue from core brands we sold at close, which were in the previous year's numbers, but did not contribute significantly to Q1 this year.

Adjusted gross profit, which we define, as gross profit less nonrecurring or one-time listing fees, was 21.8% compared to 19.5% in Q4 and 23.7% in the same period last year. Rebates and discounts continue to be higher than expected with nominal improvement to 14.6% compared to 16.1% in Q4. However, they are still higher than the prior year period of 11.2%, which we are aiming to return to. This is in part due to timing and receiving trade spend discount from retailers as well as product mix.

On a normalized basis, if rebates and discounts were in the 12% -- sorry, 11% range, adjusted gross profit would have been 25% for the quarter, which would continue to improve margin trends that we've been seeing over the last 4 quarters.

In Q1, SG&A expense as a percentage of gross revenue declined to 24.4% compared to 31.2% last year and 32.3% in the prior year period. The substantial improvement in SG&A is primarily due to cost savings and efficiencies across all brands and the realization of lower cost from previous restructuring initiatives.

During the quarter, we took a $195,000 restructuring charge related to our May 2019 announcement. We expect that SG&A as a percentage of revenue continue to improve as we begin to generate meaningful returns on investment through cost rationalization and increased revenue base as the Canadian brands grow and the Riot brand launches.

Adjusted EBITDA, which is earnings before interest, tax, depreciation and amortization adjusted for one-time items, was a loss of $264,000 for the quarter as compared to a loss of $3 million in Q4 2019 and a loss of $388,000 in the prior year period. This is obviously a substantial improvement over the previous quarters and a strong sign that the restructuring efforts are starting to work.

From a cash flow perspective, the company's use of cash in operations for the quarter was $3.8 million versus a use of cash of $396,000 last fiscal year and $1.3 million in the same period last year. We continue to manage our working capital diligently and have credit availability through our $10 million ABL facility with TD Bank, subject to fluctuations in the borrowing base. The bank has provided us a waiver for our breach in low covenants as of June 30, 2019.

Thank you, and back to you, Matt.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [4]

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Okay. Great. So as Stuart indicated, the quarter was significantly better than any we've seen in some time. We still had lots of challenges with shorting products and the associated fines from customers, but this is the first quarter where we have seen the effect of some of the restructuring done in the first half of the calendar year. Our expectation is that the brands will continue to grow, and we will continue to see reduced expenses as our corporate footprint becomes small. My hope is that we will also start to see a higher level of brand accountability now that we have brand leaders in place for 3 major brands. They are compensated in part on bottom line results and so our hope is that they will be paying attention to the pennies, as most entrepreneurs are forced to do. The balance between cost control and revenue growth is always a difficult one, and we're trying to find the right balance as we adopt this new operating strategy for the company.

We haven't seen a breakeven quarter from an adjusted EBITDA standpoint for almost 6 quarters, 1.5 years. Although we still did not breakeven this quarter using that metric, we got significantly closer than we have in quite some time. My hope is we will continue that trend towards positive adjusted EBITDA until we are able to return to profitability in short order. Our biggest challenge at the moment is to keep control of trade spend, while also promoting enough for new consumers to find us. The balance between in-store promotion and out-of-store promotion is something we continue to try to find as we experiment with different ways to encourage trial.

One thing we will all agree on is that we have a group of products and brands that are very relevant to consumers, and the trick is now to figure out how to make those consumers aware of the brands in the most affordable way. At a brand level, there were some very positive news in Q1. Love Child continues to be the fastest-growing baby food company in Canada, winning distribution from both conventional and organic competitors. We've been seeing that the Love Child brand has the highest amount of loyalty in the baby food category, which is a situation we wish to continue to capitalize on. I believe, we're seeing this in part because we have been so transparent with our consumers about previous issues regarding our recall and then the other stocks we may have had. We are in the process of launching some new items, including new snacks called lentil loaves that are similar to our very successful line of Love Ducks snacks as well as several new pouch products in the new subcategory we've created to address the breakfast market for children.

All new items have been very well received by our retail partners, and we expect significant new distribution in the coming 2 quarters. All in all, Love Child is poised to continue its growth cycle, particularly now due to the incoming new leadership within Love Child, with our new President of Love Child, Britt Compton. Britt has come from a major CPG business, where she was a senior brand leader for most of their largest brands. She worked her way up through that company to eventually lead the entire brand management group as well as to take on special projects that I think will be very helpful within Love Child. In particular, she was responsible for worldwide innovation for certain brands as well as leading a digital marketing initiative and a worldwide sustainability initiative. Her knowledge in these areas, I believe, will set her up for a very successful career with Love Child.

Go Veggie has also had a very strong run of late. As you may recall, Go Veggie has been in decline for some time when we bought it or had been in decline for some time when we bought it. And then we rationalized more of the business to get to a base of products that we are comfortable with. Since making those changes to the portfolio, the business has started to grow again, and now with the impending launch of Riot as well as the repositioning for the Go Veggie brand, we believe our plant-based cheese business is poised for explosive growth over the next year.

You will all be familiar with the Beyond Meat story due to their very successful IPO not long ago, which I hope shows you the appetite for the plant-based food category, in general. We believe, we have one of the stronger brands in the plant-based cheese space, and our new Riot formulations are closer to cheese than anything we have seen in the market so far. They melt very much like normal cheese; they look very much like normal cheese; and the taste, although not exactly like cheese, is getting extremely close.

In some of our internal sensory panels, we found that some people were not able to tell the difference between our Riot butter and plant-based cheese products versus the dairy versions in products like real cheese.

We are launching 2 shreds, 2 slices and 2 skews of plant-based butter. Although this is taking us a lot longer than we were hoping, the formulas are exceptional, and once we get the product into market, we believe we will have a category killer that could do extremely well in both retail and food service. Our plan is still to launch this in the coming 2-or-so months.

Central Roast continues to recover from the working capital shortages that we saw in Q3, Q4 and in part in Q1. Our customers have largely stayed with us giving us room to get back to full stock and start filling our orders again. I believe, in this case, our transparency with our retail customers helped us greatly through these challenges. Central Roast is now filling above 90% of our orders again, which is a very important threshold, and we are slowly but surely reactivating any accounts that we had problems with over the last 6 months. We will not get back to normal right away, as it is a bit of a process to fill the shelves again and convert consumer back, but all signs point at the fact that we are moving in the right direction, and we believe that we will be able to get Central Roast back to its former glory in the next few quarters.

Within Central Roast, we have launched a new format of bag. We've new capabilities for tubs, and we have a completely redesigned package that really stands out in the shelf. We have an excellent team looking after the recovery of that business, led by the President of Central Roast, Chris Renner, and so I have every confidence that this business will get back to the strong position it previously held in the clean snacking category in very short order.

Finally, we have Cedar. Our kombucha business within Cedar has been doing extremely well. However, we have seen some private label business go away in our cold press juice category because of a retailer strategic shift from juice bars. And our sales of the branded cold press juices are quite flat, with most of the retailers flat or even a little bit down in the category as a whole.

We are in the process of finding ways to differentiate the Cedar brand within cold press juice, which we will be unveiling on the shelves in the next little while. In the meantime, we're focusing heavily on the kombucha business with some very exciting new launches of kombucha that feature flavors that we all grew up on, including a root beer kombucha and a cream soda kombucha, products that have flavors of soda, but under 10 grams of sugar. These innovations have been very well received by our retail partners, and our expectation is that kombucha will become the lion share of the Cedar business this year.

Generally, I'm very encouraged with most of the things that are going on in GreenSpace right now. We're getting closer and closer to positive EBITDA; the restructuring, although extremely difficult, is producing a higher level of accountability at the brand level than we have seen previously; some of our brands have seen strong growth currently; others are poised for strong growth; and we've a plan for the products that need a bit of a leg up.

I won't tell you that all of our problems are behind us because they aren't, but the direction for GreenSpace is better than it's been in a long time.

Over the coming quarters, my expectation is that SG&A will continue to trend towards where we used to be as a percentage of revenue. It seems like forever ago that we were seeing SG&A margins as a percent of revenue at around 20%. That number has grown up to over 30% in previous quarters; however, we're seeing a drop again steadily, which is very encouraging.

Jessica that concludes our prepared remarks. If you could, please, open up the floor to questions, we'd appreciate it.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bob Gibson of PI Financial.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [2]

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Okay. So let's get to some of the fun, exciting stuff. Can you give us any color on the Go Veggie deal at Walmart? How are the sales looking?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [3]

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Yes. I can. So we've rolled into 4,400 stores -- roughly, 4,400 stores -- Walmart stores, and it's a Mexican shred is the actual product that's rolled out, and the sales have been excellent. They have been above both our and Walmart's expectations. Velocity has been steady. We haven't done much promotion yet, but we put in a caddy basically, like it's a little unit that stands up the pouches and that's been very well received and been very successful. So all in all, I think, we're really happy with how it's gone so far.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [4]

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Perfect. And what are the chances of getting it up into Walmart Canada? Is that work or not?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [5]

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Yes. I think it does. I think -- yes, it's a great question. And I think the -- we pulled out of Canada, which is ironic, obviously, but we pulled out -- we pulled the Go Veggie business pretty much out of Canada when we bought it because the minimums were much too high, we're shrinking account product. But obviously, we have great strength in Canada, so the idea is to launch Riot, obviously, in Canada and pretty much at the same time as the U.S. And then with the Go Veggie Refresh, we're going to launch Go Veggie back into Canada as well and Walmart, we hope, will be a customer.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [6]

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Great. You had mentioned previously that you saw Riot Eats could go into the food service channel, can you give any color what type of institutions, et cetera?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [7]

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Yes. I mean it's early days, truthfully, on that, but Riot melts better than anything in the market, like it really melts almost exactly like cheese. You put a cheese slice on a burger and it melts. In a grilled cheese, it melts perfectly, like it's remarkable how well it melts, which means the function of it is probably what makes it so interesting in food service. Companies like Beyond Meat built their businesses in food service. They didn't build them in retail, and they are getting massive as we see with A&W and with Tim Hortons. They are getting massive traction in the food service channel, and no one's done that well in the cheese world, in the plant-based cheese world. And we think we have a product that can do that. So it is a focus -- or I -- it's an initiative that we are starting to chase.

We locked our formulas about 3 weeks ago. 2, 3 weeks ago, we got the final kind of plant trials done on our formulas, and they were excellent. So we now have our [laca] samples, and we got lot formula, and so we're now going to start going out to food service distributors and food service customers and start to show them what we have.

The Riot brand from a retail perspective is an organic non-GMO brand. The Riot brand from a food service perspective will still be non-GMO, but it won't be organic. It will be conventional, just to keep costs somewhat in line for food service customers who are a little more fickle about pricing. So yes, we have really high expectations, especially now that the product has come along as far as it's come along. It's -- you got -- everyone will start to see it relatively soon. We'll, obviously, be talking more about it, but once we get it in market, you'll be able to buy it and see it. And it really is a product that melts, functions better than anything else like it.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [8]

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Perfect. And then lastly, could you just give us some comment on the U.S. storage and delivery? I know you are working on that, and what's happening?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [9]

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Yes. It's still -- we still run storage and delivery as a percentage of sales much higher in the U.S. than we do in Canada. Go Veggie is a refrigerated brand, so you would expect that. We have a lot of dry brands here in Canada. But it's still disproportionate, and so we're looking at a bunch of initiatives to try to bring this cost down. We pick a lot. We do single picks, which means like case picks in distributors. That's very expensive. We've done it because customers basically if we have a short amount of product, you have to do it. It's kind of rationalize the amount of product that different customers get to avoid fines and avoid them being upset by getting no product. So we've had to do it a little bit over this last little while. But we're trying to get away from that and get to full pallet picks again and that will help a lot. We're looking at initiatives to bring our, in particular, the freight part of storage and delivery down. And I don't know how much we can do on the actual storage side, but we're looking at initiatives there as well. So we're trying to bring that down by a 1% or 2%, which won't bring us down to the Canadian level, but we'll get it closer.

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Operator [10]

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Your next question comes from Kyle McPhee of Cormark.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [11]

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Just on the latest round of restructuring announced in May, the $1.2 million per year of annualized savings. Did any of those dollars show up in the quarter or is that more next quarter when we see the full benefits? If you can just quantify that would be great? I'm really just trying to figure out what your bottom line would look like with full credit for those cost savings?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [12]

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We did put a restructuring in. There was 100...

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Stuart Pasternak, GreenSpace Brands Inc. - CFO [13]

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$195,000 related to departures.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [14]

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Yes. Related to -- yes, exactly. So there is -- that -- those are sort of forward-looking costs that we've had to put into these numbers. They come out of EBITDA, they come out of adjusted EBITDA, at least. Do they come out of EBITDA as well?

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Stuart Pasternak, GreenSpace Brands Inc. - CFO [15]

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No.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [16]

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No. So just -- they come out of adjusted EBITDA, that $195,000. But that...

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [17]

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Sorry, that $195,000 is the savings you realized? The run rate savings realized during the quarter?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [18]

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No. No. That's kind of the costs -- forward-looking costs of some of those people over their severance period.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [19]

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Got it. Okay. So the full $1.2 million a year run rate, when would that show up?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [20]

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Yes. So I think you'll start to see it in the quarter we're now and looking forward because we've taken that restructuring charge, and so you'll see kind of the normalized look at our company going forward in terms of kind of the salary structure. So you'll see it in this quarter Q2, in terms of what our kind of normalized base looks like then.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [21]

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Got it. Okay. Now on the gross margin line, you mentioned it's still a little bit below target, can you quantify maybe where that normalized level would be ex all the noise from stuff like the timing of rebates and discounts for brands you sold, like should it be closer to kind of 25% from your current list of brands?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [22]

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Yes. That's the number, 25% is where it should be. We have initiatives to see it higher truthfully, but we like to see it in the 28% range. We're working -- everybody at a brand level is working on those initiatives, trying to get that gross margin kind of story up a bit, but so much depends on trade spend, like if you spend -- last quarter Q4 we spent over 16% in trade spend, this quarter 14% and we're used to 11% or 12%. So we have to get that trade spend down or we just have to communicate to you that if we've made a decision to move some of our below-the-line marketing spends or out-of-the-store marketing spends into trade spend, then it will compress gross margin, but it will have no effect or a positive effect on EBITDA because it won't show up below the line in SG&A.

So right now we have been making that decision a little bit. We've also seen sort of that legacy -- call it, legacy deductions from retailers for trade spend that was -- previously, you get these post audits is what they are called and we got hit with a few post audits where this could be from a year ago, where they said, "Hey, you actually owe us $50,000 more." So we got hit with a few of those post audits, which hit this number, trade spend and hit Q4 as well. So we're working with our retail partners a little closer on that, trying to figure out whether they are right. And if there are right that maybe they could give us a little more notice about it, so we could account for it a little better. But anyway, regardless, those all impact gross margin and because trade spend is inflating. So our hope is we are coming back down in that 12% -- 11%, 12% range. Our U.S. business runs lower, it's running very lean from a trade spend perspective. So -- and our Canadian business runs higher. So I think there's probably room to find middle ground there.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [23]

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Got it. Okay. And then just thinking about still on the gross margin line, the mixed impact of one of your big growth engines should be kind of the Go Veggie and Riot Eats, does that pull up your gross margins over time from a mix perspective? Is it higher -- is it above average gross margin?

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [24]

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Yes, yes. Go Veggie and Riot are our largest contributors to gross margin. So as they improve -- Love Child is above average, but only slightly above average. Whereas, both Go Veggie and Riot are significantly above average. And so as they grow, we'll see the gross margin profile grow with it.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [25]

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Got it. Okay. And then last one for me just on the sale of Kiju to Zurban, your press release from May, I think it said $7.5 million cash is what you're expecting to get paid. When I see your cash flow statement today, it said you got $4.8 million, so just looking for some color on that mismatch.

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Stuart Pasternak, GreenSpace Brands Inc. - CFO [26]

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That was the -- we would have paid down the line as well. So some of that money would have gone down to pay down our bank line.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [27]

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So we -- yes, we received $7.5 million in cash and then how we accounted for it, I guess, is how you -- $500,000 of it was in escrow, so $7 million was actually the cash portion.

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Stuart Pasternak, GreenSpace Brands Inc. - CFO [28]

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Right. $1.8 million went to TD to pay down our line and I believe that covers off most of it.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [29]

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We'll get back to you and anyone else that wants details, let us know, we'll get back on the details, but basically it was $7.5 million plus a $0.5 million earn-out, $0.5 million of this $7.5 million was in escrow. So the cash was $7 million and then we paid down some of our TD debt and the accounting of it that's probably is what you're looking at, so we'll get you the details and the accounting of it.

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Operator [30]

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(Operator Instructions) All right, there are no further questions at this time, please proceed.

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Matthew Andrew von Teichman Logischen, GreenSpace Brands Inc. - Chairman, President & CEO [31]

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Okay. Thank you very much everyone for joining. As always, please reach out to me or Stuart if you have any follow-up questions. And yes, I mean, I think as a general, we're very pleased with how things are moving now. It's been a brutally painful year really almost a year for you, the shareholders, and the staff of GreenSpace and the Board and everybody else, it has been very difficult. But this is the first kind of time where we're seeing some of the effects of the changes we've had to make. So hopefully, you'll see more of it. Thanks, again, for taking the time to listen, and please reach out if you have more questions. Thanks very much.

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Operator [32]

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