ECS Botanics Holdings Ltd (ECS) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us for ECS Botanics' First Half of FY '26 Investor Update. In today's session, we're going to walk through the company's financial and operational performance for the first half of the year, including the return to profitability, 2 consecutive quarters of positive operating cash flow and the continued rollout of ECS' branded product portfolio. I'll pass you across in a moment to Nan-Maree to kick off our discussion of the company's progress. Today, we'll have a presentation from Nan followed by an opportunity for Q&A. [Operator Instructions] So to kick things off, I'll hand over now to ECS Botanics Managing Director, Nan-Maree Schoerie, to walk us through the results and the progress ECS has made over the first half. So with that, go ahead, Nan.

Thanks, Tim, and welcome, everyone. I appreciate you spending some time with me this morning as we share the half year results. First of all, we'll just go through the disclaimer, which is obviously standard, but just make sure you're aware of it. In terms of the first half results, I think the highlights are really the revenue has grown by 16.5% year-on-year, which I think is impressive, particularly in the current market, where there is a lot of headwinds from multiple imports, particularly in the B2B space. And I'll talk about how we managed to grow that revenue despite the headwinds. And I think -- well, in fact, it is there on that slide, the growth of our B2C business, now more than 60% of our revenue, is really why we're seeing the level of growth that we're getting in our overall business. Had we not changed to the B2C model, I think we would have been in a world of pain at the moment. And that's primarily because as most of you are aware that follow the cannabis space, there's a significant amount of imports. But what we're also seeing is a number of smaller cultivators that have come to market and they're struggling to get -- offload their products. So the price compression that we're seeing in the B2B market in Australia is significant. The other reason why we're seeing good revenue, though, is in that B2C space. We've diversified our product range fairly significantly. And again, I'll talk about that in more detail further on. By having that diverse product range and not only solely relying on flower and oils has made -- has put us in a much better position. We have had 2 consecutive cash flow -- operating cash flow positive results quarters. And obviously, that's really pleasing to see considering that we've gone through a long period of time where we were in an investment phase and we weren't seeing any operating cash flow. Now they're not huge by any stretch of the imagination, but the trends are really what we're looking for. So we've moved into that cash flow positive space. I think it's also important to talk about our ESG credentials. You'll hear a little bit about this presentation of how ECS' business is a little bit different to many other medicinal cannabis companies and that we've really built a company for the long run. So we are organic. We are GMP. We've installed solar energy. And our model is a low energy cultivation model, which going forward, we think will become more and more important, particularly because the price of energy, as everybody knows from the personal experience is going up. And we would need that energy typically at nighttime on the farm because of the need to keep lights going for longer to extend the day. So having that low energy and having that solar is important for us. In terms of our shareholders, they're pretty stable. All of the -- other than Windpac, they all, including myself, have been here for a number of years. Windpac came in on the Bell Potter raise a couple of years ago. So we've got a really good top 20%, I guess, shareholding and then obviously, a fairly long tail. But very loyal shareholders, which I'm very appreciative of. Let's go to the next slide. Sorry, I'm not sure what happened there. Sorry about that, guys. I'm not sure why I've got this little pen directly in front of my keyboard. So in terms of revenue, we've spoken about we're seeing some good growth in revenue. We have seen a turnaround in the profitability and EBITDA. But I do want to just mention here that one of the things with medicinal cannabis company and a lot of farming whether it's trees and things and cattle, we have to value our inventory in terms of biological assets. And so what happens is you value your inventory based on the current selling price. And so when the prices are volatile, we do see an issue and what we saw at the end of last year where the market price goes down, then the value of our inventory goes down. This is nothing we've done, nothing we can do about it. It's the way the accounting practice goes for companies that have to value their biological assets. So in such a volatile market where the price is, I guess, primarily declining, it does mean that we have to keep looking at our balance sheet and making sure that we're doing the necessary changes to account for the changes in price in the valuation of our inventory and also our product in the ground. So we value, for example, at the end of December, we value the crop in the ground as well as the inventory. So we have been very conservative in managing our balance sheet. And again, we've done -- we took $880,000 non-cash impairment of deferred tax, really just to try and make sure that our balance sheet is matching the actual business and what's happening in the marketplace. But overall, good results and a good turnaround in terms of a small net profit before tax, but also a great improvement in terms of EBITDA. Okay. So we have a look at the cash turnaround. So clearly, this is where -- this is the heart and soul of the business at the moment. It's all about maintaining cash and keeping ourselves net operating cash positive. So how have we achieved this? Well, first of all, a lot of what the red lines are there is the investment phase that we went through when we went into a B2C model. We had to hire MSLs. We were actually really lucky in that. When we hired our MSLs, it was a time when Althea was looking to restructure. It was before they sold their business. And we were able to pick up a sales force from Althea, typically like some of the top salespeople came across to us as one unit. So they had worked together. They knew the market. They had a very good understanding of what doctors needed and where the doctors were. And that helped us get our I guess, a fast track into the B2C market. However, we didn't have products. When we hired them, we had only got one -- a couple of wrap products that were sold to veterans and then we started doing flower. So that whole transition period in 2025 was really around building inventory and having a sales force out there that didn't have all the products they needed to sell. Now you could have said, oh, why didn't we start later? It's kind of a chicken and egg situation. You can't have product sitting in your warehouse if you haven't got anyone to sell it. So it was a transition period and we knew we were -- it was going to be pretty painful. Having said that, we also had some good initiatives at the farm in terms of improving our costs. Our cost to produce -- our cost to cultivate have come down. Our cost for post-harvest have come down. And this has taken a lot of focus and is very, very necessary for us in order to compete in this very competitive market. So I'm very pleased to see the benefit that's come through in terms of the efforts of the team, both in terms of cultivation costs and also post-harvest costs. Some of those cultivation benefits that we're seeing actually is a direct result of the new PCEs that we built, where we're getting higher yields. We're getting better quality product. So that's all coming through now. So that investment phase has really come to an end, and we're starting to leverage the benefits. Obviously, the other thing is the change from B2B to B2C or the shift, I guess, of the dynamic there. We make much better margins on B2C. And as a result, that will flow through our net operating costs. I did actually want to mention at this time that -- so where to from here because we've got the sales force, we've got the B2C. How do we continue this and how do we extract more value for our shareholders? What we're doing is -- for example, is we are a GMP manufacturer, and I mentioned this earlier. Being GMP is quite expensive. It's necessary for pharmaceutical products. So if we weren't GMP, we wouldn't be able to export to Germany and the U.K., for example. Having said that, it does come at a price. And so what we've done most recently is we're using [ QuicSolv ] to help us bringing -- introduce AI into our production facility, into our post-harvest facility. And what they're doing is we're using AI to do the calculations, for example. So a batch document is about 40 to 50 pages long, lots of numbers, lots of signatures. So what AI is doing -- will be doing for us, and we're in the final test stages of this model, is it actually does all the sums for us and then the supervisor or manager only has to check that there's no issues. AI will flag if it thinks there is an issue. But also what we're doing is we're digitizing those documents. Now if you had to acquire a GMP -- a digital GMP system, it would cost millions of dollars. But what we're doing is we're using a process that basically is an into digital process, which will allow us to use iPads to do all the data entries and then from there the AI will be able to take over. So significant AI initiatives going on in terms of improving our productivity. So just let you know that there are further improvements that we're expecting in terms of cost savings. This is really not going well. All right. I do apologize for this, guys. It's now gone 3 slides ahead. Not very professional, I apologize. All right. So here we are. These are beautiful new PCEs that we've finished. So we constructed 9 in the last round. They are significantly better than the previous 6 and the previous 6 were significantly better than the first 6 that we built. And the reason for that is they -- these ones have deeper beds. So, the beds are made out of concrete. In the previous ones, we used red gum. So the beds are deeper, the drainage is better. The lighting, they have lighting and they have underfloor heating and the concrete. And as a direct consequence of that, we're getting better yields and we're getting better quality flower. And that's what I mentioned earlier. Those -- all those things will drive our cost down, which ultimately will mean that we can actually be really competitive in this market. We've also finished the building a 460 cubic meter curing room. We needed to build something to store all the additional flower because particularly the outdoor, it all comes off at once. And so we built this curing room, and it controls the temperature between 8 and 10 degrees or 8 and 12 degrees, probably more accurate, which is really good because it means that flower is at maximum preservation temperature. We've also built an additional drying room and our Live Rosin facility is all in place. Unfortunately, we've had some issues with the water pressure for the RO facility. So we've had -- we will be installing an additional pump to make it operate more effectively, but that is about to come -- start producing Live Rosin soon. I'll be patient now and hopefully this thing will change on its own. There you go. All right. So B2C, I've spoken about this a little bit about how fortunate we were to be able to employ this entire B2C team that's working really effectively and they're highly motivated. They were very keen to join ECS. ECS has a really good brand in the industry. And so they were very keen to join us and have hit the ground running, as I said before. Introduction of OzSun was another really good initiative that we did. In the past, ECS used to grow a significant amount of B-grade flower, I guess, in the outdoor and use it for biomass for making oils for extraction, but that market has declined significantly and also become very competitive. And so by having the OzSun product range, which was really about flower that wasn't that A grade but more B grade flower and still being able to get a better price than we would ever get if we turned it into extraction has been an absolute goal for us -- or sorry, a win for us. But what's happened is, OzSun has got such a good brand name now that we're starting to put better quality flower into OzSun because we can. And then we're looking to potentially have variations of OzSun going forward, which is like a C grade brand and also a premium brand of OzSun. So OzSun, the brand is actually doing really, really well. If I meet anybody, any doctors, any pharmacies and I tell them I'm from ECS, the first thing they say is, OzSun . So -- and I think I mentioned that when we take it to Germany, they call it Aussie Sun, which is going to be an interesting progression of OzSun. The AVANI Advanced has done really well as well. That's the VESIsorb technology. You can see we had a bit of a setback in October and November that related specifically to supply chain issues that were resolved. So that's behind us, and I don't believe it will ever happen again. But you can see also the capsules business was impacted directly in October and November by that. So capsules is a space that ECS has a large market share. And the current changes by the VBA and the TGA potentially, the VBA at this stage around pastilles, the VBA won't allow the use of pastilles is a really good opportunity for ECS as well because we're very, very well positioned already in the capsule space. So that's a movement in the right direction for us. Our whole model is the traditional pharmaceutical model where our salespeople talk directly to doctors. So we are a little bit more protected than a lot of the market in terms of whatever changes the TGA brings through. Our model has always been selling to doctors on a normal traditional pharmaceutical model. We don't focus significantly on vertically integrated clinics and things like that. We obviously do have our product in Canview and Vitura are one of the few companies that are very reluctant to push their own brands, so we can compete really well in those clinics working with Vitura. But the other companies that are in the vertically integrated space are really focused on pushing their own product, most of which is imported. I spoke earlier about the need to invest. So you can see all these products that we released over the last 12 months, all of that was significant investment. In order to release a product, you have to go through the labeling, you have to register the products, you have to get all the clearance through quality and then you can then get it on all the doctors' portals and then you can release it to market. So it's quite an extensive process, and there's quite a lot of investment before you can really start getting the sales. That is 10x more difficult when it's in Europe, where the registration of the products takes a lot longer. I will touch on, on this slide just on the Terphogz because I'm sure some of you are interested to know what happened with Terphogz. So we did -- we had a misfire with Terphogz is probably the best way to explain it. We partnered with the Thai company that we believe they had the Terphogz genetics. So we thought it was a really, really good situation. But unfortunately, they weren't prepared to or weren't in a position to allow us to have those genetics exclusively. And so -- and there were some political issues with the supply of the genetics. So it got all a little bit messy and certainly not the sort of place that ECS wants to play in. So what we did was we then got the actual genetics from Terphogz. And for the last 12 months, we've been popping the seeds and doing the phenohunt, and we're about to launch Terphogz again into Australia and New Zealand and Germany and probably the U.K. as well in the next sort of 6 months. So you'll see that Terphogz will come back to market. This will be grown by ECS on our facility. It is the Terphogz genetics. The only difference is there's no Z because Z, I think I might have mentioned to some of you in the past, Z can only be grown from clones, and we don't have -- we haven't been able to import the clones directly into Australia. So we're doing crosses, Z crosses. So they all have a Z in the genetic, but -- and they are all beautiful flower, but it's not the Z itself. It will be things like Gelonoidz, Watermelon Z and things like that. So different products. But that will be relaunched and we'll go again. And now we have 100% control of the supply chain. We're a lot more comfortable that we can do the right thing and we'll also be able to price it a little bit more cost effectively because we were -- the price we were paying for the Terphogz flower out of Thailand was a very high price, which was difficult to translate into the actual customer experience. I've touched on this a few times in the presentation that the market is very, very challenging, particularly in Australia, but even in Germany. But where ECS is starting to really, I guess, push through all of this is that we are, a, we've got brand loyalty that's developing, the Australian grown, people want our products. There's a high level of trust associated with Australian products. And also, as I mentioned earlier, we're getting better results in terms of getting better operating costs as a direct result of higher yields and improvements that we're making. So we are able to counter the price issues that we're seeing in the market. A lot of these price issues, we don't believe will be sustained. I think some of the things that the changes that the TJ will make will support the Australian industry more, but also just in terms of the sustainability of some of these companies that are selling product at very, very low cost. We don't believe it's sustainable. So a lot of it is about new industries starting up and people coming in and investing and then not being able to sustain. There is some consolidation that's happening in the market at the moment, and that's something that we're obviously always watching out for. But I think you'll also see a lot of companies that will start to disappear over the next 12 months. And I think the other point that I mentioned there is our wages costs or our salaries and wages went down by 5% in the first half of this year. That's a significant change when you consider that we had a mandatory award increase of 3.5% put through by the government and also the additional super. So despite those headwinds, we've been able to optimize primarily by reducing our employees, the number of employees. We haven't reduced, obviously, the wages and salaries that our staff are getting, but we've actually reduced or not replaced people when they've left. So we've continued to focus on bringing those costs down in terms of all aspects of the business, including our labor costs. I've just announced recently the partnership with Nimbus. So we still do have Bloomwell as a customer, but Nimbus will be selling the OzSun products through them. This is an idea of trying to translate what we're doing here in Australia and seeing whether we can replicate that in Germany. Germany is a fast follower to Australia in terms of how the market is going and where the pricing is going. What Nimbus will do for us is they'll provide the platform for which our products are put into pharmacies and onto their platform. So it really is a distribution contract and the product will still remain ours and it will be under our brand. So we'll be interested to see how that goes. And the next stage of this is that just looking at other European markets in a similar way and seeing where else we take OzSun. So watch this space. There's a picture of the farm on a semi cloudy day. Just in terms of the U.S., we're watching what's happening there. It's obviously quite a big shift if the U.S. does move to reschedule cannabis. What we see is, and we know for sure is that if it is rescheduled and provided more broadly across the U.S., it will be in a medical space and you will need to have FDA or GMP approval. Now most cannabis cultivators in America do not have GMP or FDA approval. It's a recreational market and they typically have been supplying that -- there's no stability. There's no special requirements in terms of cleanliness, et cetera, et cetera. It's very much a rig space. So having our credentials and our already existing relationships with companies in the U.S., we think if it does go that way, the opportunity will open up for ECS. It may be a short-term frame before the Americans and the Canadians get their GMP and FDA sorted. But we think that if the regulations change, we will be in a good position to get early mover advantage in that aspect. So how do we keep going in this market? So we've stopped. We don't need to expand anymore. We've built additional facilities. So all that level of investment is done. It's behind us. There will always be small maintenance type investments we need to make, but there's no more major CapEx that's planned for the business and not necessary. We are diversifying what we're doing as well in terms of -- I spoke about it earlier, we don't only do flower, but we do capsules, we do gummies. We'll be expanding our vapes business significantly over the coming months. And so what we're trying to do is get the balance right between leveraging our assets and cultivation and our brands, which are very much tied to production of flower, but to give our MSLs the opportunity to sell these other products at the same time. It helps us in terms of risk, but it also helps us to grow without having to invest significantly more in more infrastructure. So -- and then I spoke earlier about the fact that we're really working -- we're continuing to work on getting the higher yields, the margin expansion and try to work on the cost side of the business so that we can continue to compete in the sort of B2B space and then obviously on the margin improvement in terms of products, but also in terms of our B2C space because we don't see anywhere near the same amount of pressure on the B2C space as what we see in the B2B space. Okay. So what are our plans and our vision. So we want to be, as I mentioned earlier, diversified and vertically integrated when it comes to the cultivation, really build those brands. And when I first went into this branding space, I think I mentioned to shareholders that I saw this is the way to go, that brands have value, and it's really translating into what we're seeing. We've launched the AVA brand most recently. So AVA is our women's health brand, and we think that's going to do really well as well. So we're trying to capture segments of the market in our B2C space. So I spoke about OzSun going all the way through to AVANI and Terphogz. And in the same way, we've got the diversification in terms of products and then also owning these segments. So we own the capsules market. I say owning, that's probably not the right word to do, but we're very successful in the capsules market, and we want to continue to do that, replicate that and sort of have segments of the market that ECS can have significant market share. We still have some of the largest companies as our B2B customers. So although our B2B market is -- or our business has reduced in Australia, it's really been the small companies that have moved away and started to use imports or disappeared altogether. But the large customers are still with us and will continue to be. So Nubu has really grown very well with us. Curaleaf, we've just launched a new flower there, and it's going really, really well. So we're continuing to have strong B2B relationships. Koyi, we keep hearing that the product is about to be registered, but we still haven't had the final word. So that one has been a very, very slow process. But I've spoken to other people and apparently, that's the narrative for Poland overall. Once we're in, we're in, but we're still waiting. There are no negatives. We're just waiting. So I think this slide basically talks to all the things that I've spoken about earlier. But just to go back to that original point, I think it's very important to think of ECS as a company that has built a good business. So we don't have these -- we're doing everything very ethically and properly with a view to sustaining and building our business in a sustainable way. And so we -- I've spoken about the diversification, focusing on producing low costs. I think we chose the right option to be using sun-grown rather than indoor. It's continuing -- when the market is -- the prices are so constrained, power prices are going to continue to be an issue for those who don't use the sunshine. So there are a lot of reasons to be optimistic about our business, a lot of things that are sort of coming through and we're getting to that position now where we can really build on our strong foundation. We spoke about the German expansion, and I touched on earlier that it won't only be Germany, there will be other companies -- other countries in Europe where I think we'll be taking the OzSun business. And that's it. Back to you.

Very good, Nan. Thank you. Broad-ranging presentation, and thanks to all of our attendees. We've had lots of questions come through live on the call. So I'll do my best to group these by theme or summarize where possible, but apologies in advance if we jump around from theme to theme a little bit. So let's dive in. Just a question on the production coming out of the PCEs. And as an adjunct to that, the demand for premium organic material. So you spoke a lot about the investment that's gone into the PCE infrastructure and your organic cultivation. The question, so where is that product currently being sold? And how are you seeing prescribers and patients respond to that premium Australian growing positioning?

Yes. So the product is getting sold under the AVANI brand in Australia. Also, we're selling it to -- through our B2B channels in Australia and also to the U.K. and to Germany through Ilios Sante and Rokshaw. Ilios Sante have tapered off a little bit. They're going through some regulatory requirements that they've asked us to put in place to continue. So that's been a little bit slower. We expect that to pick up again in the next month or so. But those companies, like, for example, Ilios Sante and Rokshaw, we need to send them premium product. They pay a premium price and similarly with the AVANI. The question around organic is really interesting because it's the one question where you say, well, do we really get value for being organic. I don't believe it's costing us a significant amount to be organic. And at the moment, for Australia, we still irradiate our flower. So once it's irradiated, it's no longer organic. But we're working on that. So that's a project that's going on in the background. But certainly, in Germany, we have -- one of the reasons why we have the business in Germany is because we're organic and we have to supply them with unirradiated flower. So polytunnel flower is critical for that.

Yes. And so I guess, to the extent that that organic element is a selling point. So are we seeing evidence that that organic Australian providence is resonating in certain parts of the market?

I don't believe that we get a premium for -- we'll get a premium price as in we're selling it into that. We sell it in the mid space. We don't sell it at the top. I don't believe we're getting a significant amount of more money, but I do believe that we're getting market share that we probably wouldn't get if we didn't have a differentiator. It's a very, very congested market. And if you don't have things that allow you to stand out from everyone else like Australian grown and organic, then it becomes really, really difficult to capture market share.

Yes, makes sense. Just a question on the margins on the vertical brands. Can you talk about the economics of ECS' branded B2C products compared to the traditional B2B model, which was the focus previously? Can you talk about how the margins differ? And how you're seeing adoption from prescribers and patients progress?

Yes, sure. So the margins are probably, on a good day, it's 10% more in terms of margin that we get through the B2C. But actually, the B2B is where the price compression is going as well. So that 10% is expanding, I guess, as we're seeing more and more cheap, not good quality necessary. Some of it is good quality, but there's a lot of flower in the market. And so it's going at a really low price. So the B2B, I would say, margin would have contracted much more -- well, it has already contracted much more than what it used to be, say, even a year ago.

Yes. Got you. You were commenting earlier on the Terphogz and Thailand issues. So regarding the Thailand venture, can we put a final, I guess, total cost on that venture? And has the Board impaired the assets associated with that in Thailand?

No. There was -- I guess it was more opportunity cost than actual cost. We were hoping to sell that flower at a premium, and that hasn't been able to materialize for various reasons, but there's no impairment as such. So it's not like it didn't cost us a lot. It was the opportunity. We were going to sell it for a lot more than what we are able to sell it for. But that's -- we only -- we placed 1 order for 3 flowers. So it was one single order, 3 flowers. That was what we purchased. And so no, it's not like a significant impairment or there's no impairment approaching relating to that.

Yes. So no material cost there. But I suppose what would you describe as sort of the lessons from that earlier approach that investors should be aware of that the company has learned?

Yes. I mean I think it's -- the lesson that I've learned is that in that non-medical space, not everybody plays by the rules. And so we ended up having to learn the hard way just how messy that side of the industry can become and how you need to make sure that we didn't get dragged into that. So that was really the -- we still think that Terphogz genetics are amazing. We think that there's a strong desire for certain patients to access those genetics, but we don't want to go into that sort of quasi rig space because it's more -- it's just not our play field. I guess it's not our center.

Yes. Got you. So just back on the infrastructure expansion so that you're able to achieve year-round production. You mentioned that CapEx is decreasing significantly. But one question here is, can investors expect a CapEx holiday for the rest of 2026 to allow free cash flow to build? And also just to clarify, just confirm, have all the PCEs now been completed as of now?

Yes. So all the capital works are completed as of today. There's no more capital works are required other than I mentioned about a small tank with a pump for the RO plant. But there will still be requirements to invest in things. So for example, one of the things we probably are going to have to look at is getting another generator because when there's a power failure, the size of the facility now, the single generator we've got doesn't cope. So that's like we're talking about 40,000, 50,000, 60,00. We're talking about sort of any significant investment. But there will be those sort of things that we have to do. But no, we're not intending to expand the facility or put in any additional massive infrastructure into the facility.

Makes sense. All good. Just a couple of questions on inventory. So are you able to provide a breakdown on, I suppose, the age profile of the current stock? Like the comments made that there's $12 million of inventory there. Can we clarify sort of how much is older than 6 months, for example? And is there -- what's the policy for impairment if...

Yes. Look, I mean, I can't go into specific details. But typically, the inventory is not more than 12 months old. 12 months is where we sort of start looking at impairments, if it's more than 12 months old. Remember that most of our flower from the outdoor will actually be 12 months before the season finished because it's an annual crop. So having -- the flower is -- doesn't expire in that period of time, particularly now we've got good storage conditions, it will stay fresh. So yes, and then a lot of that inventory as well, we've got, as we said before, a diverse range of products. So there's a lot of inventory that is required because you've got to have consignment stock in B2C. Having said that, I can say that there is some -- we have got probably more resin than we need. And so that's the one area where we -- I don't think we're going to impair it, but we are probably going to have to discount it slightly just because the oils market is not nearly as buoyant as it was, but we're looking at various options there. So none of this inventory that we have is not good. It's all good inventory. And as I mentioned earlier, one of the challenges though is if the prices keep changing, then the value of your biological asset or your inventory changes directly proportionate to that without any change in the actual product itself.

Yes. That's good. And just one other question on inventory and the quality thereof. Can you talk to what quality control measures you put in place to make sure that the flower remains A grade and any potential batch quality issues with humidity don't lead to further inventory write-downs?

Well, one of the good things about where we are is there's not a lot of humidity. I did mention earlier that we specifically built that curing room to store flower in optimum conditions. We haven't had an issue in the past where we've had to dispose of product because it's gone old or mouldy or whatever. What happened in the past is that we had -- we were collecting a lot of biomass. So we were with a plan to extract it and sell the resin or sell the oils and that has changed. So now we don't -- we only keep enough for what we think we're going to use. But that is the -- that's not A grade quality flower. The A grade quality flower, we don't typically ever have to change it. Once it's been harvested and it's been trimmed, the quality stays the same.

Excellent. Okay. Just across to the German collaboration. So the question on the partnership with Nimbus. We've announced first sale is targeted for April. Does the agreement include minimum purchase quantities or is it consignment style whereby you get paid upon the final sale to German patients?

Yes. It's an interesting question because it's a bit odd the way it works. So we have to sell the flower to Nimbus. But you should think about this deal as being Nimbus are going to facilitate the sales of OzSun in Germany. Nimbus will not significantly benefit -- well, they will benefit, but it's not their product. It's not their salespeople. It's our product under our brand. They do have to pay for it when it arrives, so they pay a nominal fee just to -- from a regulatory perspective. And then what happens is we pay them to distribute it based on selling and we get -- so it's kind of like, let's say, for example, and I'm just using numbers, nobody should quote this, but let's just say if it's $5, they would give us $1 when it arrives and then the $4 profit is -- we have to pay them another $1 for the -- or $1.50 for processing it, but we've already got $1. So we pay them $0.50 and we get the balance. I know that was very messy. But it's kind of like what we're saying is we pay them for the services they provide, and we take the balance of the profit. Having said that, because of the regulator, they have to pay us a small fee initially now. The challenge we have there, it's not all upside is if we don't sell the flower for whatever reason, we would then either need to discount it or return it to Australia or destroy it because it's our product until the patient gets it. So it's very similar to the B2C model we have in Australia.

Yes, that's good. Just a question on the European regulatory side. So the OzSun and Terphogz strains that are destined for Germany and the U.K., do we now have all the necessary export permits from the Office of Drug Control for those ones?

No. That's what we're waiting for now. So we've applied for the export permits for the product to go to Germany for numbers. What we're doing there, just for full transparency, we're going to send a trial batch across and make sure that all the processes go through and all the testing is done and then it will follow by the commercial batches. So that trial batch is about to go. I think it leaves on the 16th of March. So that -- and then once that's been tested over there and everybody is happy, we'll send the next batch. So yes, it's -- and typically, it takes probably 8 weeks to go through the permit process. So they have to apply for an import permit, then we have to apply for an export permit and then we can ship. So it's quite a juggle. And of course, the current issues in the Middle East are adding another level of risk, I guess, around getting flights, etc., etc. But so far, we haven't been impacted, but we are aware that there's potential for delays.

Yes, that makes sense. So still on the regulatory side, but closer to home, the comments made that you were spotted at the UIC conference on the weekend when the TGA updated the industry about regulatory reform. The question is, were you encouraged by what the TGA had to say? Or did it raise concerns, particularly with cannabis being referred to the scheduling committee?

I think no. So first of all, I think that the TGA said nothing, which is -- they said a lot, but they said nothing. I do feel like the TGA will make some changes. I don't believe that ECS will be significantly impacted by those changes. But time will tell. I think the challenge we -- or the thing that does concern me a little bit is what they might do with pastilles or gummies and vapes. But in terms of the rest of it, I'm not concerned. And anyway, whatever they do is going to take years. it will be 2 years down the line before we see any significant changes. And if they ever saw me there, they should have come and said hello.

Yes, that's it. You're an open book. Just flipping across to the financial side. So it was observed that the cash balance dropped from 31 December to the end of January by $1.1 million. Can we explain sort of what drove that movement in the cash position?

Honestly, you're going to have to take it on notice. I cannot answer that question. Sorry. I'll have to respond on -- I'll have to give it -- you can just take the details of that person. I'll happily respond. I just don't want to give you the wrong answer.

That's fine. Well, I guess just as an adjunct to that, sort of you've obviously got cash on hand from the undrawn NAB facilities. It's just a question about that facility. Are there any specific covenants or minimum cash on hand requirements that you need to abide by to fully utilize the facility for your operations?

No. I mean, we've got a great relationship with NAB. There's no concerns there. I do feel like we do have quite a lot of repayments that we're making now. So that will start -- we'll see that coming through. So we've got to pay back the equipment finance side of it. So that part is coming through, and we start to see that impacting cash. Look, there were some questions that we raised the $1.9 million from the capital raise. And the sensible thing to do is to use that to pay down the debt because we're paying interest on -- you pay a lot more interest. And our interest rates are pretty good, but you pay more interest on debt than you get on putting the money in the bank. So it makes sense for us to pay down as much of that debt, but we can draw it all the way down. We keep -- obviously, we want -- and we always have from day 1, we've always wanted to keep a buffer in that NAB loan for a rainy day because what you don't want to do is have all the money spent and then something happens and you've got no cash reserve. So that NAB -- part of that NAB loan, and those of you who have been around for a long time will know that there was -- I think it was a $2 million loan that we had for a long time. I wouldn't ever touch it for that very reason. We need to have a buffer there, but NAB doesn't have any -- NAB would like us to use more of it actually because then they make more money. But obviously, that's not in the best interest of our shareholders.

Yes, that makes sense. And so no change in NAB's lending criteria or any collateral requirements or anything like that? Yes, okay. Let me just jump through these questions here. So yes, just on the governance side of thing, in terms of executive remuneration. Could you comment on how the Board approaches executive remuneration? And how that aligns with the company's performance and long-term shareholder value creation?

Yes. Look, I think how the Board approaches it is looking at market. What would a CEO or a CFO or a COO, et cetera, quality manager, what is the market rate for these people because it's not easy to get -- you've got to have a remuneration that's attractive enough to attract good people. So that's really how they approach it. And certainly, in my experience with the Board, they're very comfortable that the remuneration is where it should be. In fact, I asked the question recently. And yes, they're very supportive of where the current remuneration is.

Yes. That's good. So just looking ahead to where things might be in 1 or 2 years' time. How do you see ECS evolving over the next couple of years if your current strategy continues to execute as planned? And what should investors expect in terms of scale, product mix, the profitability profile in a couple of years' time?

Yes. Look, first of all, we don't really give guidance, so I can't go too much around that. But obviously, the focus is on continuing to grow the business. I think the B2C is definitely where we will see most of the growth, whether that's in Australia, but also obviously, in Europe is what I'm looking at. So we'll continue to do that. We'll continue to diversify products. And I think what will happen in the sort of medium term is we'll start to see companies falling over, I guess, for want of a better word and the market stabilizing and hopefully ECS will be well positioned to continue to capture more share. We've done really well in that B2C space. I think we get a lot of -- like everyone in the industry, we get a lot of back pressure or whatever. But the reality is we've grown our market share in a very short period of time really, really well. And I think what will happen going forward is we'll continue to grow, but it probably won't grow at that same rate in the B2C. It will grow more as the market goes. Now somebody asked the question around the TGA. I think that will be interesting as well as to whether they tighten up on some of the rogue behavior that happens in our industry. And if that happens, that will benefit us because, as I said earlier, that's really not -- that's not where we play.

Yes. Got you. And so just changing tack a little bit. I mean we've spoken a lot about your organic growth plans and strategy. Inorganic growth is an option for every company as well. Can you talk at all about your, I guess, approach or philosophy on that side of things as it relates to M&A opportunities?

Sure. I agree. And I think it's something that we absolutely need to keep our eyes open for. I also realize that our share price at the moment is -- I think we're undervalued. And so we've got to be very careful that we don't do an M&A deal that ultimately is bad for our shareholders because it's -- a lot of the private companies have a very inflated view of what their valuation is. The listed companies obviously have -- across the Board, most listed companies, except for a couple of exceptions, are actually probably undervalued. And so it's like, well, then you would need to merge with or do an acquisition with a listed company because if you go into the private sector, they still think that their valuations are just ridiculously high on no basis. So I think there was -- obviously, it was a very large M&A deal that was done recently. And if you have a look at that deal and you get under the covers, it will be interesting, I guess, to say where that all ends up because -- it was -- they weren't both listed, but Cannatrek is obviously a private -- a large company, and we all know what the valuations are. So I hope it goes really well, but we'll watch that space and I constantly look at M&A.

Yes. Sounds good. So in terms of international expansion, other than the markets that you've discussed today, any other plans you can talk about to enter new markets?

Yes, probably not. I can't talk about those things on the basis that it would be not fair to the rest of the shareholders to talk about things that aren't already in the public domain.

Yes. No problem. And I guess a question on shareholder communications. So how do you think about improving the cadence and the quality of your comments with shareholders, particularly around operational developments, operational challenges so that your investors have a clear picture of your progress against your strategy?

Yes. I guess you're damned if you do and you're damned if you don't. But I think I'll put that question around to you. Tim, you're in charge of communications.

Yeah. Well, I mean, we do our best to ensure that anything material is disseminated as rapidly as possible. And like any ASX-listed company, you've got your obligations to disclose anything material to the market as promptly as possible. And our philosophy is very much one of trying to maximize management's, I guess, availability to answer questions in an open forum. And hopefully, the clarity with which Nan's approaching a strategy is something that's starting to come through in these sort of sessions. And we do want to do sort of more of these probably more frequently over time as the strategy unfolds. So that's probably how I'll put it.

Yes. I think also just to add to that, the ASX are not in favor of us just putting out announcements that are of no materiality. So we've also got to be careful. I mean, they don't like it. I know some companies have got away with it. And you might ask, well, why don't we? But they don't like it. They -- all the announcements need to have materiality and the information contained needs to be material. They don't want us to use it as a communications forum as such. So these sort of webinars are probably an easier way to share some of the dialogue and the back story rather than putting out ASX announcements.

Yes. That's good. And front of mind for everyone on the headlines, geopolitical issues this week. Would you anticipate any geopolitical events impacting your business?

Well, the answer is no other than potential airline issues, challenges with the airline. But I think like everybody, who knows where this is going to end. But at the moment, based on today's situation, I would say that the only challenges we all have will be related to getting our product on to airplanes, particularly going into Europe. Obviously, product coming from Canada, we don't expect any issues. But certainly going to Europe, we think there's going to be -- it's going to get more and more congested because of the number of flights paths that are closed.

Yes. Well, we'll have to watch that space. And that concludes all the questions we've had today. So yes, on behalf of Nan and the company, I'd really like to thank everyone for tuning in to join us for the update today. We really appreciate everyone's support and interest -- support of and interest in the company. If you do have a question that we didn't answer today, please reach out. Management will be happy to discuss further offline. And we'll also make the video recording of this session available online at the NWR Communications YouTube channel. Looking forward to the opportunity to talk to you again. And Nan, I might pass back to you for any closing comments.

Yes. No, thanks, Tim. First of all, my apologies for some of the technical issues again. I have never seen that little pencil in the bottom of my corner, but I do apologize for that. Hopefully, I was able to answer your questions and give you a little bit more clarity. I do believe that generally, as I said, the company is well positioned. I think there's a lot of positives going on, but I'm also mindful of the headwinds as we discussed with imports and also with the TGA. So it's getting that balance right. But we're in this for the medium term and the long term as well. So we need to make sure that all the decisions we make continue to generate that value for you guys or for your shareholders, not only in the short term, but also in the long term.

Exactly. All right. Well, thank you for that, Nan, and thanks everyone for joining us. And we look forward to chatting with you again soon.

All right. Thank you.