Sergio Patino: And just to add on the — you asked about the priorities, Scott. So the only priority just looking at the balance sheet is restructuring the debt. As you can see, we are in a very unleveraged position where we have annualized EBITDA $31 million with debt today or less than $28 million or so. So a ratio less than one. So we’re looking at that — and the second position in the balance sheet is with less than $1 million right now, so we’re looking at extending the maturity of the debt. And so we are actively looking at discussion with several different lenders and looking at different attractive term in it.
Scott Fortune: Real quick, focus on margins, more gross margins. Obviously, you’re moving up, steady pickup in EBITDA margins, it’s come from 3% to about 6% to 7%, you look long term 10% to 12%. But just a sense of the gross margin at the 26%, 27% level over the last six quarters. Are we going to start to see a little bit of inflection here as club membership, the leads kind of add on and just kind of talk about the white label products kind of expectation of margin expansion, or is it still just too competitive of store environment here and still challenging to really move up the gross margins from that level? Just more color on the gross margin side that would be great.
Raj Grover: So Scott, our gross margins have remained stable for almost like eight quarters now, right. We’ve remained between that 26% to 28% range. Although, the 28% was only achieved with the Manitoba SRF. Generally, it’s been around 27% so we’re not too far off it at all. I said this last quarter, in my call last quarter that we have this dominating position in Canada. We’re absolutely crushing it in terms of our bricks and mortar business. And we don’t want to let loose on that. When you’re generating $4 million a quarter prior and $5.7 million of free cash this quarter, I am not on a horse or in a hurry to raise our margins, which we clearly have an opportunity to do so. We want to really tighten up the margin, margin profile, keep it tight.
So we can basically get rid of some of the noise, some of the marginal players in the country that are just there, but they really shouldn’t be there, right? So that is our strategy. This is why we are holding on to the line on gross margins. We have also been pressured, to be honest, we’ve also been feeling the pressures from gross margin declines and sales declines in our e-commerce business, although they are all. We are still EBITDA positive in our e-commerce portfolio. There’s a good strategic reasoning why we bought these assets and there’s a good strategic reasoning why we are holding on to them. They’re not bugging us. They’re still EBITDA positive, right? A lot of our CBD competitors are no longer in business, a lot of the accessory players are no longer relevant.
So we are holding the line in this tight inflationary environment, in this high inflationary environment. And we will have a chance to up the gross margin profile, not only in our brick and mortar business, basically at will when we want to do so, because we are the dominant chain in the country, but we want to get rid of a little bit of this noise in terms of marginal players that are still in the country in Canada, in the bricks and mortar business. And also be alive in our e-commerce business to play when the real inning start globally in terms of CBD and consumption accessories, and seeds, and cannabis dispensaries opening up in other countries, we will have additional gross margin opportunity. We’re just being very careful on how we manage the strategy, although, it’s not hurting us.
We just produced $5.7 million in free cash flow.
Operator: Our next question comes from Frederico Gomes with ATB Capital Markets.
Frederico Gomes: I guess, my first question is, you mentioned the strength of your balance sheet, how you are under levered at this point and how your plan is to remain cash flow positive while growing. So I guess my question is given where your valuation is, and you also have decided buying as you mentioned, Raj. So how do you look at capital allocation at a potential share buyback at these levels?
Raj Grover: So Fred, like I said, we’re still in growth mode. We anticipate opening another 20 to 30 stores this year and we intend to do that from our free cash flow generation. I think it will be a little immature for a company our size that is growing at such a rapid pace. I mean, we’ve been growing at exponential rates over the last three, four years with Canada’s top growing companies as per Global Mail over the last three years, same thing with Financial Times. North America, we, in fact, all of America topped growing retailer in 2022 as per the Financial Times. So Fred, where we want our dollars to go is store growth not in share buyback yet. We are not there. Of course, we want that time to eventually come and it will come.
Right now, we are very focused on growth and managing our business extremely well and generating huge amounts of cash that can actually go back in growth. We have good two to three years of runway ahead, maybe even more than three years in Canada alone. Then we’re talking about the German opportunity. We’re then going to be talking about the US opportunity. So we’re going to need all the cash that we have. Although, I think we will be every quarter — the quantum of free cash flow may vary, but we absolutely intend to remain free cash flow positive as we ramp up growth here in Canada.
Frederico Gomes: And then my second question is on your cost structure. So I guess a while ago, you mentioned you were reviewing cost structure and trying to find efficiencies and you have been doing that in your results. So how much of that work has already been done and how much more do you think you have left here to find additional cost reductions?
Raj Grover: I’m going to pass this to Sergio, because I can talk forever, Fred. I want him to answer a couple of questions here. Sergio, go ahead.
Sergio Patino: So I will say you can see that in our P&L that there has been significant reduction in professional fees, G&A and even in the marketing aspect. I will say where are we in the journey is probably half of the journey. We still expect a significant improvement on the e-commerce side, on the international side of things on the operating expenses. But yes, in the last four quarters that has been the focus and it will continue to be in the next two to four quarters. We are actually implementing company wide internal controls, ERP implementation, new systems. So there are a few more initiatives that are on the go that will help us to continue to reduce that in the future, the D&A and professional fees in particular.
Operator: Our next question comes from Ty Collin with Eight Capital.
