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Sundial Growers Inc (NASDAQ:SNDL)
Q2 2020 Earnings Call
Aug 14, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to Sundial Growers second-quarter 2020 financial results conference call. [Operator instructions] The conference is being recorded. After the presentation there will be an opportunity to ask questions. Yesterday afternoon, Sundial issued a press release announcing their financial results for the second quarter ended June 30, 2020.

This press release is available on the company's website at sndlgroup.com and filed on EDGAR and SEDAR as well. Presenting on this morning's call, we have Zach George, chief executive officer; Jim Keough, chief financial officer; and Andrew Stordeur, president and chief operating officer. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated.

Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. I'd also like to note that we are conducting the call today from our respective remote locations. As such, there may be brief delays, crosstalk or minor technical issues during this call.

We thank you in advance for your patience and understanding. We will now make prepared remarks, and then we'll move on to a question-and-answer session. I would now like to turn the conference over to Zach George.

Zach George -- Chief Executive Officer

Good morning, and thank you, everyone, for joining us on our second-quarter 2020 earnings call. As the COVID-19 pandemic continues to affect global markets and people around the world, we hope that everyone is staying safe and healthy during this time. Before we discuss our operations and our second-quarter results, I want to take a moment and address the impact of COVID-19 and how Sundial is adapting during this time. First and foremost, our top priority continues to be the health and safety of our employees.

Sundial quickly activated our emergency operations center back in March. Our response team, which is comprised of key leaders from across the company, has been monitoring the situation daily and has implemented a business continuity plan to support its employee base while continuing to develop and produce reliable, high-quality products that meet the needs of our consumers. I'm proud of how our decisive team has executed on this plan. In accordance with the guidance of provincial and federal health officials to limit the risk and transmission of COVID-19, we've implemented mandatory self-quarantine, travel and sanitation policies, as well as social distancing measures.

We continue to be committed to our stringent procedures to ensure the protection of our employees and consumers along with achieving minimal disruption to our operations. Sundial did not experience any material disruption to production and processing activities in the second quarter related to COVID. Racial and diversity disparities continue to be prevalent in workplaces across the country, and the swell of nationwide and international protest and demand for change has not gone unnoticed by Sundial. We are proud to support and have signed the BlackNorth Initiative led by Wes Hall.

BlackNorth is an initiative that is challenging Canadian leaders to commit to specific actions and targets designed to end anti-black systemic racism. Among other things, the initiative set several specific goals such as having at least 3.5% of executive and board roles in the company held by black leaders by 2025. Social justice starts at home. We need to and will address our hiring practices and corporate culture, as well as any potential conscious or unconscious biases in our leadership.

There are many ways to get diversity wrong, and we want to choose the hard right instead of the easy wrong decisions. Diversity for us isn't about checking boxes or hitting hiring goals. We need to take concrete actions. We are committed to continuing to learn, listen and lead on action to address diversity, discrimination and racism.

To ensure we reach our BlackNorth Initiative goals, we are committed to review and improve our diversity policies and put real actions in place that support long-term systemic solutions. August 1 marked Sundial's one-year anniversary as a public company. While the team has accomplished many important milestones, to state that Sundial shareholder return profile since the IPO has been disappointing would be an understatement. Over the last six months, our newly constituted management team has worked hard to effectively reset the business.

We have made solid progress on advancing our core objectives, including improving our financial flexibility, narrowing our operating focus and lowering our cost structure. But there is still significant work to be done to deliver on innovation, improve capacity utilization and reduce our cost of goods sold. In the second quarter, the team achieved the extremely difficult task of growing revenues by 44% while reducing SMG&A costs by 35%. In addition, our cash burn rate was reduced by 38% on a sequential basis.

To achieve this result in the span of a single quarter is a phenomenal accomplishment. Our team continues to deliver on the mission of transitioning from a business model that was entirely reliant on wholesale revenue to one focused on branded products. Not only did branded products reach an all-time high of almost 70% of total revenues this quarter, but our average gross selling price per gram of branded product actually increased by 11% to $5.67 per gram versus Q1, largely driven by our success in the vape category. As we relentlessly strive for continued improvement, we've made some very difficult decisions this past quarter, including additional head count reductions, the sale of high-quality assets and the curtailment of our cultivation activities.

We are intently focused on reducing our cost of goods in the coming months. Our leadership team has formed a task force to identify ways and areas for additional strategic cost-cutting in our cultivation and production processes. It is essential that we become more competitive versus our peers and the illicit market as consumer demand shifts and new products are introduced. These initiatives, along with continued strong consumer demand and increased sales levels to date in 2020, should position us well for the balance of the year.

Sundial's success will continue to be driven by delighting our customers with branded product offerings and capturing additional market share with a focus on inhalable products. We are pleased to see our quality brands resonating with consumers. We have strong foundational market share in Canada and are excited by the growth we are seeing in the broader market. To develop trusted cannabis brands that resonate with consumers, it is critical that we deliver consistent, high-quality products.

Andrew Stordeur will provide more details around this in his update. As the industry in Canada continues to grow, we believe that Sundial is well-positioned to meet evolving consumer preferences by being a consumer-centric organization with data-driven consumer insights and analytics. While Sundial remains focused on its core strategy, the board of directors has determined that it is prudent to conduct a review of potential strategic alternatives to ensure that all opportunities to maximize value are explored. Sundial has engaged ATB Capital Markets as financial advisor to assist with this review.

There is no assurance that this review will result in a transaction of any kind, and the company does not intend to provide any update or additional comment on these matters until the board approves a specific transaction or otherwise concludes the review. While we are pleased to be one of a small handful of Canadian LPs able to post quarterly revenues greater than $20 million, we remain focused on the intense competitive landscape and the need to gain greater scale to reach sustainable profitability. We view the Canadian market as a compelling long-term opportunity, but the industry is still in its infancy, and growing pains are part of the current reality for all LPs. We are only just starting to see evidence of true brand loyalty among consumers.

We are carefully monitoring commoditization in the flower market and have witnessed an epic 80% increase in product SKUs in the marketplace since the beginning of this year. It is unlikely that we will see this quarter's 40% growth in sequential revenue continue at the same pace in subsequent quarters, and fortunately, Sundial's success does not require it. We continue to believe that the Canadian cannabis industry will begin to take the shape of an oligopoly over the next 24 months. This path will likely see both consolidation, which will help leverage corporate cost structures, and business failures as investors back away from smaller entities that will never achieve the scale required to become sustainably profitable.

Inventory liquidation and noneconomic pricing decisions will only accelerate this process, ultimately bringing greater industry stability to be enjoyed by surviving LPs and their stakeholders. Sundial expects 2020 to be a transition year as the company has reset its strategic focus, streamlined its organizational structure and implemented a comprehensive operational and supply chain productivity optimization program. Our restructuring plans already helped strengthen Sundial's position. We expect to continue to invest in our strategic initiatives, and we remain focused on reaching sustainable profitability.

I would now like to turn it over to Jim Keough, Sundial's CFO, to give you a financial update.

Jim Keough -- Chief Financial Officer

Thank you, Zach, and good morning, everyone. I would like to remind everyone that all amounts are in Canadian dollars unless otherwise stated, and as we were still in the early stages of start-up one year ago, the comparative period that I refer to will be Q1 2020 unless I indicate otherwise. Also note that I will refer only to continuing operations, which will exclude results from our U.K. ornamental flower business as it was sold during the quarter.

In Q2 2020, we made significant strides in optimizing our asset base, reducing our overall cost structure and recapitalizing our balance sheet for sustainable profitable growth. We are pleased with our financial results for the quarter, particularly our cannabis revenue growth. We completed the sale of our U.K.-based Bridge Farm assets on June 5. As previously disclosed, we sold Bridge Farm to the former management sellers in exchange for the following: the assumption of $45 million in debt under our term debt facility, which then totaled $115 million; the assumption of contingent consideration liabilities from the original Bridge Farm acquisition agreement; and the cancellation of approximately 2.7 million Sundial common shares held by the former management sellers.

These shares were issued in relation to the original Bridge Farm acquisition. Along with the sale of Bridge Farm on June 5, we amended and restated our credit agreement and extinguished our term debt facility, as well as raising additional funds by way of issuance of convertible notes in the amount of USD 18 million in aggregate principal. Under the amended and restated credit agreement with our senior lenders, we eliminated all financial covenants with the exception of a minimum cash balance of $2.5 million until December 31 of this year or one quarter later under certain circumstances, as well as a covenant requiring us to raise USD 10 million of equity by December 1, 2020. Furthermore, quarterly principal payments of $2.1 million have been deferred, with the first payment now due on September 30, 2020.

With respect to the term debt facility that was outstanding, the remaining $73.2 million of principal and accrued interest that was not assigned to the former Bridge Farm management sellers was extinguished and replaced with $73.2 million in senior second-lien convertible notes. These notes were convertible into common shares at an initial price of USD 1 per share. As part of this transaction, common share purchase warrants were issued to acquire up to 17.5 million common shares at an initial exercise price of USD 1 and an additional 17.5 million shares at an initial exercise price of USD 1.20 per share. We have also improved our liquidity position with the issuance of USD 18 million in unsecured convertible notes.

The notes do not bear interest except upon triggering certain defined events, and they mature on June 5, 2022. Overall, the amendments we've made to our debt facilities and the follow-on convertible notes issuance has improved our liquidity and relieved lender restrictions to allow us to execute our go-forward business strategy. Turning to our Q2 2020 financial results. We reported net revenues of $20.2 million, reflecting a 44% increase over the previous-quarter net revenues of $14 million.

We recorded an adjusted EBITDA loss of $3.9 million for the second quarter, which was a $7.7 million improvement over Q1. Our net loss from continuing operations amounted to $31.6 million, primarily reflecting noncash charges related to fair value adjustments and an inventory impairment provision of $13.1 million on dried cannabis and cannabis extracts related to adjustments made to our product portfolio in order to meet rapidly evolving consumer demands. As Zach mentioned, we've taken some difficult but decisive actions to improve our cost structure. Sundial's G&A costs related to cannabis operations were reduced by 28% from $10.6 million to $7.7 million in Q2 when compared to Q1.

The reduction in our workforce required to adjust to market conditions, and a focused review of all expenditures created this improvement. Sales and marketing costs decreased from $1.8 million to $0.5 million in Q2 when compared to Q1 as certain costs were deferred. We're budgeting for increased investment in sales and marketing expenditures in the coming quarters. During the quarter, we harvested approximately 6,400 kilograms of cannabis and sold just over 6,000 kilograms.

This compares to last quarter where we harvested approximately 10,300 kilograms and sold 4,400 kilograms. During Q2, we curtailed cultivation and harvesting capacity utilization in response to market conditions, including an oversupply of product in the industry and adjustments by provincial boards in their inventory management strategies. We are aggressively accessing opportunities to maximize the value of our existing inventory. Our modular grow room configuration positions us to access additional production capacity as the need progresses.

Sundial is focused on opportunities for increased capacity utilization and throughput in future quarters to decrease the manufacturing overhead burden on production and reduce our cost of goods sold. On average, our gross selling price per gram equivalent of branded products was $5.67 per gram in the second-quarter 2020, including provisions, compared to $5.11 per gram in the prior quarter. The change in average gross selling price was primarily due to successful increase in vape sales. Average gross selling prices for unbranded flower in the second quarter were $2.82 per gram, up from $2.74 per gram in the previous quarter despite competitive pressures in the wholesale market as a result of industrywide increased inventory levels.

Adjusted gross margin before inventory impairment and fair value adjustments for Q2 2020 was $2.9 million, compared to an adjusted gross margin of $0.5 million in Q1 2020. This represents an adjusted gross margin of 14% of net sales for the current quarter. For the quarter, we reported an adjusted EBITDA loss of $3.9 million in comparison to an adjusted EBITDA loss of $11.6 million in the prior quarter. Included in our adjusted EBITDA loss this quarter was restructuring costs of $2.4 million incurred as we continue to reduce our overall cost structure and optimize our operations.

With respect to our balance sheet, as at June 30, we had cash and cash equivalents of $21.6 million and total debt, including convertible debentures, with a principal value of $177 million. We continue to take measures to address liquidity, including disposition of noncore assets, monetization of inventory, minimization of all obligations across our cost structure, operational efficiency improvements and maximization of cash flow from operations. Subsequent to the quarter end, Sundial has filed a registration statement for a mixed shelf prospectus, allowing it to issue common shares in an amount of up to USD 100 million at its discretion and intends to establish an at-the-market equity program covering issuances of up to USD 50 million. As we have mentioned previously, we've fully completed construction of our cultivation facilities in Olds and are now limiting capital expenditures to essential expenditures.

As such, we are reviewing alternatives to our planned extraction and processing facility at Olds, where the largest part of our 2020 capex budget was allocated. From a maintenance capex standpoint, we anticipate spending about $500,000 per quarter to maintain current capacity. Overall, we're very pleased with the progress we've made to strengthen our balance sheet and liquidity position. I'll now invite Andrew Stordeur, president and COO of Sundial, to provide some remarks about operations.

Andrew Stordeur -- President and Chief Operating Officer

Thank you, Jim, and good morning, everyone. The Canadian cannabis industry continues to be extremely dynamic as the variety of offerings and the accessibility of quality legal product becomes more readily available. We believe that our brand portfolio and our agile production footprints give Sundial a competitive advantage to better meet the demands of our consumers and customers as preferences evolve. So let me update you on some of the progress Sundial is making.

We have been consistent on our sales mix strategy over the past three quarters as we focus on driving better market penetration with our branded product offering versus the wholesale channel. Our Quarter 2 branded net sales increased to 69% versus 54% in Quarter 1 2020, which puts us on track to deliver an 80% branded and 20% wholesale business mix by year-end. Our recreational market share continued to show momentum in Quarter 2, with growth in each of the four regions nationally: West, Ontario, Québec and Atlantic Canada. At the end of June, we have reached a 4.5% market share nationally, compared to a 3% market share in Quarter 1.

Ontario will be a key market for our commercial business as we ramp our provincial investment in conjunction with the province's store expansion efforts. As at the end of July, Sundial has moved into the top 10 licensed producers within the Ontario market as measured by market share, and our expectation is that we will continue to make positive traction in Canada's largest province year to go with continued investment in our people and our brands. Quarter 2 was also our first full quarter in the Province of Québec, and we are extremely pleased with how our brands have quickly resonated with Québec consumers. 22% of our revenue in Quarter 2 came from the Province of Québec, with our Top Leaf brand leading our sales mix.

We remain optimistic about the opportunity in the province and how our brands are positioned to meet the needs of Québec consumers. Our vape product portfolio continues to resonate with consumers and gain traction, representing 26% of our total revenue in the quarter. And as a reminder, the SQDC does not allow vape sales currently in the Province of Québec. What is becoming more imperative to consumer preference in the vape segment is products that only contain cannabis or cannabis extract and have no added ingredients.

Our vape portfolio delivers against its brand promise consistently, and we remain encouraged that our focus on the high-growth inhalable segment will allow us to further differentiate and drive meaningful share growth in this segment. In Quarter 2, we continued to expand our product offering through several strong launches: the introduction of Palmetto flower with the Nuken 3.5 gram whole flower SKU and the release of the Raskal OG 510 vape cartridge. We've only introduced the Palmetto brand in select provinces year to date, but we expect to expand distribution nationally later this year. We also released under our Sundial brand Blue Nova flower, the CBD 20:1 sublingual oil and the Lemon Riot disposable vape cartridge.

And finally, we were very pleased to release another Top Leaf brand offering with Bubba flower, which launched the THC potency over 25% and quickly became one of the company's top-selling flower SKUs. Top Leaf's Four-Star General 510 vape cartridge was also launched in the quarter and was well received by consumers. As Jim had mentioned, we expect our sales and marketing investments as a percentage of net revenue to grow meaningful during the second half of 2020 as we develop a holistic holiday campaign to drive in-store and online brand awareness. Sundial's innovation pipeline continues to strengthen as we will be launching concentrate line extension to Quarter 4 for both Top Leaf and Grasslands in the form of bubble hash, rosin and live rosin.

Select entry into the edibles segment is also being considered as we look at several third-party manufacturing opportunities with the right economics. Sundial's approach to the value segment remains simple under our Grasslands portfolio. We must remain competitive given the size of the segment, but we are not looking to lead price down further. We think this action is counterproductive to a healthy industry for all stakeholders.

Instead, we intend to shift the narrative with our customers around how to grow the category by focusing on optimal assortment, along with price and promotional strategies that deliver profit per gram versus a volume and all-cost approach. On that note, we are excited to be launching a 28-gram Top Leaf offering, providing the cannabis connoisseur a large-pack option to meet their specific needs. Timing of this launch is expected to be in Quarter 4 or the early part of 2021, and we anticipate this to be well received, given Top Leaf's positive traction with our consumers and customers nationally. Our supply chain team has done a tremendous job overcoming significant processing challenges during the first quarter of 2020 as our On Time In Full or OTIF metrics continue to surpass 90% in Quarter 2.

While it's certainly an encouraging trend, we want to keep that OTIF metric above 85% but below 100% on a year-to-go basis. Constant tension between supply capability and increasing demand is optimal to creating a more agile and consistent supply chain muscle. While Sundial has made meaningful progress on the commercial and operations fronts, we also certainly understand that building a sustainably profitable business centered around the consumer will require time to develop our brand portfolio and thoughtful choices on where and how we invest for future growth. The learning curve certainly remains steep for Sundial and the industry as a whole, but we remain encouraged in the progress made in Quarter 2 and how we're positioning our business momentum for the remainder of the year.

With that, I'd like to turn the call back to Zach for closing remarks.

Zach George -- Chief Executive Officer

Thanks, Andrew. In conclusion, Sundial continues to make progress in an uncertain environment. We have completed five quarters as a public company and are working hard to transition from a start-up business that has required significant cash consumption to a more mature, stabilized business that is a generator of free cash flow. I am proud of our team's focus and dedication while navigating through this unprecedented time.

Thank you, everyone, for joining the call. Take care, and stay safe. I will now turn the call back to the operator for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question is from Vivien Azer with Cowen. Please go ahead.

Vivien Azer -- Cowen and Company -- Analyst

Hi, thank you. Good morning.

Zach George -- Chief Executive Officer

Good morning, Vivien.

Vivien Azer -- Cowen and Company -- Analyst

Good morning. So my first question is on your revenues. So the mix improvement toward branded products is clearly healthy, and you can see that showing up in the ASPs, for sure, in terms of the sequential improvement. But I'm a little bit surprised that your ASP is like just holistically as low as they are, given that branded mix close to 70%.

So can you just offer a little color on like the offsets? I presume it's very aggressive wholesale pricing, but any other color would be helpful. Thank you.

Andrew Stordeur -- President and Chief Operating Officer

Yes. Hi, Vivien, it's Andrew. I can take that. So just clarifying the question, just in regards to the ASP in general for Q2 and lower based on what we saw on the provincial mix versus the wholesale mix?

Vivien Azer -- Cowen and Company -- Analyst

Yeah, exactly right, Yeah. Because I would think that like given that close to 70% of your revenues are now coming from branded products, that fundamentally your ASPs might be a little bit higher. So just trying to understand the offset or the drag. Thanks.

Andrew Stordeur -- President and Chief Operating Officer

Yeah. I think when you look at the -- when you look at our mix, we're pretty happy with the mix that we had as far as the branded side goes. And obviously, there is still a little bit in there, as you mentioned, in regards to the wholesale side. But our mix is kind of moving in the direction that we expected to.

So I'll just give you a little bit of color on that. And we anticipate still good, solid pricing on our branded portfolio, certainly as Top Leaf continues to build traction. But about 16% of our mix year to date is sitting in Grasslands, about 46% sits in Top Leaf, and the balance is really in Sundial. So we have solid mix in there as far as the brand portfolio goes on the branded side.

We anticipate that mix to continue to be the same. But yes, I think you're right. We're seeing a little bit of that wholesale number being there. And the 80-20 as far as how we're targeting for the balance of year is well on track as far as the split goes.

Vivien Azer -- Cowen and Company -- Analyst

Perfect. That's really helpful. Thank you for that. My next question is on your commentary around sales and marketing in the back half.

Seems reasonable enough that you would want to do something around holiday. That's kind of traditional CPG. and certainly, alcohol does it. But I think you used the word holistic.

So given the restrictions in the marketplace, I know it's competitively sensitive, but like just a high-level understanding of what that is and like order of magnitude like what we should be thinking about because that line item has moved around a fair bit just in the two restated quarters that we have. Thanks.

Andrew Stordeur -- President and Chief Operating Officer

Yeah, good question. Thanks, Vivien. Yeah. So I think you're right, as we look about kind of the occasions as far as how consumers shop, obviously, as you get into Q4, there's a big one.

We came out with a couple of campaigns, lighter versions as we got into the summertime, but we've kind of geared up aggressively, given the offerings we're going to have in the market, certainly anchored around Top Leaf. When I say holistic, I'm talking about kind of above and below the line. And certainly, the big area of focus for us is going to be in store, and we kind of call that store-backed marketing. So looking at all of our retail partnerships across the country, we've got a great opportunity to drive traffic.

Retailers are excited about the program. We started talking to them about this, and you'll see a lot of the activity that we're going to implement specific to retailers, specific to the regions focused on Top Leaf but very much about in-store experience driving kind of awareness inside the four walls of the store.

Vivien Azer -- Cowen and Company -- Analyst

Terrific. And last one for me is on vape. So Headset published some data earlier this week at the provincial level looking at category mix. It looks like vape is, I think you guys said, 26% of sales, so you're punching above your weight, which is great absolutely.

So just trying to think about like how you are like benchmarking your success. Like what are the KPIs? What do you think like the right market share is relative to the category mix in vape specifically?

Andrew Stordeur -- President and Chief Operating Officer

Yeah. We're -- we continue to be really optimistic. Obviously, we've been pretty consistent on the vape side. So I think we're where we expected to be on vapes.

But of course, Vivien, to your point, we actually think there's tremendous upside still in the category. There's certainly a lot of offerings that are coming out. We've actually had pretty good traction just based on the full cannabis broad spectrum offerings that we have in the market. So as far as that split of business, if you kind of look at it from a holistic standpoint as far as the industry goes, it's kind of following what we thought it was going to follow with regards to the size of that segment.

But as we continue to grow, we're going to continue to bring offerings. We're looking at a 1-gram offering as well in the back half. So the innovation is going to continue in vape, certainly, on Grasslands and the 1 gram. And we're going to bring out some new cultivars and strains on Top Leaf.

But I think as you look about -- we're not going to give real guidance around what the portfolio mix is going to be. But if we're sitting at about 11% total right now, I think we can double that as we get into what should be a pretty solid mix of segments for all of Canada, and we certainly want to take advantage of that. So we're certainly not done on vape. We've had good traction to date.

But the growth is still there, and we're pretty optimistic about that. Another thing we're doing on vape as well just as that segment continues to kind of move is there's a lot of opportunities there in regards to continuing to build a more profitable kind of vape offering. So we got a lot of initiatives inside of Sundial right now on how we best do that. So you'll see more offerings coming to market.

We're bullish on it. I think our products delivered. Consumers seem to like it. And if you look across the spectrum across all the regions, it's performing pretty consistently in all aspects.

I think we've now been eight or nine weeks in a row now in Atlantic Canada the No. 1 provider on vapes. So we intend to hold that, but obviously, it's going to be harder than it was just given all the entrants coming in.

Vivien Azer -- Cowen and Company -- Analyst

Understandable. Thanks very much for the color. I appreciate it.

Operator

Our next question is from John Zamparo with CIBC. Please go ahead.

John Zamparo -- CIBC -- Analyst

Thanks. Good morning. I want to get your expectations on gross margins over the next few quarters. The press release referenced trying to get COGS down a bit further, but it does seem like pricing's holding in maybe better than some would expect given market dynamics.

So just would like to get a sense of puts and takes over the back half of the year. Thanks.

Zach George -- Chief Executive Officer

Hey, John, this is Zach. I could take that. So we are expecting volatility in margins in the back half. We believe that stabilized margins of approximately 40% are achievable.

But with what we're seeing in terms of areas of price compression and competition in the marketplace, we expect volatility over the next six to 12 months.

John Zamparo -- CIBC -- Analyst

OK, thanks for that. And I may have missed it on the call, but I mean, your 2.0 portfolio as it stands now and where you want to go, is that accretive to margins or in line with it? Or is it a bit below? Is there start-up costs? How should we think about that?

Zach George -- Chief Executive Officer

Yeah. We're looking at a number of initiatives, and we'll only start to invest meaningful time and capital to the extent that they are accretive to current margins.

John Zamparo -- CIBC -- Analyst

OK, got it. Thanks. One of the potential outcomes of the strategic alternatives was an investment in others. I'm curious what you would look for in a potential investment.

I think you mentioned retail as a possibility. Is there a goal to vertically integrate so you could get preference for your own brands at store level? Or just what might you be looking for in a potential investment?

Zach George -- Chief Executive Officer

Yeah. So as you know, John, we have a strong focus in the premium category, which we believe is still very much in its infancy in the Canadian marketplace. So don't want to get you too focused on retail, I would say. We do see a number of opportunities where there are brands or collections of brands that we believe are gaining traction with consumers.

And to amalgamate those into an attractive portfolio where there would be operating efficiencies but also have them sit under a much more efficient nimble corporate structure would be a great opportunity to drive profitability. So you may see interest in the tier two LPs selectively at the corporate or brand level that we'd be looking at.

John Zamparo -- CIBC -- Analyst

OK, that's helpful. And then, one last one. Maybe we could talk a bit about innovation. Maybe if you could elaborate on what you have in terms of the pipeline for future products.

And particularly, I'm curious about concentrates. It does seem like pricing is a bit unattractive in the market right now versus the illicit side, so maybe there's an opportunity there. But I just would like to get your thoughts on that, please.

Andrew Stordeur -- President and Chief Operating Officer

Yeah. Good morning, John, it's Andrew here. A couple of pieces on that. I think we mentioned in the call that we've -- the inhalable segment for us kind of consists of concentrate.

That's always been kind of in the pipeline for us. We're getting ready to launch that in Q4. And to your point, just like in any other segment, there's certain price partitions where we're going to need to compete in. And if you look at the limited offerings that are on the market today, they're kind of all over the map.

So we're going to be launching the Top Leaf brands, as well as the Grasslands map or brand, and you'll see kind of those different formats play in those different price partitions accordingly. So that's going to be a big focus. And as I stated, that will be bubble hash, rosin and live rosin. Those are going to be kind of the three areas -- or three formats we'll be focused on from a solventless standpoint.

And then, we're also excited to kind of launch in the flower side a 28-gram Top Leaf. That's also in the pipeline as well for us as we build-out. And we're still looking at edibles as an opportunity, but certainly not a key focus area for us as we're, obviously, in that inhalable side and very focused on that side.

John Zamparo -- CIBC -- Analyst

OK, that's great. That's all for me. Thank you very much.

Operator

Our next question is from David Kideckel with ATB Financial. Please go ahead.

Venkata Velagapudi -- ATB Financial -- Analyst

Hi. This is Ven, David's associate. Firstly, congrats on the quarter. So I had a question on the market share data provided in the presentation.

Your market share improvement in the West and Québec is very strong, especially you had 6.5% market share in Québec without vape. Just wanted to understand the reason for lower market share in Ontario apart from a slower rollout of retail infrastructure. Do you see anything related to difference in consumer preferences or competitive dynamics across the provinces?

Andrew Stordeur -- President and Chief Operating Officer

Good morning. Thank you for the question. It's Andrew here. Yes, I'll take that one.

Maybe I'll start with Ontario. Yes, I think our whole strategy from the onset was to really anchor pretty strong in Western Canada, and we see our strongest share position in Western Canada. We're certainly seeing good share growth continue in Q2 as we ramp up those branded sales. Ontario, as we mentioned, is going to be a big focus for us commercially.

So we're investing aggressively there with both people and brand activation. And that's kind of working in conjunction, obviously, with the store rollout. And yes, we do see some slight variances certainly as far as how the consumer is looking and how the consumer is shopping in different regions. But for the most part, as we look at it from a macro segment standpoint, on the inhalable side, the split of that business in flower, vape and concentrates is pretty consistent.

The makeup of how that's working and what's resonating with consumers might be slightly different. But as far as our portfolio goes, we're seeing pretty consistent Top Leaf consumption. Consumers are really rallying against that brand. Sundial is pretty consistent as well.

And Grasslands is a bit higher in the market in Ontario. So it's certainly something we're watching as we make some decisions there with the portfolio. But relatively speaking, the macro view on those segment mixes is pretty consistent, and we're playing in those pretty aggressively.

Venkata Velagapudi -- ATB Financial -- Analyst

Yeah, thanks. That's helpful. And lastly, I wanted to understand your gross margin dynamics. In addition to revenue mix, what factors do you think will drive the gross margin over long term?

Andrew Stordeur -- President and Chief Operating Officer

Sorry, can you just repeat the question just so I heard that. I just want to make sure I got that.

Venkata Velagapudi -- ATB Financial -- Analyst

I think your revenue mix is currently having a substantial portion coming from wholesale segment. So I think that may be one of the reasons for your lower gross margin. So in addition to the revenue mix, do you see anything coming from the cost side to improve the gross margin over long term?

Andrew Stordeur -- President and Chief Operating Officer

Yeah, yeah, good question. So I think the strategy for us has been consistent. We're going to see an 80:20 mix on that branded side versus our wholesale channel. We're on track for that.

So we're going to continue to do that. I think in regards to margin and making sure that we're tightening it up, I think, absolutely, we've got some pretty aggressive initiatives inside the facility to make sure that we're managing that cultivation and production costs down accordingly. I would mention, look, I mean, at the end of the day, we're never going to be the lowest cost producer in cannabis in Canada just given our cultivation facility in the indoor. That said, we can make traction on ensuring that that price goes down and, obviously, helps with our margins.

And the team is certainly focused on that. So absolutely, to answer your question, that is a big focus for the back half of this year. It has been and will continue to be. And that's going to be ongoing.

And we certainly see tremendous opportunities to take some further costs out on that cultivation and production side, which is, obviously, going to impact margins on the positive side.

Zach George -- Chief Executive Officer

Just to add to Andrew's comment. Stating the obvious here, but the margins you're seeing today are reflective of cultivation and processing costs that have moved dramatically. So we've already made massive improvements and continue to gain more ground there. So we're excited to present the results of those as they flow through margins in future periods.

Venkata Velagapudi -- ATB Financial -- Analyst

Thank you.

Operator

Our next question is from Doug Miehm with RBC Capital Markets. Please go ahead.

Doug Miehm -- RBC Capital Markets -- Analyst

Good morning. A couple of questions. First one really has to do with pricing in the vape categories. And I know you have your partitions, but can you give us an idea of what you think is going to happen with respect to pricing in your view on the vape side over the next six months to a year?

Andrew Stordeur -- President and Chief Operating Officer

Yeah. I think it's going to come down, Doug, right? I mean, I'd love to say that pricing is going to remain as it is today with premium kind of leading the charge, which is what we're seeing, by the way, on vape, on the segment, but I also think we're going to see more offerings come into the market. You're going to see providers try to move through their inventory on oil. So I think the natural view is from our end, the industry's standpoint is you're going to see the value side of vape kind of move up as far as volume goes.

But I think the profitability and the profit pool still sits on that higher end. And I think your vape consumer is going to be willing to pay a little bit more, certainly, as we see a little bit more noise on these ingredients, additives and whatnot. And I think they're a little bit more conscious around vape than we've seen in the past. But I think high level, Doug, you're going to see more to the left on vape, no doubt about it.

That's why we're looking at Grasslands, but we're also looking at the larger play in Grasslands with the one-gram offering. But I don't think it's going to be as aggressive of a move that we saw going to the left that we did with flower.

Doug Miehm -- RBC Capital Markets -- Analyst

OK. And sorry, why is that we've heard from people that they're going to be pricing on a 50% discount soon?

Andrew Stordeur -- President and Chief Operating Officer

I can't comment on what other people have said, but 50% discount on vape?

Doug Miehm -- RBC Capital Markets -- Analyst

Yes.

Andrew Stordeur -- President and Chief Operating Officer

Yeah, that's certainly not something that Sundial is going to be doing. But we think that given our offering and given where the vape category has been, where we see it certainly in more established markets out of the U.S., that the elasticity is very different in vape than it is in flower. So can't comment around somebody making a 50% drop on vape, but I guess, we'll see when that happens.

Doug Miehm -- RBC Capital Markets -- Analyst

OK, perfect. Next question relates to whether or not the company received any COVID-related grants or benefits. Nothing was noted. And if there was nothing received, I'm curious as to why you didn't pursue those.

Jim Keough -- Chief Financial Officer

Doug, this is Jim. I'll jump in on that one. And we have carefully looked at all the programs that are available. We've not been able to access them.

We've not qualified for the programs available to date. There continues to be new programs rolled out as you know. And I believe that we potentially could -- that we will qualify for the wage subsidy -- the new wage subsidy program. But we have not finalized that, and we're continuing to work on that.

But to date, those programs are -- have certain requirements and specifications to qualify that we have not been able to qualify. We've carefully evaluated all of those programs that are available.

Doug Miehm -- RBC Capital Markets -- Analyst

OK, thanks very much for that. And then, final question just has to do with the deal that was finalized this morning. Can you tell us about why that was completed right in the face of the $50 million ATM that's going to be out there shortly?

Zach George -- Chief Executive Officer

Yeah, sure, Doug. This is Zach. I can take that. So as you know, we recently completed a pretty material restructuring of the business back in early June.

And we're continuing to work to shore up our liquidity, capital resources and improve the balance sheet. So we're looking at a number of levers that we can pull to do that. As we mentioned earlier in the call, it's critical that we continue to invest in our brands, and we're going to ramp spending in both sales and marketing. So we wanted to make sure that we had certainty around that path on the operations side.

We won't be utilizing the ATM in the near term, but do expect to raise capital in the future, if that's where you're headed with the question. So made a decision to bring greater certainty to our liquidity position. And if you recall, it wasn't 90 days ago when we were issuing press releases around breach of covenants, living on -- we were living on waivers at the time prior to getting our new credit facility in place. So continuing to move through this restructuring.

We've been equitizing the balance sheet in the public markets, which can be a messy process. But we're going to take further steps to continue to clean up and derisk our balance sheet.

Doug Miehm -- RBC Capital Markets -- Analyst

That's pretty sure. Thanks.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Zach George for any closing remarks.

Zach George -- Chief Executive Officer

Thank you, operator, and thank you all for joining. We are grateful for your support and attention today. We look forward to updating you on our future progress. Thank you.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Zach George -- Chief Executive Officer

Jim Keough -- Chief Financial Officer

Andrew Stordeur -- President and Chief Operating Officer

Vivien Azer -- Cowen and Company -- Analyst

John Zamparo -- CIBC -- Analyst

Venkata Velagapudi -- ATB Financial -- Analyst

Doug Miehm -- RBC Capital Markets -- Analyst

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