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Edited Transcript of MEZ.V earnings conference call or presentation 21-Aug-19 9:00pm GMT

Q2 2019 Indus Holdings Inc Earnings Call

Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Indus Holdings Inc earnings conference call or presentation Wednesday, August 21, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gwyn Lauber

Indus Holdings, Inc. - Director IR

* Robert Weakley

Indus Holdings, Inc. - Chairman, Cofounder, and CEO

* Joe Bayern

Indus Holdings, Inc. - President

* Tina Maloney

Indus Holdings, Inc. - CFO and Corporate Secretary

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Conference Call Participants

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* Bobby Burleson

Canaccord Genuity - Analyst

* Doug Cooper

Beacon Securities Limited - Analyst

* Stephen Boland

N4 Financial, Inc - Analyst

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Presentation

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Operator [1]

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Welcome to the Indus Holdings Inc. second-quarter 2019 earnings conference call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Gwyn Lauber, Director of Investor Relations. Ms. Lauber, you may begin.

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Gwyn Lauber, Indus Holdings, Inc. - Director IR [2]

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Good afternoon and welcome to the conference call to discuss Indus Holdings Inc.'s financial results for the fiscal second quarter of 2019. Before we begin, please let me remind you that during the call, Indus Holdings' management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations.

These risks are outlined in the risk factors section of our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today. The management does not undertake any obligation to revise any forward-looking statements in the future.

With me on the call today are Robert Weakley, Indus Holdings' Cofounder and Chief Executive Officer; Joe Bayern, President; and Tina Maloney, Chief Financial Officer, who will go into detail about the Company's financial results for the quarter later in the call.

Now I will hand the call to Robert. Rob, please go ahead.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [3]

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Thank you, Gwyn, and welcome, everyone, to our 2019 fiscal second-quarter earnings conference call. It is hard for me to believe that it's been less than 120 days since our RPO and less than 90 days since I spoke with you on our first earnings call.

On that call, I introduced you to Indus, walking you through our strategy for success, presenting the management team's view, and outlining the work we did to position Indus for continued growth as a vertically integrated leading cannabis consumer packaged goods company. Today, I want to share with you our accomplishments since our last call.

In the second quarter, we began trading on the Canadian Securities Exchange after completing our RPO and private placement. These milestones provided us with capital to continue to implement our growth strategy. We launched an initial marketing program and continued the renovation of 110,000 square feet of our cultivation facility, both of which will contribute to our revenue growth in the second half of 2019.

As you saw in our earnings press release, we attained the quarterly guidance that we provided on our last call, generating USD9.7 million in revenue for the quarter, an increase of 51% over last quarter's revenue. And also added 87 new dispensaries in the quarter.

At the time of our RPO, the only market we were operating in was California. Over the course of just a few months, we became a multistate operator pending the license transfers for our Nevada and Oregon acquisition, which we believe will be completed in Q4 for Nevada and Oregon. During this transition period, Indus has taken over the management of the day-to-day operations. This allowed us to expedite the planning process of the launch of selective Indus brands into those markets in Q4 2019.

With this acquisition, we will operate in three states, significantly increasing the market opportunity for our brands. This geographic expansion not only drives revenue growth but also validates our strategy, which is to acquire companies that own one or two brands and operate in one or two states. This strategy allows us to leverage the strength of our California brands and distribute select products in new markets.

In vetting perspective acquisitions, we look for companies that would be immediately accretive without significant upfront investment. We also look for like-minded management teams who can realize our shared goals.

As part of our plan to not only acquire but also successfully integrate new companies into Indus Holdings, we added a Vice President of Integration to our management team, who will plan and execute the integration of Nevada and Oregon as well as future acquisitions. He brings extensive experience in our space, having run operations for a large cannabis company in Colorado and Arizona.

He is responsible for identifying efficiencies within the operation, understanding these new markets so that we can plan the rollout of our brands, and form charitable and community partnerships that we can make a positive impact on the communities that we serve. I believe that his experience will accelerate our move into new markets and will have a direct impact on our success.

The recent acquisition is an example of our expansion strategy. When the transaction closes, we will acquire a recently renovated 24,000-square-foot cultivation and production facility in Nevada plus the ability to expand our footprint to nearly 76,000 square feet. Nevada's cannabis industry revenue is estimated to reach over $600 million in sales by 2020 and our operations is in prime location that is less than two miles from the Las Vegas Strip.

The pending acquisition also includes a recently opened 6,000-square-foot manufacturing facility near Downtown Portland, adding a warehouse, office, lab space, and extraction capability. We will take advantage of the synergies of our business and add our portfolio of brands to these new markets.

Oregon's market for cannabis is estimated to be over $1 billion in 2020. The transaction is expected to be revenue and EBITDA accretive in 2020 and is expected to close in the latter half of the fourth quarter of 2019.

We are also investing in the CBD market. According to a study by ArcView and BDS Analytics, the US market for CBD brands is expected to exceed USD20 billion in year 2024. In assessing CBD acquisition prospects, we look for brands with national reach and brand recognition and the potential to develop products that cross over with the ability to offer CBD and THC version.

In the second quarter, we entered the CBD space with two acquisitions: Humble Flower Co. and Shredibles. We will continue to expand these brands in the health and wellness sector nationwide, enabling us to build brand awareness within the CBD and THC market. In the coming quarters, we expect to expand our CBD offering through additional accretive acquisitions as well as internally develop a CBD version of our own THC brand.

On our last call, we also talked about our capacity, infrastructure, and investments that position Indus as a vertically integrated leader in California, the largest cannabis economy in the world. Our team takes incredible pride in the work we do, and I'm always amazed at the foresight and ingenuity that's on display whenever I take visitors on tours of our facilities.

The infrastructure that we started building back in 2014 gives us the capacity to grow into a much larger company in the future. For example, our manufacturing facility has the equipment in place to produce enough chocolate confection, baked goods, hard and soft non-chocolate confection, tinctures, capsules, mints, and beverages to support significantly higher revenue. And we believe there is demand in the market to consume what we produce in the future.

By the end of the year, most of the work on our California cultivation facility should be finished, including a significant power upgrade that will provide us with supplementary power to run the entire facility. This upgrade has been three years in the making and will allow us to finish the additional 110,000 square feet of renovation in Q3. And to support revenue growth in Q4. When our greenhouses are complete, we will have a dependable supply of flower, giving us a more predictable business model.

We also see partnerships as an important aspect of the growth strategy. Recently we announced our partnership with Platinum Vape, expanding the distribution of their high-quality edibles, vape cartridges, flower, and pre-roll products across California.

Platinum Vape's products have been added to Indus' portfolio of owned brands, including Cypress Cannabis, House Weed, Flavor, and Acme along with agency brands like Dixie, Beboe, and Orchid Essentials, giving our dispensary partners an even wider array of popular brands.

Our brands are an essential pillar of our success with California dispensaries and one of the reasons that we added 87 new dispensaries to our customer base in the second quarter. Aside from enabling revenue growth, our distribution network makes Indus the chosen destination for brands looking to expand within California and in the future in other states. We are well positioned to take our expertise as a top distributor in the highly regulated California market into new markets and to be a leading distributor in those markets.

An investor recently told me that what we are doing at Indus is unique and I believe he was right. We have a cultivation facility that will supply consistent high-quality flower at some of the lowest costs. Our manufacturing and extraction facilities have the capacity to produce more than double our current production and expect that we will increase utilization of these facilities over the coming quarters.

Our sales and marketing teams have built strong relationships with dispensary and influencers across California and understand how to build brands that resonate with the consumers in our market. Our distribution network is the backbone of the operation, with dispensaries around California knowing they can rely on Indus to keep their shelves full and customers in their stores. As we continue to build our portfolio of brands and expand into new markets, I am confident that Indus as well positioned for a steep growth trajectory.

With that, I will turn the call over to our President, Joe Bayern. Joe?

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Joe Bayern, Indus Holdings, Inc. - President [4]

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Thank you, Rob. As Rob outlined, there are a lot of exciting things happening at Indus. On our last call, we discussed our strategic vision and priorities and how we are actively taking steps to achieve those.

We will become a world-class consumer product company by focusing our efforts on four strategic pillars. One: in order to continue ourselves as a top-tier consumer product company, we need to have top-tier consumer products. We have to increase our focus on quality, product development, and product commercialization.

Two: we need to build national brands in the highest value categories. Three: we need to build industry-leading distribution capabilities to secure the route to market for our products. And four: we need to build out our geographic footprint.

I realize it's only been a few months since we embarked on this journey, but I'd like to give you an update on how we are progressing against these priorities. We believe it is our ability to build great brands that will ultimately allow us to win in the marketplace.

We know that to be successful, we need the best products in each category, inspired marketing programs for those products, and research and development to identify and develop new forms of consumption that these consumers want. We know we need to constantly evaluate our brands, and we need to anticipate trends in the market through research and analysis to remain successful.

In order to help accomplish this, we've reorganized our structure, creating a new product commercialization team. This team will be overseen by one of our cofounders, Mark Ainsworth, and will include consumer insights, R&D, and a group of product commercial team specialists to help ensure our new products are launched as efficiently as possible.

On the branding front, we're starting to see the results of our efforts show through the top line, but much of the work that was achieved in the programs implemented may not be visible to the external audiences yet. Programs like Acme 200, our social media influencer program, which engaged trending influencers in varying marketing segments throughout California and our cooperative marketing agreement are creating a foundation for future growth and brand awareness.

Some of these efforts have been challenged as the California market faces some fundamental short-term obstacles which can limit growth. The shortage of flower and trim is one example. As the industry continues to mature, we will anticipate and react appropriately to the headwinds we may encounter by extending our planning horizon and continuing to invest in strategic aspects of our business.

Today, the shortage of high-quality flower and trim in California is restricting our top-line revenue. We believe there are several factors that are contributing to this, including an unusually cold and wet winter, which reduced yields and potency; the process of granting permanent licenses, which was supposed to take place at the end of June; and the fact the black market continues to proliferate. Had these not occurred, we expect that we would have not just met but exceeded our guidance for the second quarter.

What we've experienced is that because the market is still developing, new growers are selling on long-term contracts. And it's been difficult to sustain a steady supply of product to supplement our own growth during our greenhouse upgrade. This has resulted not only in the lack of supply, but in a nearly 50% increase in the cost of product on the spot market. On a positive note, we've been essentially selling out of our flower brands on a daily basis, indicating pent-up demand.

To help offset this, we've added resources in procurement who are working with third-party growers to secure long-term relationships. We are locking in dedicated quantities for the upcoming harvest in September and we are expecting higher yields from our own cultivation in the second half of the year.

By reconfiguring our growth schedule, we will increase our second-half output by over 75% compared to the first half. While we will rely on third-party growers to supplement our own supply of product into the foreseeable future, investing in cultivation capacity will be the most effective way to hedge against the market fluctuation we are currently experiencing.

In the first half of 2019, we've been operating at 35% of our capacity. But the end of the third quarter, we will be at 75% and at the end of the first quarter of 2020, we expect to be 100% of capacity in our cultivation.

At the corporate level, we made other changes that will continue to have a positive effect on our business. During the quarter, we implemented a pay-for-performance sales plan that we expect to drive additional sales in the market by rewarding sales reps who exceed their quotas and laying out very specific initiatives that each salesperson needs to achieve in order for them to meet their goals.

We are working through our supply chain issues and expect to have some partnerships in place that will allow us to have a more predictable supply of all raw materials going forward. And we continue to look for ways to increase our planning horizon and improve our visibility into our business through the implementation of a sales and operations planning process.

On the distribution front, we are filling our brand pipeline, adding agency brands that complement our portfolio of brands and can help us expand our presence within dispensary. As Rob alluded to earlier, Platinum Vape is an example of a popular California brand that we recently added.

Our strategy is to provide dispensaries with a complete array of product, and Platinum met the criteria by filling a void in our product portfolio. It will not only help us to increase our revenue per delivery and revenue per order, but it will also help us secure Indus as one of the distributors that dispensaries need to work with. Platinum Vape is just one of several companies that we are in discussions with to add more strategic higher-margin agency brands to our portfolio.

In addition to adding new brands into distribution, we recently completed a state-of-the-art renovation in our 15,000-square-foot Salinas warehouse and are currently working on the expansion of our new 25,000-square-foot warehouse in Los Angeles.

Lastly, we've also made progress on a geographic expansion platform with the pending acquisition of Nevada and Oregon. Planning is well underway to launch several of our owned and agency brands into those markets when the acquisition closes.

Looking back over the last 12 weeks, I'm amazed at the progress that we've made. While we are still fine-tuning our strategy and evolving our organization and capabilities based on current market demand, I believe we are on the right track.

The second quarter demonstrated that our initiatives are taking hold. And while we may face some short-term challenges, I'm confident the plans we have in place will position us to win in the market. Our second-quarter results suggest our vision is the right one, that we are headed in the right direction, and that our strategy is working.

And now I'll turn the call over to Tina, who will take us through our financial results for the second quarter of 2019.

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [5]

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Thank you, Joe, and good afternoon, everyone. Before I begin, please note that a portion of my commentary will be on a non-IFRS basis, so please refer to today's earnings release for a full reconciliation of IFRS to non-IFRS results. We report all figures in US dollars unless otherwise noted.

As Rob highlighted, we reported record revenue at $9.7 million for the quarter, up 183% year over year and 51% over the prior quarter. As we've noted previously, our brands are segregated into three categories: owned, agency, and distributed or third-party brands.

Beginning in Q2, we reclassified purchased bulk sales into the distributed brands category. For comparison purposes, we have revised Q1 from what was previously reported, resulting in approximately 34% of our revenue being from owned brands, 33% from agency, and 33% from distributed. In the second quarter, approximately 35% of our revenue was from owned brands, 29% from agency, and 35% from distributed brands.

Owned brands grew 178% year over year, impacted by the marketing programs around products like Acme and across all our owned brands. Our agency brand revenues grew 332% compared to the prior year. To reiterate from Rob and Joe's remarks, we continue to focus on adding strategic partnerships that will expand our revenue for delivery and to expand into new markets along with Indus' owned brands.

Gross profit, excluding adjustments to the fair value of biological assets, was $1.5 million for the quarter compared to $1.1 million in the second quarter 2018 and $1.3 million in the first quarter of 2019. Gross margins of 16% declined from the first quarter, with the decrease primarily attributable to product and category mix and higher raw material costs as shortages of flower and trim supply in the market have significantly driven up prices. These higher costs are difficult to consistently pass on to the customer. We believe the upcoming fall season harvest and RT4 will lessen supply constraints and stabilize pricing as more product comes into the market.

Operating expenses were $8.4 million for the quarter compared to $2.2 million in the same period last year. The growth in OpEx included $1.8 million for costs we incurred for our reverse takeover and acquisition. Additionally, we made significant investments in marketing and brand activities and in our corporate infrastructure that were required to scale our business and to support our expansion plans. We will continue to invest in brand and product marketing initiatives and enhance our sales force by selectively hiring with a focus on key accounts.

Due to efficiencies associated with scaling the business and as our revenues grow, we will leverage our back-office infrastructure. And operating expenses as a percentage of revenue are expected to decline over time.

On a sequential basis, operating expenses of $8.4 million were up $3.9 million from the first quarter, primarily due to the $1.8 million in costs related to our reverse takeover and acquisitions that I mentioned previously, the launch of marketing and brand initiatives, higher stock compensation expense and employee benefits, and increases in accounting, legal, and professional fees associated with being a publicly traded company. Adjusted EBITDA was a loss of $3.8 million compared with the $0.5 million loss in the prior quarter.

Coming off of a record revenue quarter with 51% sequential growth, we feel good about our momentum heading into the rest of the year. We believe that we've anticipated our near-term challenges and our expectations are in line with what we see in the market today.

Looking ahead, our expectations are that the Q3 revenue growth rate over Q2 will be in the 45% to 55% range, with Q4 exceeding that range. We also anticipate lower operating expenses as a percentage of revenue stemming from gaining leverage in our operating structure will drive positive EBITDA in Q4.

With that, I will turn the call back to Rob. Rob?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [6]

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Thank you, Tina. Since our last call, I've talked to many of you personally and appreciate your shared enthusiasm for our Company. One sentiment that I've heard time and again is not Indus is not like any other company in our space.

What started as a California edibles company developed into something much bigger: a vertically integrated cannabis consumer packaged goods company that operates in three states, including one of the toughest regulatory states, California. The investments that we made over the years, both financial and through manpower, translate into our having all the pieces in place that will continue to set us apart as leader.

And now I turn the call over to our operator. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Bobby Burleson, Canaccord.

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Bobby Burleson, Canaccord Genuity - Analyst [2]

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Congratulations on the strong results.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [3]

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Thank you.

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Bobby Burleson, Canaccord Genuity - Analyst [4]

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Just first one here. There's a lot of different things happening in California right now. You mentioned supply constraints, but there was also some new testing on edibles that hit last year midyear.

And I'm wondering if you'll think about seasonality for the broader market in California that you guys are anticipating, are you expecting an uptick second half over first half of any kind of meaningful degree, even with the supply constraints? And I'm talking broader market here.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [5]

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Broader market in which way? I'm sorry. With the lab testing, you're saying?

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Bobby Burleson, Canaccord Genuity - Analyst [6]

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No, in terms of retail sales. Like, what is the demand that you guys are expecting for the broader market second half over first?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [7]

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Of course. We're definitely more of a demand. As we saw, and as Tina mentioned, looking at a growth again quarter over quarter of 45% to 50% and even greater in Q4 as more supply and our own cultivation comes online.

We are seeing more and more dispensaries coming online. As we mentioned, we picked up over 80 of them just Q2 and anticipate to see that continue to grow throughout 2019 and into 2020 as we continue to see more and more enforcement coming from Sacramento on the black market. There's definitely a noticeable crackdown really in the last probably 60 days on the black market that's been ramping up. So we are very optimistic on the second half of the year.

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Bobby Burleson, Canaccord Genuity - Analyst [8]

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That's great. And on that 87 dispensaries I think you guys picked up in Q2 in the just-reported quarter, what is your penetration rate now? I think it was around 84% before. Have you guys recalculated that based on that additional 87?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [9]

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Yes, it is roughly flat.

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Bobby Burleson, Canaccord Genuity - Analyst [10]

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Okay.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [11]

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And so yes, we are right in there. We typically range anywhere from 83% to 85% depending, again, as things flow through. And so again, as you can see, there's a fair amount of dispensaries opening up in the market.

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Bobby Burleson, Canaccord Genuity - Analyst [12]

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That's great. And you talk about a couple of different ways to think about growth. You've got the dispensary coverage, right, where you guys are around 84%. And then there's the actual penetration in those dispensaries in terms of the amount of revenue you might be doing on average. And obviously, the mix of the type of revenue.

But just wondering kind of high level, do you have any kind of statistics that describes how penetrated you are on average into the dispensaries that you are shipping into?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [13]

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Sure. We don't actually have specifics as the dispensaries are so diverse in the way that they are mom-and-pop to large chains and it varies. It is a huge focus for us. Besides just picking up new dispensaries, we are -- and Mark Russ, our VP of Sales, is very focused and that is where Joe touched on the pay-for-performance -- is not only picking up new dispensaries but also picking up additional shelf space in those dispensaries across all different brands.

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Bobby Burleson, Canaccord Genuity - Analyst [14]

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Okay, great. And you are reclassing your revenue a little bit, moving some of the bulk activity into distribution revenue. But within that, house or owned brand or agency and distribution, it sounds like you're going to be looking for some larger relationships in that distribution category itself and maybe consolidating a little bit into a smaller number of larger relationships. Any update on progress securing large customers for that third segment?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [15]

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Definitely, and Joe maybe might want to touch on that. But Platinum Vapes was obviously a big partnership coming in, along with we've secured some pretty good partnerships with some large cultivators and locking up all their supply.

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Joe Bayern, Indus Holdings, Inc. - President [16]

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And I think the vision is to create your more strategic partnerships across both agency anticipated brands. Most of our focus thus far has been on agency brands -- Platinum Vape falls into that category -- because most of our experience has been that people want sales representation as well as distribution. Or at least the people we're talking with.

So that's where the agency differs from distribution, where we are just delivering it to the dispensary. And I think we've started several constructive discussions with what we think are compelling companies and brands. And so we are filling our pipeline with opportunities in the distribution area. So I think now that our renovations have been complete in Salinas and we are getting our LA operation up and running, we'll have more capacity to bring on larger brands.

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Operator [17]

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Doug Cooper, Beacon Securities.

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Doug Cooper, Beacon Securities Limited - Analyst [18]

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First of all, I'm on the road right now. So I checked just before the call; the numbers aren't up on SEDAR yet. When do you expect those to be in SEDAR?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [19]

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We are expecting to file on Monday (technical difficulty) to SEDAR.

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Doug Cooper, Beacon Securities Limited - Analyst [20]

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Monday?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [21]

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It probably will be Tuesday, Doug, at market close.

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Doug Cooper, Beacon Securities Limited - Analyst [22]

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Sorry, you're talking September?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [23]

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No, this coming Tuesday in August.

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Doug Cooper, Beacon Securities Limited - Analyst [24]

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Okay, the market is not closed on Monday. Okay, after the market close, you mean? Okay.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [25]

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After the market closes, correct.

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Doug Cooper, Beacon Securities Limited - Analyst [26]

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Okay, got it. So what is the cash position of the Company as of June 30?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [27]

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At June 30, we have $24.8 million in cash. $10 million of that is restricted cash and that's relating to the [premium vape], $10 million that is sitting in escrow.

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Doug Cooper, Beacon Securities Limited - Analyst [28]

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Okay, so $24.8 million, including $10 million restricted?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [29]

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Yes.

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Doug Cooper, Beacon Securities Limited - Analyst [30]

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Correct, okay. Just getting back on the gross profit line, you said it was $1.5 million. Is that excluding the biological asset, you said? Or including the biological asset gain?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [31]

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The $1.5 million is before the biological asset adjustment.

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Doug Cooper, Beacon Securities Limited - Analyst [32]

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Okay. That was a positive adjustment, correct?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [33]

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Yes.

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Doug Cooper, Beacon Securities Limited - Analyst [34]

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Okay. So $1.5 million, so 16% excluding the biological asset. And when we think about the gross margin per segment, and we talked about it before, is there any reason to think that those gross margins have changed, excluding the impact on the spot price of flower?

Like how much of an impact did the increase in spot price of flower have? And can you think about it on a pro forma normalized basis if spot prices decline, as presumably some of these permanent licenses come on? If spot prices return to a more normalized level, what would gross margin have been, do you believe?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [35]

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Well, we haven't done that specific math calculation for you, Doug. But just to give you some background information, last fall, flower was selling for $800 a pound. It is now $1,600 a pound. So we've seen a doubling of the cost of quality flower that we are able to put on the spot market. So that has a significant impact throughout our own products also and into definitely through our bulk flower that we're selling.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [36]

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And Doug, I can jump in. Joe and the team, we have spent quite a bit of time working with new cultivators and locking in a pretty fair amount of product for Q4, the end of Q3 and Q4, that is at a lower price. So we -- and then obviously with our cultivation coming on board, that will help offset that greatly.

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Doug Cooper, Beacon Securities Limited - Analyst [37]

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Right. And when we think about 2020 and your growth expectations in there, what percentage of your own needs will be provided by your cultivation when it is fully ramped up? How should we think about that? Or how much of your product needs will be needed to go on the spot market?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [38]

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For flower, we'll be able to supply the majority of our Cypress Cannabis brand with all of our own flower. Where we will be looking to purchase flower is for our House Weed brand, which is our lower epic weed for every day, and then trim.

So our extraction facility can process about 600 pounds a day and run 7 days a week anticipated for next year. So that is 4,200 pounds a week of trim. Our cultivation is expected to produce about 1,000 pounds of trim a week next year. So that will be the real area.

Now again, that 1,000 pounds of trim a week should supply us with the material we need for our brands when it comes to crumble and shatter and everything else. With the additional stuff that we will buy in the open market or the spot market would go into bulk sales and different things like that. Supplying other brands.

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Doug Cooper, Beacon Securities Limited - Analyst [39]

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Okay. Joe, you mentioned -- I guess you talked about the capacity utilization of the greenhouses themselves. You talked about 35% year to date, up to 75% Q3 and then Q1 up to 100%. I mean, one of the I guess thoughts, our thoughts on the infrastructure of the Company is the kitchens are built out, the distribution, the extraction equipment is there. What are those assets running at right now?

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Joe Bayern, Indus Holdings, Inc. - President [40]

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You're talking about the -- outside of cultivation you mean, Doug?

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Doug Cooper, Beacon Securities Limited - Analyst [41]

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Yes, outside of cultivation. Like the extraction equipment, the kitchens, that kind of stuff. I'm assuming it is pretty low, right?

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Joe Bayern, Indus Holdings, Inc. - President [42]

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It's pretty low, yes. I would say we are probably at 25% of our utilization on our extraction equipment. We have -- and again, one of the limiting factors in the first half there has been just availability of trim at the right price. And I think as far as topicals and edibles, I think we are probably at 25% to 30% of our capacity.

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Doug Cooper, Beacon Securities Limited - Analyst [43]

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And I guess to that end, when we talk about CapEx to get funded, outside of the remaining CapEx to get the LA facility up and running, the Salinas facility, is there any material CapEx required to get the infrastructure up to the point where it can start generating to the level we all hope in the next couple quarters?

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Joe Bayern, Indus Holdings, Inc. - President [44]

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I think on the manufacturing side, there's very little CapEx required. We talked about the CapEx plan for cultivation, so that's already underway. And I think the LA warehouse would be the other use of capital in the near future. But other than that, I think we are already funded on most of the capital projects.

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Doug Cooper, Beacon Securities Limited - Analyst [45]

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Okay. And can you give us an idea of how much capital is required to finish off the greenhouse in LA?

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Joe Bayern, Indus Holdings, Inc. - President [46]

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The greenhouses for the most part are in good shape. I think we are looking at about another $1 million, $1.5 million on finishing that off because everything is here and ready to go as we expand through. And the big thing is our power upgrade happening in three weeks. And again, all that infrastructure has been in place and we are just waiting for EG&E to connect us.

There is one other piece of equipment that we are installing in about 30 days. We just received a permit actually today and that is a $1.6 million flower packaging line, which we've already paid approximately 50% on. This has been built over the last probably six to nine months and is finally ready. And it will enable us to package flower at a much reduced cost. As we look at right now, we have roughly 60 people at times packaging flower by hand and that will reduce down to, I believe, about five.

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Doug Cooper, Beacon Securities Limited - Analyst [47]

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Okay. And then the buildout of the LA facility?

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Joe Bayern, Indus Holdings, Inc. - President [48]

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The LA facility, we're still getting all the bids in. You're probably looking at roughly $2 million, Tina, $2.5 million?

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Tina Maloney, Indus Holdings, Inc. - CFO and Corporate Secretary [49]

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Something like that. And (multiple speakers).

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Doug Cooper, Beacon Securities Limited - Analyst [50]

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so $2.5 million? And then I guess finally, the Oregon and Vegas facilities coming with W Vapes, is there any CapEx required for those assets?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [51]

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There is no CapEx at the moment. There's opportunity for us to expand on that. And we are working with our real estate partner also as we've done in other projects with TI money to help us cover those expansions if we decide to fast-track them.

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Operator [52]

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[Stephen Boland], N4 Financial.

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Stephen Boland, N4 Financial, Inc - Analyst [53]

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Two questions. You mentioned a lot of [obvi] that contributed to the growth this quarter: more dispensaries, more capacity on your side, and more shelf space. Is it possible to quantify which -- was it a blend that helped to grow it? Or which one would you say contributed the most to the growth in the quarter?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [54]

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It was definitely a blend. I don't have the exact numbers, and I know Tina is putting everything together still that we'll be releasing out next -- financials, but I don't have that right here. Obviously with the addition of 87 more dispensaries, that is certainly an uptick, along with average order size.

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Stephen Boland, N4 Financial, Inc - Analyst [55]

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Okay. And then the second question on the shortage of raw material, is that possible that -- how elastic is your pricing in your owned brands? Is that possible to pass some of that cost through into your retail pricing?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [56]

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Not really, and that's the struggle where we've had in our COGS for this quarter. We can on bulk sales and stuff like that, but as any brands, just as you would be if you were M&Ms, you can't really up the price if chocolate goes up per se. It's the cost of doing business for that quarter and we want to make sure we maintain the shelf space and the relationship with the dispensaries.

So again, we believe it to be very short term. And that we'll be able to, again, with our cultivation coming onboard and knowing the forecasting we have there, we feel comfortable that our COGS will come back into the appropriate place.

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Stephen Boland, N4 Financial, Inc - Analyst [57]

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Okay. And not sure you can speak to this yet, but just in terms of the acquisitions that are closing in Q4, certainly a fair amount of time now to do even more diligence on the acquisitions. Is it possible to talk about plans, synergies, anything that you've identified further since you made the original deal?

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [58]

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Sure. As I mentioned, we are running the day-to-day operations now in Nevada and Oregon. And we are already seeing savings across the board where we've brought in our integration manager, our VP of Integration. And as Tina mentioned, all of the back-office synergies, specifically with accounting all coming out of our offices here in California, cultivation, manufacturing.

And then as you look, they were running all of their expenses off of one single brand. We're now looking to add a fair amount of our Indus brands into each of those markets. So it will help offset those expenses also.

So definitely a lot of capacity in both those areas and we're excited to get the brands. As we mentioned before, the synergy between California and Nevada and even Oregon being neighboring states, there's a lot of brand recognition for our brands already in Las Vegas and Tahoe and throughout Nevada. And with 50 million visitors a year coming in there and a bunch of them from California, we think it's going to be a great market for us.

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Operator [59]

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We have reached the end of the question-and-answer session. And I will now turn the call back over to Robert Weakley for closing remarks.

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Robert Weakley, Indus Holdings, Inc. - Chairman, Cofounder, and CEO [60]

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Thank you again for joining the call and taking the time to get an update on our business. We look forward to talking with you through the third quarter and on our next earnings call. Have a great week. Thank you.

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Operator [61]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.