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Edited Transcript of MEZ.V earnings conference call or presentation 2-Dec-19 1:30pm GMT

Q3 2019 Indus Holdings Inc Earnings Call

Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Indus Holdings Inc earnings conference call or presentation Monday, December 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Mitoulas;Investor Relations Contact

* Mark Ainsworth

Indus Holdings, Inc. - Executive VP, COO, Director & Co-Founder

* Robert Weakley

Indus Holdings, Inc. - Co-Founder & CEO

* Tina F. Maloney

Indus Holdings, Inc. - Corporate Secretary, CFO & Director

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Conference Call Participants

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* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* Jonathan Francis DeCourcey

Canaccord Genuity Corp., Research Division - Research Associate

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Presentation

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Operator [1]

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Greetings. At this time, we welcome you to Indus Holdings Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Bill Mitoulas, you may begin.

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Bill Mitoulas;Investor Relations Contact, [2]

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Good morning, and welcome to the conference call to discuss the Indus Holdings financial results for the fiscal third quarter of 2019. Before we begin, please let me remind you that during the course of this conference 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 and management does not undertake any obligation to revise any forward-looking statements in the future. This call has been prerecorded with Robert Weakley, Indus Holding's Co-Founder and CEO; Mark Ainsworth, Co-Founder and newly appointed Chief Operating Officer; and Tina Maloney, former Chief Financial Officer, who will go into detail about the company's financial performance results. The Q&A portion of this call will be open to analysts' questions where Rob and Mark will provide further insight into the company's performance, operations and go-forward strategy.

For those of you who may happen to leave the call before its conclusion, please be advised that this conference call will be recorded and archived on the Indus Holdings investor relations website page. And now with that, I'm going to hand over the call to Robert. Rob, please go ahead.

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [3]

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Thank you, Bill, and welcome, everyone, to our 2019 Fiscal Third Quarter Earnings Conference call. In addition to discussing our achievements and performance in the previous quarter, I'm going to take part of my time later in the call to discuss some of the recent decisions we've made to better position Indus for the immediate and long-term future along with our high-level strategy to create a pathway for profitability.

Last quarter, we discussed how we were fine-tuning our strategy to focus on 4 core pillars. The quality of our products, national awareness for our brands, distribution capabilities and expansion of our footprint. While we know we still have some work to do, and we anticipated the challenges, I will go into detail in a minute. We are also confident we will continue to deliver on our promise that will position us properly as a world-class consumer product company.

We ended Q3 with $10.1 million of revenue, a new quarterly revenue record, which was 4% above Q2 revenue of $9.7 million and 94% above prior year Q3.

Year-to-date, the company achieved $26.2 million in revenue with 140% year-over-year growth. While we continue to show quarter-over-quarter growth and continue to adjust based on current market trends, the higher revenue target we projected for Q3 was offset due to a number of factors.

One, we are unable to fill demand for branded flower, our largest product category due to: A, lower output from our Owned cultivation due to regulatory and PG&E delays in greenhouse renovations. At the beginning of 2019, we started renovating 2 of our 4 greenhouses in anticipation of receiving a power upgrade from our energy supplier, PG&E. While we had applied for the power upgrade almost 3 years ago, I am very pleased to report that we, at last, received the long-awaited upgrade from PG&E in Q3, and we are fast tracking our greenhouse renovations to be in a position to plant in Q1 and begin to harvest that full production in Q2.

B, the unavailability of bulk flower in the market to supplement our Owned flower at a price and quality level suitable for our branded products.

C, key supply agreements that failed to consummate in the quarter. Indus contracted for more than 2,000 pounds of flower in the quarter that was a combination of under promised yield, under promised potency or did not pass our compliance tests, resulting in more than a $3 million negative impact on revenue top line.

Two, the delay of product availability based on consistency of lab test results. A, our focus has always been on the high level of standards when it comes to product that leads to our warehouses. The continued inconsistency of labs has increasingly slowed down our speed to market. The greenhouse renovations, along with the adequate electricity supply, will allow us to increase our cultivation by 110,000 square feet as well as increase our [core] output from 1,000 pounds per month to 4,000 pounds per month. When all greenhouses are producing, this will reduce our flower costs by 40%. We will also increase our trim output fourfold. And most importantly, this will reduce our dependence on purchasing outside flower and trim to improve margins in all of our brands.

We are currently working towards finishing the installation of an automated flower packaging line, which has been 1 year in the making. This improvement will help us significantly reduce labor packaging costs by reducing 80 temporary packaging employees, increased margins and revenue per pound as well as overall productivity.

The ability to become self sustaining is critical to Indus' success. It will not only improve our margins, but it will bring us to profitability and positive cash flow far sooner than if we continue to purchase from contractors.

On the brand side, we continue to make great strides. Over the previous quarter, we placed a strong emphasis on rebranding many of our Owned and Agency brands and reintroduce them to the market. Humble Flower, a cannabis and CBD brand we acquired at the beginning of Q2 has been reimagined with new packaging. Humble is essential to our mainstream ambitions. This is a crossover brand that we started rolling out in Anthropologie stores in California and Oregon earlier this month.

Additionally, in Q3, we launched Kaizen medicinals, an Owned concentrate brand that we recently acquired. In December, we will also be reintroducing our Canna Stripe Gummies brand back into the [market]. We have been extremely focused on our Owned brands as the profit margins have proven to be much higher. We know consumers want California brands, and this gives us the ability to build long-term value as well as the ability to license or expand with partners in other states [at little] cost to Indus.

Finally, I wanted to note that Indus is fully Metric compliant in California. Metric is the state's track and trade system used to track commercial cannabis activity from seed to sale. We have been working towards full compliance for several months and are pleased to be compliant well in advance of the state's mandated deadline of the first of the year.

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

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Tina F. Maloney, Indus Holdings, Inc. - Corporate Secretary, CFO & Director [4]

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Thank you, Rob, and good morning, 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 U.S. dollars unless otherwise noted.

As Rob highlighted, we reported record revenue at $10.1 million for the quarter, up 94% year-over-year and 4% over the prior quarter. As we've noted previously, our brands are segregated into 3 categories, Owned, Agency and Distributed or third-party brands.

As a reminder, beginning in Q2, we reclassified purchase bulk sales into the Distributed brands category.

In Q3, approximately 42% of our revenue was from Owned brands, 40% from Agency and 18% from Distributed brands.

Owned brands grew 38% year-over-year, impacted by the marketing programs around products like ACME and across all our Owned brands.

Our Agency brand revenues grew 354% and Distributed brand revenues grew 47% compared to the prior year. Excluding adjustments for the fair value of biological assets, we experienced a gross loss on revenues of $5.5 million for the quarter compared to a gross profit of $2.4 million in the third quarter 2018 and $300,000 in the second quarter of 2019.

Gross margin, excluding fair value items, was a negative 75.3% and a positive 20.6% in the 3 months ended September 30, 2019 and 2018, respectively, and a negative 18.1% and a positive 22.1% in the 9 months ended September 30, 2019 and 2018, respectively.

The company recognized a decrease in adjusted gross profit and adjusted gross margin for the third quarter, primarily attributable to significant inventory adjustments, higher discount and increased raw material costs, a shortage of the flower and trim supply in the market have substantially driven up prices. The inventory adjustments included revaluation and write-offs driven by the company's decision to discontinue certain amending processes as a result of our internal quality metrics, changes in materials requirements and consistent laboratory testing in California and the overall economics of reblending and reprocessing.

Operating expenses were $12.4 million for the quarter compared to $2.9 million in the same period last year.

On a sequential basis, operating expenses of $12.4 million were up $4.0 million from the second quarter. The increases were driven by higher expenses, reflecting the increased volume and complexity of services required as the company's operations increased over the year. Those expenses included higher compensation expense due to increases in head count from the scaling up of operations, higher share-based compensation expense, higher insurance and increased professional fees associated with being a publicly traded company.

In addition, third quarter operating expenses include transaction costs related to acquisitions and the reverse takeover of $500,000.

As a result of the higher cost of goods sold and the increase of operating expenses, adjusted EBITDA was a loss of $16.8 million compared to a $3.8 million loss in the prior quarter. However, based on our analysis, approximately $8 million of those costs incurred in Q3 are not expected to reoccur in Q4 or in 2020.

As Rob mentioned, we certainly see the shortfalls of our Q3 performance and have already instituted plans to reduce costs and optimize cash. In addition to implementing the cost saving measures Rob mentioned previously, the key to achieving our financial objectives will be to finish the renovations at our cultivation facility, automate our flower packaging process and selectively expand [their] capabilities [in] extraction. Additionally, we will selectively add debt and equity financing as required.

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

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [5]

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We believe Indus will hit an inflection point, when the work on the greenhouses is completed allowing Indus to especially quadruple our annual output of flower and trim, automate the flower packaging process and complete targeted capacity improvements in extraction. We have taken a number of steps to enhance our cash position and continue to fund growth into Q4 and beyond including: one, we have secured asset-based financing, which includes approximately $1 million towards existing equipment and up to $1.5 million of planned new equipment purchasing.

Two, we have renegotiated our asset purchase agreement with W the brand out of Nevada and Oregon to release $10 million from our escrow account. The funds will be used to provide a reduced deposit of $2 million to the seller on the purchase price to purchase the existing building for $4 million pursuant to an executed building purchase option with $4 million reverting to Indus to be used for working capital and funding of capital projects.

Three, we have restructured our agreement with our IT partner WAYV to significantly reduce the fees on our Owned and Agency brands while expanding the use of their online promotional platform for distribution.

Four, we will be scaling back our investment in and support for noncore brands in 2020 to continue to build a sustainable and profitable platform for future growth.

Five, we have restructured our organization, resulting in over $2 million in annualized savings. In addition, we believe that the installation of the automated flower packaging line in combination with the streamlining of our operations will reduce temporary labor costs and improve operational efficiencies.

Six, we are in the process of reorganizing our sales structure and gaining leverage with our trade discounts. We believe these actions will enhance our profitability and sales growth.

Seven, we have also initiated a full review of all of our packaging and raw material costs to realize opportunities to reduce costs. The actions listed above will provide the resources needed to complete the key capital projects of finishing the cultivation, automating the flower packaging line and increasing capability and extraction, all of which we believe should be completed by the end of Q1 of 2020.

This will help ensure profitable growth in the coming quarters and create a strong foundation to build on the back half of 2020 and beyond.

While we're certainly facing a number of headwinds, we continue to see improvements in the fundamentals driving our business.

According to BDS, our #1 brand Cypress Cannabis, is now the #18 highest revenue grossing brand in California flower market, up from 92 since the beginning of the year, despite demand outstripping supply resulting in consistent out of stock situations.

Based on our estimates, we would have been squarely in the top 10 brands if we were able to meet demand. That's with a distribution level of 32% of the total number of dispensaries in California, which gives us confidence there is still a lot of runway left for growth in this [process].

In addition, we recently tested a new line of Live Resin vape products under our ACME brand, and they're off to a great start. We expect a full launch of 12 new SKUs in January of 2020. In mid Q3, we added a new agency brand called Platinum Vapes, which averaged $850,000 per month of revenue for the quarter.

We also increased the number of active accounts sold in the quarter by 5%. On the distribution front, we've increased deliveries per day by 56%, going from 46 to 72 deliveries, while covering approximately 90% of all the license dispensaries in California. In fact, we had over 12 days in Q3 with 100 or more deliveries compared to just 1 day in Q2. And most importantly, we increased our average delivery value by 10% [going].

Everybody knows that forecasting for a start-up company with exponential growth is a difficult proposition, especially in a nascent industry that's heavily regulated and evolving at a rapid pace.

Still, we've made tremendous progress building the foundation for a very compelling business and what will become a very lucrative industry.

Lastly, as announced on Friday, we have made some management changes that will get us over that last hurdle as we strive to achieve profitability.

First, our Chief Financial Officer, Tina Maloney is retiring. She has agreed to remain with us as we transition her responsibilities. Second, Joe Bayern, President, is also leaving the company. We thank them both for their contributions to the company.

Equally as important, and something I am personally extremely excited for is that Mark Ainsworth, Co-Founder and Executive Vice President will ascend to the role of Chief Operating Officer, effective immediately. Mark has been instrumental to Indus' upward trajectory since inception and will focus on successfully executing the plan.

We've made tremendous progress since we founded this company 5 years ago with a single brand and 4 employees to a nationally recognized team with a goal to achieve further dominance within the industry.

With that, I'll turn the call over to Mark Ainsworth.

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Mark Ainsworth, Indus Holdings, Inc. - Executive VP, COO, Director & Co-Founder [6]

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Thank you, Rob. It has been a long journey from where we started, and I couldn't be prouder of what we collectively accomplished. I know that we have a way to go to fully fulfill the vision we had 5 years ago and become a leader in the industry. For those of you who don't know me, I am a very behind the scenes kind of guy focusing on the nut and bolts of the operation. So the opportunity to become the Chief Operating Officer for this company was one that I meet with tremendous excitement.

I am more energized than ever, and I will be focusing on operations and execution while holding everyone accountable to the promises that we make. As I am based in California and have been since inception, I will oversee the day to day and will continue to invest my time in creating the best products and brands while utilizing a lean scale approach. You will be hearing more from me in the next few months, and I look forward to helping the teams stay on the path of profitability.

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

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [7]

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Thank you, Mark. Since our last call, we've achieved significant milestones, and I am very excited about the strategy that we've discussed and the direction that this company is headed. We are fortunate to have a team that recognizes the challenges we face, especially in such a heavily regulated state and as we look ahead to 2020.

We are very close to becoming cash positive on an operating basis, therefore, we need to remain laser-focused on our top priorities of finishing the improvements at our cultivation facility and exploring every opportunity to reduce expenses and preserve cash. I'm more optimistic about the future of our business than ever because I truly believe we have the right vision, the right platform and the right team to not only succeed in this industry but to become a true industry leader.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Doug Cooper with Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [2]

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[Pretty] -- not to oversimplify, I guess, the strategy going forward. But you need to raise revenue, increase gross margin and lower G&A. And so I guess, the greenhouse cultivation facility becomes a real critical aspect of that. And can you give us some guidelines, sort of just reconfirm what the production is today, say, in Q4 run rate as we sit here at the beginning of December? If you don't get the capital, I think you mentioned you need a few million dollars to finish -- if you get the capital to finish the CapEx needed, what the run rate would be then? And maybe if you don't get all of it, what the run rate might be at that point? And what's the sort of market bearing pricing for flower? And what do you think your cost would be to produce a pound in -- at the greenhouse? Let's start there.

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [3]

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In 2019, we have produced about 11,000 pounds of flower from the cultivation and about 4,000 of that coming here in Q4 because of running a full season harvest in greenhouses, 1 in 3 [that are the] 2 that are about to be -- that we're working towards being finished with the electricity, which adds about 110,000 additional square feet to our cultivation. So in essence, we'll be going from 8 grow rooms that we currently have today to about 30 grow rooms here in Q2.

On average right now we get about 250 pounds per grow room yield. What that does also is it reduces cost, the majority of your cost at the cultivation are fixed, except for electricity and trimming. Water is your other big expense typically, but we have our own well. And so the great thing is we don't have a cost there. So right now we're slightly over $500 a pound in cost, and we expect to reduce that cost by over 40% when everything is producing. So again, roughly next year, about 30,000 plus pounds of flower and trim coming out of the cultivation mainly because we'll lose Q1 in production. And then going into 2020 -- or 2021, we'll be sitting more around 40,000 to 45,000 pounds going forward there.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [4]

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Okay. And I'm assuming -- and what's the market price for flower? Like what would you be selling the Cypress at based on that production? What's the sort of market price?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [5]

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Sure. Right now, we sell Cypress for $1,600 a pound, wholesale. And as I had mentioned earlier, we literally can't keep it on the shelves. We're only supplying about 32% of the dispensaries in California, where we typically service about 90 mainly because we can only -- we want to make sure that we keep the shops that we service in stock. And so also with Metric, I think it's very important to touch on Metric compliance going into 2020. The trick is the seed sale tracking system for California and for the state that is going to really end the black market and specific black market flower getting into legal dispensaries or into the market. We hired somebody back in June that has 5 years plus experience from Colorado, same system there. He's now built the team of 4 or 5 individuals, and it's taken them about 4 months to bring us fully Metric compliant across the board from cultivation, extraction, manufacturing and distribution. And we think that's a huge -- it's going to be a big pinch point come January 1 when it's mandatory in California to be able to operate, you must have -- you must be Metric compliant. And so we think the price of flower, we'll see where that goes going into 2020. But as we saw in 2019, there has been a major shortage of legal flower.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [6]

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Okay. So just to recap, 30,000 pounds in 2020. You said $1,500 for (inaudible), that's $45 million of rev in flower revenue coming from the greenhouse. In -- to get that -- just to be -- to reiterate, the 30,000 pounds that you're talking, you earned a 16,000 run rate in Q4, say, to get that 30,000, how much CapEx would be required dollar perspective?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [7]

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Sure. It's about $4.2 million, and I can turn it over to Mark Ainsworth real quick. He can kind of step through what we've completed and what we have left as he is heading [that] up now.

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Mark Ainsworth, Indus Holdings, Inc. - Executive VP, COO, Director & Co-Founder [8]

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Yes. Thanks, Rob. We just got our power upgrade. We have been waiting for quite some time for that. We went from 400 amps to 4,000 amps, which will allow us to improve potency a little bit more on that, on the flower due to we can actually turn the lights up all the way and the greenhouses have been raised, the other 2. And we have replaced the walls, the roofs, the electricians are ready to start. We have our permits. So we're ready to roll, and that's what I have to say about that.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [9]

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Okay. Maybe just move over to the other, I guess, ancillary revenue that could accrue from the greenhouse is the extraction. Can you talk about what kind of raw materials could come out on the trim side from the greenhouse and what that could translate to revenue?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [10]

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Definitely. So I mean [we provide the one fixture] , flower to trim, so as we look at going for [11,000] pounds of -- over this year to 30,000 pounds next year, that's also about 30,000 of trim.

On average between 14% and 16% yield on-prem, we used 12% for our modeling just to be conservative. And so all that trim goes directly to our extraction facility where actually we've made some huge improvements also in Q3 there. We acquired a brand called Kaizen recently. And the gentleman, founder, [Dan Yoo] was [a kind of connoisseur who sold a] brand in Santa Cruz that was very popular, we were able to acquire that, bring them into our facility and [make some] improvement, both with the yield and quality as we go across things. And the biggest thing there is to understand is the pesticide issues. And I think Tina touched on it a minute -- a moment ago during her thing [is at] almost $7 million in inventory write-offs. And I think it's very important to understand that those write-offs of inventory is there. $0.4 million in oil that was the large write-off that has -- didn't pass our quality standards or lab tests for pesticides or different items. Those -- that oil can be remediated, but it takes time and takes up equipment usage. And right now we felt that the best usage for all of the equipment and the facility was to produce product coming from our farm with Q4, where we have all the trim and stuff coming in and put that on the shelf for now.

So not planning to sell that or remediate it in the next coming 6 months or so, it was a management decision to go ahead and write that inventory off, but we do plan on using that in the future and remediating it for future years' use.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [11]

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Okay. So basically, the greenhouse, you think once all the upgrades are done, this can support, I mentioned the $45 million to $50 million of the flower sales and the extraction sales are probably -- if you do the math, probably in the neighborhood of $20 million to $30 million. These have high gross margins, I'm assuming you're going to self-distribute, you have relationships with all the dispensaries. Now we moved it, and the gross margin should be significant given your costs that you mentioned earlier. So move to SG&A, I think in the MD&A, it said you had 325 employees. I mean revenue per head is pretty low, obviously. Can you talk about the cost savings you anticipate based on the new strategy of maybe less focused on Distributed brands, third-party Distributed brands.

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [12]

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Sure. I think that those 300-plus employees are employees as much as they [are employed from temp agencies] so that we can ramp up [based on product]. As I mentioned, the flower packaging that alone will (inaudible) of the solutions (inaudible). This volume we've been working on for over a year, it's about $1.6 million that we've invested into it. It's already paid for, and we're now just prepping the space for (inaudible) in January. It's been tested and everything is ready to go. And that will eliminate -- literally will go from about 80 employees a day that we have right now that package flower 6 days a week down to about 6 employees per day, and it will double the amount of yield that we get per day for the [market]. So that's one of [the pick].

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [13]

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Maybe I'll phrase it another way just because maybe other people want to get on. But on an annual basis, what do you think G&A and sales and marketing expense can get to -- get down to? What's your target?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [14]

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Sure. We finished about 8 -- our target is $5 million per quarter, somewhere between $5 million and $5.5 million per quarter.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [15]

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Okay. And then on the balance sheet, maybe just a comment on the balance sheet, you still have significant positive working capital as of September 30, maybe talk about your comfort going forward just on a stand-alone basis if you weren't able to raise any capital here in the next -- well, between now and the end of the year, let's just say.

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [16]

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Sure. Right now we feel we've got the working [capital] to maintain the business. We're really looking at the fast tracking of the greenhouses because the ROI is about 8 weeks [timing] (inaudible) [as simply growth] period for each of those rooms, and that's why we're just looking to fast track it. There is definitely -- Indus has a pathway, still to profitability and everything. It just takes longer. And so really looking at that [same] management approach moving forward to make sure that, again, if the terms of financing, things don't make sense, we look to just push the greenhouses out of it, and again, get a little leaner and really push everything to profitability and move that forward.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [17]

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Okay. Maybe -- sorry, just one -- my final question. The greenhouse, as I mentioned, becomes an important integral part of the strategy, I guess, going forward. Can you talk about who is, sort of, in charge of that to make sure it goes well and the yields -- or who's sort of overseeing that?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [18]

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That's Mark's main purpose right now, as we look at things, making sure that construction stays on schedule and on budget. And so we're pretty confident with the contracts, the contractors and everything that Mark has put in place.

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Operator [19]

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Our next question is from Jonathan DeCourcey with Canaccord.

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Jonathan Francis DeCourcey, Canaccord Genuity Corp., Research Division - Research Associate [20]

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Last caller was pretty thorough. So I don't have as many as anticipated, which is great. Just a quick question. First off, on the -- so you mentioned the $4.2 million in required CapEx to get to the 30,000-pound level next year. Can you tell us what of that has been spent or is that $4.2 million still required of that?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [21]

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That's the remaining balance, it's broken down. About $1.2 million left for greenhouse 3 and also another $1.2 million for greenhouse 4 (inaudible) greenhouse and then the finishing of dry rooms and everything else. Again, so as I mentioned with Doug, there is a -- because of the margin and the ROI on this, we would like to fast track all of it at the same time, there is a pathway to do it in steps where we would finish greenhouse 3, let that produce 1 cycle of yield and then that would pay for greenhouse 1 to be finished, moving it that way.

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Jonathan Francis DeCourcey, Canaccord Genuity Corp., Research Division - Research Associate [22]

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Okay. Great. And then another question I had was just regarding the -- not taking the wholesale flower from the customer, from the supplier. How would a robust testing environment have prevented that in an ideal situation? I guess the question is just, do you think there is a pathway here in the near term for our third-party testing companies to provide more of a comfort level for companies like yourself in taking on wholesale supply? Do you think that environment is getting better?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [23]

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Mark actually handles a lot of that. So I'm going to turn that over to Mark to answer that question.

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Mark Ainsworth, Indus Holdings, Inc. - Executive VP, COO, Director & Co-Founder [24]

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Yes. I mean we've been working closely with several labs. I mean the inconsistency of labs has been you can R&D test at one facility, and then R&D test at another facility when you have completely different outcomes, and the same thing happens in the compliance world. So we've sought out to work with some of the best labs that we feel have the most sensitive equipment in the market and their teams are very consistent, sample prep has been consistent, they have good processes. So we've started talking with several labs about doing a pilot program where they would do R&D tests on site. So we're working through a few LOIs or different agreements with a couple of labs that have pitched us to come inside and just do the R&D testing for us, and that would also allow us to test on the same equipment that is going to be compliance tested. So we feel that doing a partnership like that is really going to help us [beat the] market.

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Jonathan Francis DeCourcey, Canaccord Genuity Corp., Research Division - Research Associate [25]

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Okay. Great. And do you think that there is increasing -- you talked about the testing also causing a challenge on delays of new product development in addition to kind of building up those partnerships? Do you think that there -- the testing labs are starting to get more capacity here in the near term so that those delays go away?

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Mark Ainsworth, Indus Holdings, Inc. - Executive VP, COO, Director & Co-Founder [26]

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I think we -- sorry, we work with about 8 different labs on the regular, our spend is quite high. A lot of it is our product also because we have the distribution we test for third-party brands going through distribution. It comes to us untested because they're a manufacturer, and then we do the compliance test. So we've really been able to kind of understand which labs are classing up [to] organizations, they have better customer service than they had a year or 2 ago, we have dedicated key account reps. Their science staff is more amenable to work with our team and understand where we -- where we're going too awry on certain things. So the relationships are getting better, the quality of talent on both sides has just tremendously improved. So I think definitely they all have capacity because they've all invested in it, and everybody's looking for customers.

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Jonathan Francis DeCourcey, Canaccord Genuity Corp., Research Division - Research Associate [27]

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Okay. And then final question for me, just had some background noise here. You mentioned the raw material trim at the greenhouse currently was approximately 1,000 pounds annually. What -- and what is that moving to with the built-out production cultivation facility?

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [28]

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Sure. So both trim and flower will go from about 1,000 pounds to 4,000 pounds a month, about 1,000 pounds a week. And again, that being our highest margin product across the board, obviously, it has a huge impact on Indus. And I think that's key to understand the success in 2020, and California as a state is you really need to be vertically integrated to be able to control your destiny and not be able to have the hiccups and the issues of flower, trim or oil on the spot market and the inconsistencies there. And so we believe this is really the point where Indus catapults with everything going.

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Operator [29]

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We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

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Robert Weakley, Indus Holdings, Inc. - Co-Founder & CEO [30]

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I just want to thank you again for joining the call and for taking the time to get an update on our business. We look forward to talking with you through the fourth quarter and on our next earnings call. Have an exceptional day.

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Operator [31]

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