Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Mehta Farm Labs first quarter financial results earnings call.

At this time, all participants are in listen only mode.

After the speakers presentations will be a question and answer session.

Ask a question during the session you'll need to press star one on your telephone if you require any further assistance. Please press star zero Oh speakers are dialing in remotely in the event of any technical difficulties, please be patient well be reconnect.

I would now like they hand, the conference over to your speaker today, nor the poor.

Mehta farms lab, Vice President of Investor Relations and communication. Please go ahead.

Thank you operator, and good morning, everyone.

We're pleased to have you join us on many crime lab fourth quarter earnings Conference call.

Joining me for today's call are Hot Mccutcheon, Chief Executive Officer, Bobby Kwan, Chief Financial Officer.

Strong our president.

Now before we begin.

No. The cautions regarding forward looking statements, which have made on behalf of muddy farmland and all of its representatives on the call.

Statements made on this call may contain forward looking information the actual results could differ materially from its conclusion forecast or projection in the forward looking information certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information.

Additional information about the material factors could cause actual results to differ materially from a conclusion forecast for production in the forward looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information are contained.

In many from lot filing with the Canadian perpetual securities regulators, which are available on SEDAR at Www dot feed our dot com.

With that it's now my pleasure to turn the call over the past mccutcheon.

Thanks, Laura and good morning, everyone.

This is not a business as usual environment no, but they're one of many from labs I want to extend my thoughts to all those affected by covert 19, whether directly through illness or indirectly through job losses.

Special thanks to the country's dedicated healthcare professionals and all the support staff for standing in front line. This pandemic.

The business, we're doing our part to keep our employees safe duties unprecedented times. We also recognize that we have a job to do it'd be sector. One I'm grateful to all my colleagues for staying focused and committed whether it works remotely or another critical environment laboratories have any form lots, Canada and Australia.

Our goal since founding May farm labs in 2015 has been to build a sustainable profitable multi jurisdictional pharma quality platform to serve the world's most attractive candidates markets I'm extremely proud to report that no first year since receiving ourselves licensed from health, Canada, We made tremendous strategic progress in our business fundamentals to it.

Our goal.

List of accomplishments include our first GMP certification.

International licensing the addition of manufacturing capabilities and capacity.

We should have Australian facility build out and graduation to the TSX from the venture exchange.

They farm labs has proven operational excellence in the emerging global cannabis industry, we have become a leader in extraction purification, while staying committed to specialization and new formulations and product development.

We delivered our first full year revenue of over $129 million and closed or year end was trying to liquidity and financial capacity to execute on our go forward strategies. We deliver these accomplishments against the backdrop of an evolving regulatory landscape and challenging market conditions that impacted the Canadian Canada sector in the latter part of 2019.

Calling of these major factors first there was a significant delay in the development of the candidates consumer market.

Retail operations, both online and with physical L., that's had been rolling out at a much slower paced and everyone expected.

It's also true for medical distribution channels.

Second you're all aware of the challenge is being faced by many of our vertically integrated peers. We haven't 18 months for your room here in which we saw how tough it was for producers to grow candidates as well as process and packaging and to get to the shelf.

We are seeing history repeats itself with candidates oil based products most have been very slow to adopt.

Companies were not fully prepared for 2.0 lacking manufacturing capabilities, resulting in their inability to convert bulk concentrate into finished consumer products.

In addition, others face significant quality issues with finished products, resulting in product returns and other issues.

Third the combination of the first two factors resulted in increased volumes of bulk resident displayed in the market, which had downward pressure on pricing it impacted our Q4 revenue and margin.

Well, we do expect these trends to continue in near term. We do believe we have the right strategy in place.

We expect to supply demand dynamic will correct itself ones first be integrated players increased their finished product capabilities and once more product focused license producers such as Ali brand and larger more mature CPG companies entered the market.

The consumer demand for these 2.0 products is high we are ready and well positioned to take advantage.

Having said this we've already started to address the current Canadian market dynamics, while continuing to advance our global company position, we are prudently investing in the build out of our global platform as our international distribution network will be an increasingly important driver to our success in the future.

We're beginning to gain momentum, particularly in Australia.

Sure on the right path towards capturing significantly enhanced growth from global medical markets.

In addition, we're excited to enhance our distribution into the global markets from Australian platform.

Bobby will speak to the Q4 results in more detail in a moment I think it's important to put our results in the context of our strategic plan. We delivered a strong first full year of commercial operations one of only a few profitable Canada's companies with adjusted EBITDA of just over $24 million and a net income before tax of approximately $7 million.

We achieved this while continuing to invest and strengthen our platform.

We expanded our capabilities and team introduced our first white label offerings. Our first cannabis 2.0 shipments in our first international sale.

Above all we received our first GMP certification from the Australian Therapeutics, Good administration, otherwise known as TJ.

Critical catalyst to our international growth.

This stands out how many years most important in industry differentiating accomplishment.

In January we received a key importation license for Australian business that will allow us to import from Canada and other jurisdictions.

Last week, we announced the expected shipment of a large volume academies oil. In addition to 35000 units of finished products from our very facility to our bulk in Australia. This will allow our shelling operations to accelerate the distribution sale of GMP finished medicinal products ahead of many domestic Australian license facilities to satisfy quickly growing demand.

<unk> for GMP medicinal end products in Australia, and potentially new candidates regulated jurisdictions in the Asian Pacific region.

We have already established a robust pipeline of supply opportunities and announced an agreement with compass clinics, Australia to supply finished pharmaceutical quality candidates oil products to be distributed directly to patients.

In Canada, just before year end health, Canada amended our license to expand our Barry facility footprint to 25000 square feet from our initial 8500 square feet.

We started shipping products to provincial distribution networks, NBC, Manitoba, Saskatchewan before year end and have since added, Ontario in Alberta toward growing list of distributors.

We are now further scaling up automated downstream production and packaging quality control and testing R&D in storage to support new product formulations and increased demand.

We've got exciting product development plans underway, including the rollout of our first maybe farm labs branded medicinal product line.

I'm very excited to go into more detail on this and will do so later in the call.

Finally, we're developing many great relationships with newly licensed customers, who have ambitious plan focused on highly sought after Canada's 2.0 products for distribution in Canada and abroad further enhancing our Canadian market stability.

Earlier this year, we secured an opportunity serves shoppers drug Mart another great Testament to the quality of our products and programs first shipments of many farm branded for made Royals have been delivered and will be available for sale within weeks on the medical candidates by shoppers National patient E Commerce platform.

So what does this all mean one.

We create a multi jurisdictional GMP accredited manufacturing platform to drive our penetration into global medical markets that can only be served by GMP certified suppliers.

Two we can now realize production synergies between our Canadian and Australian operations to accelerate sales.

Three we're capitalizing on the opportunity here at home to deliver ready to go finished products to paying customers under 2.0 and beyond.

And for all these developments demonstrate that we can execute our long term strategy, while delivering on our business plan and responding with high integrity to quickly changing market dynamics and challenges while effectively managing the short term disruptions of today to product and channel diversification.

One of these businesses for options is the global pandemic of covert 19.

We are actively monitoring and analyzing the market impact of this virus, while having a Canadian marketplace, but it's impossible to forecast. This point the magnitude of the effects of as such terrible virus first and foremost we are working but you don't need to keep our people and products safe.

Today, Canada's retail outlets and associated license producers remain open we're diligently working with our supply chain partners to minimize any disruptions. We're responding quickly to the developments from our governments in public health officials.

I'll now turn the call which Bobby.

This is bobby's first call as many farms lives global CFO, but he has already become an invaluable contributor to our senior leadership team and our evolving global strategic plan Bobby Please take it away.

Thanks, Todd, it's a pleasure to be here.

Since joining the Mehdi farm team my priority has been to mobilize the company to remain tightly focused on business fundamentals.

As a young company, we're continuing to build a bridge to the future.

Given the current dynamics and the can you didn't kind of this marketplace. Your carefully managing our costs in cash and are being strategic and prudently investing to drive growth and efficiencies.

And while meeting the up Walden needs of our customers.

I'll speak to some of our plans in a moment, but first since I've covered the annual financial highlights I'll move to Q4 results.

That's all of you know 2019 was the first full year of operation, which means we have little year over year comparison.

Such I will focus on the sequential comparison quarter three.

But this in context I'll, let go past earlier comments on the market conditions across the entire can you didn't kind of the sector has a number of factors in parts of our financial results.

These are all related and include a slower than anticipated rollout of retail channels in Canada, and especially the largest province, Ontario.

Slower than anticipated a ramp up of consumer kind of is 2.0 products getting to show.

And because of the first two we saw an oversupply well boyle on the market, which drove down pricing.

Q4, 2019 revenue came in a $32.4 million.

Although this wasn't a 25% decrease compared to Q3 the team delivered a solid finish to a brito here were met if I'm less.

The quarter over quarter decline in revenues was primarily the result of lower than anticipated volumes to the tune of approximately minus 17%.

And a lower realized average selling price on ball oil broadly in line with the wholesale pricing compression seen in the overall I don't use market.

In terms of volume spot customers accounted for about 45% of total revenue during the quarter.

While contractor customers slow their purchases and did not exercise purchase options.

The lower pricing is a direct consequence of the market dynamics I just described.

The supply of both oil is outpacing the demand.

In terms of product mix.

Vast majority of Q4 revenues still came from wholesale both oil as we just began to ship our very first 2.0 products in late December.

Quarter for 29, gross profit was $10 million compared to $14.8 million in Q3.

Gross margin as a percent of revenue for Q4 2019 was 31%.

300 basis points lower than quarter three.

This was primarily the result of lower average selling prices I mentioned earlier and the impact of six production cost.

Over lower volumes.

Partially offset by favorable impact from lower drives lower purchase huh.

Operating expenses for Q4, 2019 was $12.5 million, including stock based compensation.

Well, the roughly $3 million decrease compared to the per quarter.

Little over one half leads to a critical investments, we're making in implementing an ERP platform, which only started in earnest in Q4.

This platform will provide the essential foundation to underpin our continued growth for the longer term.

The balance of the Opex increase is attributable to business development support expenses.

The higher salaries and wages and some additional engineering project consultancy costs related to GNP in a few other capital projects.

As a result of the factors just itself.

Adjusted EBITDA for Q4, 2019 was $2.7 million or 8% of revenue compared to $10.1 billion for Q3.

On a net income before tax season, Q4, 2019 recorded a loss of $2.4 million compared to a net income of $5.4 million in Q3.

Turning to the balance sheet.

At the end of Q4, 2019, we reported a cash balance of $39 million slightly lower than $42 million at the end of Q3.

On receivables.

As of December 31st 2019 portal Aer was $26 million.

Pass due amount was $8.6 million and all that.

<unk> point $7 million or 90%, what's due to the one overdue account that your world and where we have commenced legal action again.

The rest of upstanding past due amount of approximately $900000 was all collected in Q1 of this year.

Turning to inventory.

Total inventory was $51 million at the end of Q4 2019.

This inventory level stem from the ongoing purchase of drives lower inventory in anticipation of a much stronger rollout of retail distribution channels.

And scaling of vertically integrated customers 2.0 finished product lines, neither of which has yet fully materialize.

Well lesser extend some of the inventory purchases were also your mark to support a quick start of our Australian operations.

At the same time beginning in December we noticed the sharp decline the demand for both oils.

He's into two trends led to a slower sales pulled through both oil into finished goods purchase by consumers as well as an overabundance of supply into Canadian market as I described.

In recognition of these trends, we slowed our raw material purchases in Q4 compared to what was purchased in the prior quarter.

As well well be taking advantage of lower input costs on a select basis.

While maintaining a requirements for higher quality flower inputs and specific cannabinoids.

Now looking ahead.

We expect many of these dynamics in the Canadian market, but I just tried to persist in the short and medium term.

Like all businesses.

Unprecedented situation, where all facing with over 19 really many unknowns for the industry, especially in the short term.

In response, we are taking a multi prong approach as we move ahead.

First we remain focused on accelerating diversifying growth.

Second we have already implemented measures to conserve cash and aggressively pursue cost savings initiatives and we will continue further going forward.

For quite a bit more color to each.

It's on grow.

So you need to accelerate new product development opportunities already in our pipeline of 2.0 products outside our current portfolio for example in the Irrs of public go Green.

As we speak we're adding several new products fuse for provincial and medical channels, and we recently launched our own branded product.

Or business development team has also further intensified efforts to supply international medical markets, where pricing and margins are more favorable.

Second on cost savings and cash conservation measures.

That's an earlier in the month to reduce our total headcount by 10% as well as rebalancing our production workforce to meet the changing product mix towards more finished goods.

Live action procurement driven cost savings initiatives for example, based on more rigorous buying process and enhanced Q waste testing methodology, we're able to reduce the number of third party to me tests, which are quite expensive without compromising on quality and safety of the product.

And lastly, we have defer or saw lower priority budgeted capital projects to conserve cash we are prudently managing capital.

Putting spend behind initiatives that will underpin topline profitable growth.

And those I will provide high quality return on investment as we execute on the long term strategy of our business.

I'll now turn the call back the path for summary comments.

Thanks, Bobby.

Having made a number of key investments in both Canada, and Australia last year, we have a strong platform in place to serve customers and launch new products. We remain laser focused on a number of exciting activities in growth catalyst.

Most importantly, we are preparing for you GMP certification specifically from the German health authorities.

She's picture you GMP certification, our two countries supply chain will allow us to serve demand for medical Canada's oil products directly from Canada to European jurisdictions.

Elsewhere, we're excited to expand our distribution network to Asian Pacific markets, such as New Zealand in Latin America, with Brazil recently coming on line, representing one of the world's largest medical consumer markets with the biggest potential on new product development, we're diligently working on various new and exciting product formulations and delivery mechanisms.

Aside our current portfolio.

Please watch closely for future announcements on these exciting new products to come.

As mentioned last week, we announced the launch of me from Labs brand. Our strategy has been to remain focused on our customers' needs.

Consumers and customers have asked for the highest quality products and we have listened.

True to our fiber routes envision we launched our first maybe farm labs branded high concentrate pharma quality CBD formulation.

We believe the combination of this initial product peary potency and attractive pricing will distinguish itself among the limited competitor products available in the medical wellness category.

This is only the first I've a family of medical wellness products to come this year stay tuned.

Taken together these actions will extend our runway for growth enhance our value proposition and diversify risk independence in the K and market.

Compared to current domestic conditions.

International Media, so markets offer both at higher degree of growth and margin opportunity.

To be clear despite our expectations. It became market, we're very optimistic about Canada and the future of concentrates Canada's 2.0 offers great potential for many from labs.

We know the market is there inevitably provincial retail distribution networks will fill up through additional store openings, leading to greater distribution potential we're ready for when newer larger and more sophisticated base of customers entered the space.

In summary, we remember that candidates remains a very new industry in Canada, we feel confident in our staying power our strategy and our ability to continue to execute.

We are mitigating risks and maintaining our balance sheet strength.

At the same time, we're taking advantage of our industry, leading capabilities and unique position as a GMP certified from a quality extraction company for global markets.

I am fully invested along with our incredibly professional leadership team and more passionate and committed than ever regardless of whatever dynamic challenges, we're faced with and it's very young and new but exciting global cannabis industry, we're committed to delivering long term sustainable shareholder value into 2020 and beyond.

Thank you very much and now I'd like to take your questions operator.

[noise] at this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.

Please limit yourself to one question and one follow up question and then you can re queue. Thank you.

Your first question comes from the line of Scott Fortune from Roth Capital. Your line is open.

Hey, guys. This is Nick stepping on for Scott.

Just a couple of questions here you guys called out anticipation of receiving your you GMP license.

Just wanted to Tony could you run a little color on the potential timing of considering the current macro environment.

[music].

Hi, sorry, it's Nick you.

This is Nick Nick Nick Thanks, a lot for the question I'm actually has gotten past that went over to ER to keep to handle just to start us off thanks a lot.

And next morning, a this is Keith Strawn President I. Appreciate the question about Ah you GMP or we have we're going through the steps. We're on probably that three of three as far as inspections go that next step is the physical inspection from the farm or we do have it.

Scheduled tentatively obviously with what's going on with Cobot 19, or we are seeing that there is some risk there as far as that inspection able to happen from those Ah. So I think that's why it's not quite prudent a bus to say would be in the back half of a 2020, but we're ready as far.

As a GNP goes and we feel really well prepared considering that we have our GMP from another picks nation, Australia. When she received in December 2000 Nike.

Got it that's helpful. And then I'll just one follow up for me did you provide an update on the timing of a potential uplisting, maybe holding you guys up on that front.

Thanks, Nick well, we actually we were previously we had a great response types and something that I think originally or would that when it's actually come down to in terms of our senior management teams decision is that the market conditions are not currently in the best the best place right now I we've decided.

The team to ER to push this into potentially the the back half of the year currently with her with our share price that where it is we actually don't now qualify for where it sits today. So we will look to position ourselves and execute when the time is right and when a what our share price actually lines up with the not that can.

Missions.

Got it makes sense thanks, guys.

Your next question comes from the line of David cannot go from Atlantic Your line is open.

Hi, good morning, Congrats on the quarter everybody I'm just a couple of questions for me Pat I'm wondering you mentioned on the call and you're closing comments, Bob you're looking forward to attracting new and more sophisticated customers, whether that's CPG your pharma I'm in the space I'm going back to your statement of claim a file.

I guess about a month ago I'm, just wondering should as analysts in the investor community should we be thinking about anymore potential contracts that are at risk.

Thanks, David.

Where we sit today, we don't feel actually there's any other risks with any of our current partners or for any other for litigations or difficulties in a in collection our accounts receivable I do feel as well we feel strongly that that the industry has as needed to take its time to mature and approved two or two.

New potential CPG companies, and and potentially branded pharmaceutical companies to come into the space.

With Canada is 2.0, just literally starting.

About three months ago now I don't think we have enough. We haven't had enough time to actually improve or show that the markets themselves either through product development or distribution channels that its mature enough for large CPG companies to come into the space or brand farm as I mentioned, having said that we feel confident that as a company.

On the heels of our GMP certification expectations of a number of GMP certification is to follow on.

That we will be one of the better position companies to bring on these new customers because we actually qualifier check the boxes on Oh, what large TPG and more importantly for us and the way they were looking into the future pharmaceutical companies look to qualify as partners in the space and the new States in Canada.

Thanks much for the question.

Okay. That's that's very helpful. Thanks, Pat and I guess as a follow up to that and on the same line. So with your press release last week that you announced with your new product the oil based product.

Being branded as a Mehdi farm type product to our knowledge that was the first time that maybe from labs has done this.

Which is great I guess just thinking about this is this something that we should think about when we're modeling a revenue, especially thinking that margins are probably a lot higher compared to if you're working with a third party like where where do you see the mix going forward and the next I guess couple of quarters. When it comes to your own a in house Brenda.

Product versus everything else.

Yeah I'll take the first part of that question, David with regards to our own brand, Jeff. We're very excited too to launch this brand and and the one main reason I was very very customer.

Centric and focused company is that our customers as you mentioned in the call script very much asked us to do this Ah theres right now a lack of very high quality.

Products actually on the shelf and in that it medical and a wellness space. So we've listened to our customers and now we felt that the with this gap at this time to actually watch our own Brent.

With regards to margin and a percentage of other revenue distribution I'm actually going to pass that over to Bobby to make a comment Bob would you mind chime in here. Please.

Sure. Thanks for that question, maybe I'll just pick it back little bit first on Pat's.

Comment on our brand that for what it's worth you know I spend most of my professional career in the sort of branded CPG space, specifically with a unilever globally over for 20 years, So naturally I'm a strong proponent of brands.

And being newcomer coming into this sector and somebody farms. What is very clear is that there is a gap in the market.

The consumers are lacking information about quality the consistency of of the very products on the market.

And what brands tend to do well actually consistently do across multiple industries is that brands existence right because they could actually provide the level of trust signified high quality in this case purity and also obviously at the same time in an overall sense.

So the supply of provide superior consumer experience and to that end you know weve Mehdi farms have developed a purposely built platform whereby we could actually deliver consistently on those elements of trust quality and consistency to our consumers and also to occur.

Summers and in doing that just like in CPG as you rightly sort of alluded to our own Brendan.

And Brian brand products.

Well over time command sort of higher margin now the exact Nick so that to answer your second part of the question. You know the finished goods part of our portfolio will evolve over time, a especially on the halo of kind of a sector in the retail distribution opening up whereby more consumers will come into come into the sector.

But again the actual piece of that it's uncertain and certainly has been compounded by the current Colin situation, but a in the fullness of time with the retail distribution opening up finished goods or whats the branded products will be an element of course will will become a greater portion where business. The exact metric is yet to be determined.

Okay. Thanks, guys for that very helpful and congrats on the quarter, Oh I've talked in the queue. Thanks, David.

Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from the line of Kimberly headline from Canaccord. Your line is open.

Okay. Thanks, guys. Appreciate the color, maybe just a bit more color on kind of your sales mix going forward into 2020.

In terms of bulk resin versus the lately with 2.0 products and then international versus domestic if you're able to kind of a little bit more color on that.

Thanks, Ken machine to push this a this first question over to Keith Keith congestion mine Springs for clarity on that I I think there might be another one follow onto this question came or maybe I could add some more color, but that Keith will start off [laughter].

Marty Kim Yeah, I think.

For sure as you know and you can see in our fourth quarter results as the vast majority of our business is still that b to b, a bulk resin I think going forward that will still probably represent a I probably around like not 70% to 80% range of revenues until we get into later this year.

I'm really excited about international but obviously for us. It's a couple that with a couple of regulatory or just moving product just from a permitting standpoint of receiving permits and not getting permits note axis is done on Keith Mckey makes it then because it's all medical or some of the volumes are bit smaller to start but.

Really excited there and then on the white label products or we are seeing I, just kind of getting the very first shipment out at the very end of 2019, and then that shipping continuing in the past corridor or we see that coming up. So I think that you. If you had to put it in three buckets. It would be your b to b still being the largest white.

Labeled domestic being probably the second and then international between the third but that with regulation changes, we could see that that number two and three up pretty easily depending on not some big filling the pipeline.

Got it that's helpful. Maybe just looking at the balance sheet I'm just wondering it looks like he goes through 4 million on on your bank facility any any color on the rationale for that so sitting pretty good from a cash perspective.

Yeah. Thanks for that question Kim or were you definitely feeling good about our current a cash position, but when it comes to actually the dropped the specifics in the drawdown I typically we have wouldn't give.

Guidance or specific details on this but I will actually pass it over to Bobby just to add any appropriate color. This one.

Sure Jim Thanks for the question just for this is actually a clean cut question in the sense. That's a 4 million was actually.

Well, the 8 million non revolving line that was a dedicated specifically before capital expenditures. So we drew down just over half of that.

On a number of discrete Oh.

Capex projects to underpin our girls and related to that but can you maybe thinking though we've not touch size of the state was not touched a the often the revolving operating line.

Got it that's helpful. Thank you so much.

[music].

Thanks, Kevin.

Somebody that maybe outs or is that it oh I thought it was limited to [laughter] [noise].

Yeah, I I'm, okay for now thanks, so much cheers.

Your next question comes from line, Adam Beckham from Scotiabank. Your line is open.

Good morning, Thanks for taking my question.

So you guys noted they've seen oversupply bulk extracting the market I don't think really that should come as surprise anyone but can you maybe just talk about the dynamics on market. Currently is it mainly oversupplied crude are you seeing oversupply and distillate nicely as well and then just secondly can you maybe just talk.

You bet lobs ability to provide isolated versus others in the industry.

Thanks out in fact question I'll definitely take that one.

Yes, the oversupply bulk extract it's been seen actually in a bulk of crude resin as well as bulk distillate a there's a couple of reasons for this the main driving factors is a the fact that actually there hasn't been an uptake the retail distribution, a with Ontario, having a limited number of stores and the slow read rollout.

That's been the main driver a this second in kind of the Cascade of the supply chain is that a number of our partners and unfortunately number of the big players or the canvas space actually haven't been able to prove that level of fishery, yet in terms of being able to convert a bulk extract or.

Just slip into these products that are gonna be shelf ready I had quite high quality and being able to pass third party testing. So I think that's an element of the industry itself I mean, requiring a little more time to mature again I've mentioned this is only about three months in since Ah sensors and distribution or Canada's chip products. So I think that a that will come.

As you move further.

The fact that matters to with this oversupply, obviously prices have I've I've have come down because of that pressure a with new additional competition in the in bulk extraction of services.

In bulk extraction production. So that's been another element of that that is actually further pushed us down the a the path of focusing more on the final mile now a with a with a with our production of tinctures beeps and Topicals actually that stressing the company [noise].

Uh huh.

It's pretty that's actually lottery I think it's basic pieces that the more time, we haven't that with distribution increasing that what we'll see a reduction this overall bulk up say oversupply and.

And then we'll see a change going down into the latter part of each one of them in and engage too.

Okay. That's great. So just the second question here. So you guys actually so you shouldn't have large.

Quantity of centers products into Australia last week.

I'm just wondering in the Australian market, where you guys have been seen so far as a result hope at 19 and the impact on medical market. There I'm just trying to get an idea how much south or you could potentially have there.

In the near term.

Yeah. Thanks that question surpass I went over to Keith to to answer that.

<unk>.

Yeah for sure I think I'm the Australian market are still very young market, but we're seeing patients increase a month over month. So I don't know the an additional effect right now uncovered 19, it's hard to tell we are we are seeing logistic problems both in Canada.

And Australia or as you know, we do ship a lot of stuff to Australia, we'd probably one of the larger in Canada as far as shipping or both and products in bulk into the Australian market and we have noticed a in the past bonds that are the shipment of those products has been slower as far as logistics from you know Barry to Pearson Airport to airport at Bell.

Burn in and out to the market. So I think for I bought a product and market standpoint, we will be seen some delays related to what's going on the world today.

Okay. That's great. Thanks for taking my questions.

So much.

Your next question comes from a line of that.

Devon.

Shuttling from P.I. financial your line is open.

Hi, guys.

You guys mentioned some increased costs this quarter I'm related to the ERP implementation do you guys quantify how much this was order or maybe I missed that.

Yeah, I think seven for the question that are going to pass it over to to Bobby real smart color to that one.

Yeah. Thanks, a lot there and in terms of this particular quarter and where we just started.

Sort of in harnesses with respect to our ERP platform, you know I alluded to the fact that so all of our total increase of 3 million, an opex about half of them little bit over half of it was attributable to the ERP.

And so that's gives you some some quantification, but ERP will continue.

Hmm and sort of good good pace throughout the first half of this year and it's an important platform as you can appreciate providing us the level of controls and level of sophistication and visibility.

Two too Little act on so the timely information and data to underpinned.

We'll roll enterprise, so I'm very much working very very diligent behind us.

Okay. So so I'm just to recap expect additional costs coming from this initiative in Q1 in Q2 as well this year, yeah, it'll be in the front half and then hopefully they'll tapered down obviously, you once implementation will life.

Okay, Great no that's everything for me. Thanks. Thank you.

Again I ask the question. Please press star and the number one on your telephone keypad.

Okay.

Yeah.

Yes.

There are no further questions at this time I'll now turn the call back over to Pat Mackin for Chief Executive Officer for final remarks.

Thanks, so much everybody thanks for fitting into the call. During these difficult times I just wanted to push in summary that we really couldn't be happier with her first first full year financials.

We've come a long ways and selling the company in 2015, we couldn't be more proud of what was what we've done in terms of execution and and the team that we put together a we really feel this is qualified our business strategy is being the right one and the right one domestically I definitely the right one on the heels, where GMP certification for us to now execute into the.

Into the global distribution game.

I do feel obviously that says that the challenges are what they are the facts about or is that cannabis is going around and beginning of time five but did the distribution and this new legalize market is as just be just be gotten in fact, I. So we feel that with increasing distribution reduction country.

An induction of the legacy or black markets.

The increase of demand for high quality products, such as the fact that we've not launched our own brand and the ability of our company to continue our vision and and execution on our original business strategy engine International distribution markets is going very key [noise].

We feel that regardless of how challenging this issue isn't covert 19 Ah that's when it does end and it will end we position is one of the strongest cannabis companies in the world and this is not going to pushes away and we're very proud to bring this value to our shareholders now and into the future. Thank you so much everybody.

This concludes today's conference call you may now disconnect.

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