Jim McIlree: On your Slide 23, you talked about working capital for the multiple national scale, VLN stocking. Can you walk us through how that works? I’m assuming there’s an inventory fill that you need to satisfy. How does that work? Is that cartons per market share target or how is it useful to look at that working capital commitment?
Hugh Kinsman: Yes. If for modeling purposes, Jim, probably is more on the inventory and accounts receivable side. So call it the core short-term working capital needs with the growth. It’s safe to sort of take it as a percentage of sales right now initially. Obviously, it will decline as a percentage over time just because of operating leverage. But our expectation is we’re building up the inventory, obviously for VLN we’re doing the same for as well. We have most of the short-term inventory needs satisfied, albeit there’ll be more incremental pressure on working capital for inventory going into the latter part of this year just with the scale. And then a lot of it will become just basically financing our receivables more so, well, I would say both on VLN and hemp/cannabis.
We don’t necessarily need short-term AR availability for our contract manufacturing since most of that is paid upfront or paid upon delivery. So really the VLN growth of the hemp/cannabis grows. We’ll definitely need to fund to finance the AR, which can be modeled as a percentage of revenue for now. And I think the incremental inventory working capital needs will be, will go past sort of our base case, our steady-state inventory levels and need more cash for inventory working capital in the second half of the year.
Jim McIlree: And on that point, it seems like as you continue to grow, you’ll still need working capital investments. But it will be at a diminishing rate relative to the markets you enter. When does that hump happen or when does that peak at that hump, if that question makes sense to you.
Hugh Kinsman: No, that makes complete sense. I think we get full benefit of the operating leverage, if you will. Probably in Q4 2023, certainly Q1 2024. At that point we’ve reached kind of a steady state particularly because of the contribution margin in both those verticals, both VLN and hemp/cannabis. That at that point we would be significantly diminished working capital cash needs at that point.
Jim McIlree: Got it. And so since you’re looking at 1.2 million cartons on an annualized basis, let’s call it by the middle of 2024, then you would still be short of that at the end of 2023 to that kind of steady state working capital needs. Is that correct?
Hugh Kinsman: Yes, sure. It’d be incremental capital need from end of 2023 to mid-2024, it’s not as significant as the initial phase of a ramp during the fiscal year 2023 which is why we are there.
Jim McIlree: Right. Got that. Okay. And then, lastly, are there any specific capital equipment needs that you have in order to get the hemp/cannabis business up and running to the state that you want it to be at? Is there anything significant we should be looking for?
Hugh Kinsman: We have modeled approximately $8 million, mostly for the restoration of our facilities as Jim discussed. Our interim extraction capabilities before we start working towards a sort of a circle of excellence plant, if you will. It probably won’t be as much. So I think if you’re assuming CapEx for hemp/cannabis of $8 million, it’s more than enough for full restoration extraction capabilities this year and working steadily towards putting a new center of excellence in place.
Jim McIlree: Got it. And then after that, it’s whatever the business is growing and —
