Q4 2019 Earnings Call
Good afternoon, and thank you for joining us until rates fourth quarter and full fiscal year 2019 earnings conference call on today's call or Brendan Kennedy Chief Executive Officer, Mark has Nate current Chief Financial Officer, Michael Crichton incoming Chief Financial Officer before we begin to please remember remember that during the course.
This call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 as amended. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those describing these forward looking statements. Please refer to tell raise reports filed from time to time with the United States.
<unk> Exchange Commission and Canadian Securities regulators and its press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied forward looking statements made today. Finally, please know on today's call management will refer to adjusted EBITDA and adjusted net loss, which are non-GAAP financial measure all the.
Company believes adjusted EBITDA and adjusted net loss provides useful information for investors presentation. This information is not into intended to be considered an isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to these really is for a reconciliation of adjusted EBITDA. It's not lost the most comparable measures prepared in accordance with gas now I would like to turn the call over time.
Brendan.
Thank you Rachel good afternoon, everyone and thanks for joining us.
I will begin this call. The brief recap till raised 2019 performance followed by perspective.
On the state of the Kansas industry in the markets in which we operate.
I will conclude with remarks on her focus for the month ahead.
In 2020.
Then Mark will review, our fourth quarter and full 2019 financial results in detail.
2019 was your first for till right.
But not a year without its challenges.
In the face of market volatility I'm proud of our team and how we executed to drive our business forward to position till right for long term shareholder value creation.
In 2019, our revenue increased 287% year over year to 167 million U.S. doors.
We built a highly diversified Canada's business across three core markets global medical.
Canada don't use and temp.
These businesses generated approximately 16%, 36% and 36% total 2019 revenue respectively.
With the remaining 12% of revenue coming from bulk product sales.
Our medical canvas product now are available in 15 countries on five continents around the world.
Our him products are available in over 17000 retail doors in 20 countries around the world.
We have a diversified asset base with facilities in offices in Canada, United States.
Europe, Australia, and Latin America.
Where are the only Canada's company that GMP certified cultivation facilities in two countries, Canada in Portugal.
Over the course of 2019 key milestones, we achieved that position tell right well to compete on the global stage include the Boeing.
Delivering on our promises to Canadian customers. We're one of the first license producers in market with 2.0 cannabis products on time and with product format to brands that have thus far and very well received.
Launching our joint venture with Anheuser Busch Inbev named the food and beverage company with CBD infuse beverages beverage products in Canada.
Completing the acquisition of Manitoba harvest, providing us with the hemp product platform in the United States and 19 other countries around the world.
Being the recipient to good manufacturing practices or GMP certifications for a Portugal facility.
Participating in cannabis clinical trials in the United States and around the world furthering our commitment to Canada's research and product development.
Completing a merger with private your holdings to allow for an orderly release until raise shares.
Formerly held by private here over the course of the next two years.
Strengthening our industry, leading executive bench by attracting talent from best in class Fortune 500 companies.
<unk> key functions within our business.
Turning to the broader industry and the markets in which we operate I will share a few remarks.
I have been an investor and operator in the cannabis industry for nearly a decade now.
And I believe that we're still in the very early days of this industries growth trajectory.
There is a global paradigm shift occurring around the legalization and use of cannabis.
As both a medicine and mainstream consumer product.
To capitalize on this opportunity to Red has strategically invested in key markets to secure raw material supply advance research and development and build brands and relationships with patients and consumers are global footprint today.
That's an advantageous position to enter new medical and recreational markets. When we are legally permitted to do so.
Over the next two to three years I continue to believe we will see additional countries legalized medical cannabis followed by adult use.
We haven't tested and we'll continue investing prudently to.
To drive long term shareholder value.
The focus of our business remains steadfast to build the world's most trusted and valued cannabis and have a company with.
The portfolio a best in class bran supported by a multinational supply chain.
I firmly believe that we have the right team assets and balance sheet to execute on our strategy.
Bill rate remains well positioned to win globally.
Turning to Canada, the challenges in the Canadian market had been well documented over the past few quarters.
Primarily the we go cannabis market has been slower than expected and taking share from the listen market.
Due to lack of points of distribution and product availability.
We are encouraged by recent announcement announcements and actions taken by provincial governments to increase the pace of retail licensing.
Additionally, as the industry evolves, we see issues with the consistent availability of high quality products applied dissipating.
The market has been volatile over the past 12 months, but I remain extremely bullish on the long term opportunity in Canada.
Putting this into context.
We are less than one and a half years in the federal legalization in Canada.
In two and a half month into the legalization of cannabis 2.0 products.
Yeah at retail sales last year were 1.2 billion Canadian dollars and are expected to grow to over 4.5 billion Canadian dollars by 2021.
That is nearly 300% growth.
End of 2021.
And in 2021 market estimates still point, the illicit market being bigger than the legal market.
Well I expect continued near term market volatility.
You can see why I continue to remain bullish on the medium to long term prospects for our industry.
In Canada, we've built a broad product portfolio of trusted brands for a phase two adult used products as previously mentioned.
We were one of the only license producers in Canada ready to ship. The first if we go station in December.
And we've been able to successfully restock retailer shelves, whereas some of our competitors have not.
In total our brands or an 11 provinces and territories today with phase two products and seven regions, where authorization that allows.
As we see regular regulations shift in certain provinces, such as Alberta in Quebec, we're well positioned to serve those markets.
Our expanded adult use portfolio under high Park currently includes the following.
Charlie Wiley milk chocolate with THC and CBD varieties.
Canada pure cannabis on one they pens and cartridges.
Marley natural pure Seo to extracted cannabis they've cartridges.
Every CBD infuse T in sparkling beverages through a joint venture with Anheuser Busch Embedment, no bad breweries of Canada.
Looking internationally, particularly in Europe, we've made great strides in building our business.
In late December Tillery, Portugal received the second GMP certification in accordance with the European Union standards for manufacturing facility in Canton, you had Portugal.
This is our second GMP certification for till Ray, Portugal, which allows us to formulate manufacture export GMP certified finish medical cannabis products, including dried flowering oils from Portugal, the Germany in other European in international markets with legal medical cannabis regulations.
Last may we received our first GMP certification in Portugal.
To manufacture an export GMP certified dried cannabis as an active substance for medical products.
In the last week, we added two and a half day inspection and Portugal for a third and final GMP certification for oil extraction, which we expect received in the first half of 2020.
Since receiving these GMP certifications, we have successfully exported medical cannabis to Germany, and Israel from Portugal.
From Germany, Switzerland.
We expect to increase our exports from our European Union campus in Portugal.
Which will be our international hub for operations with indoor outdoor and greenhouse cultivation sites as well as research labs processing packaging and distribution sites for medical products.
Our processing capacity is greater than or cultivation capacity with ample runway to grow scale and finish and prepare finished goods with raw materials from third parties. In addition to our own cultivation capacity.
Our footprint.
2.7 million square feet in Portugal, including 2.4 million square feet of outdoor grows phase 300000 square feet for a greenhouse and processing facility.
In 2020, we expect to increase our greenhouse and processing capacity in Portugal by 340%.
In the fourth quarter Hillary Portugal also partnered with the University of Cobra to develop a first of its kind strategic partnership to research cannabis derived medical products.
The industry is lacking data and we believe clinical research will help foster mainstream acceptance within the medical community and among governments in international markets.
In the United States, we remain focused on building a portfolio of consumer centric CBD brands in states where were legally permitted to do so.
Manitoba harvest is our core U.S. assets with him products that over 14000, U.S. retails doors today.
We're closely monitoring the FDA guidance around CBD and await further clarity before we make further investments in this market.
During the fourth quarter, we also important medical cannabis into United States from Canada for a new clinical trial conducted by Columbia University.
Evaluating the efficacy of medical cannabis as a treatment for T.I.P. end or taxane induce peripheral neuropathy, which affects 67% of women undergoing breast cancer treatment.
Since we closed our fourth quarter.
I would like to comment on changes to our executive team and broader employee base.
In January we strengthened our executive leadership team with two new hires.
John the live in as Chief opposite operating Officer, who was formerly with Revlon.
Michael crew Tech as incoming Chief Financial Officer, who was formerly with Molson Coors and farm again.
As announced in January our current CFO, Mark casts and it will be transitioning to a strategic business development role with until Rick.
And we'll be closely involved at Michaels transition.
We're happy to continue having marks expertise as we navigate this ever changing industry.
Additionally, last December we brought on former Mattel and General Mills Executive Katy Dickson as president of Manitoba harvest.
While we continue to make key hires the rapid shift in investor focus to profitability also led us to restructure our broader organization.
Tool to better align with the competitive landscape and meet our 2020 goals.
Each of our operating businesses has been reviewed in order to increase efficiencies reach reduced duplications in costs with a focus on return on our invested capital.
As a result in February 2020, we eliminated approximately 10% of our global headcount.
While these decisions are never easy fill rate has been successful and being one of the leading cannabis companies.
Because of our ability to pivot and react when needed.
For the balance of 2020, we anticipating we anticipate optimizing our current assets and market footprint.
Along the way, we will evaluate opportunities to make disciplined strategic investments or enter into partnerships only where warranted.
We anticipate some of the falling.
Continuing continuing to restock, our phase 2.0 products across Canada, where regulations allow.
Exporting till Wright medical products to new countries and expanding our medical Canada's product offerings in the international markets. We currently serve.
Completing the buildout of our facility in Portugal.
And obtaining our final GMP certification there.
Entering into strategic partnerships that enable us to further accelerate our growth.
Growing our global medical Canadian adult use in hemp product market share and aggressively driving cost efficiencies.
And finally, becoming EBITDA positive in Q4 of 2020.
With that I would like to turn the call over to Mark.
Thanks, Brandon good afternoon to those would be joining us on todays call and webcast.
And it's a pleasure to be speaking with you today.
This would be my last earnings call Chief Financial Officer, I'd like to welcome Michael Kruczek, well be taking over after we file and report on form 10-K.
I've been working with Michael since he joined in January and I'm confident it will be a smooth transition.
I'm excited to move it's my new role strategic business development and focused on strategic initiatives fortunate right.
Turning to our result.
Please note the all the financial information we discussed today is prepared in accordance with U.S. gap in us dollars unless otherwise indicated.
On Bell Q4, with a challenging quarter for the industry.
As Brian that articulated the lack of points of distribution. Among other things has kept the illicit market robust in Canada, and it's moderated the rate of growth legal market.
However against that backdrop of proper industry challenges.
Im encouraged by the fundamental performance by key businesses relative to our peers.
Specifically, we put up strong sequential quarterly growth numbers, so for Q3, and our adult east business, which include an uptick in average selling price.
Similarly, we experienced sequential quarterly growth or home products.
Given the state of the industry. We also determine its prudent at this point to de risk our balance sheet by taking noncash impairment charges related to the uncertainty in the U.S. CBD market as well noncash inventory valuation adjustments addressing significantly significant industry wide supply of Canada X.
Traction extract pizza.
Finally, we raised $60 million that to provide a capital cushion as we focus on our path to profitability.
Drilling in Q4 results in more detail.
Q4 revenue grew more than three fold to approximately 47, $8 or 61 million Canadian dollars compared to the fourth quarter of last year.
Revenue in have products grew 17.5% sequentially from the prior quarter.
I'll tell you used to 7.4% from Q3 and 34% after adjusting for returns at pricing reserves, taking in the quarter.
Our international medical business was $4 million in the quarter compared to $5.7 million in Q3.
However, Q3 included $3 million wholesale shipments.
Excluding the wholesale shipment international medical increased 48% from Q3 at 280% from the prior year.
Our Canadian medical business was up 27% in the prior year down slightly from the prior quarter between 18.
Finally, as we previously forecasted our bulk sales decreased 44% from the prior year.
60% from Q3 as demand for XTRAC products.
And keep stock has dissipated in Canada.
Going a little deeper on our adult use.
Sales represented 36% of revenue in the fourth quarter and increased sequentially from 31% of revenue mix in Q3.
With additional retail distribution and new form factors, becoming available we expect adult used to be a driver of continued revenue growth.
Our average selling price, excluding excise taxes for adult use was $3.19 or $4.16 Canadian for Q4.
An increase from Q3, $2, a 98 cents or $3, a 96 cents Canadian.
As Q3 and significant mix of lower priced product to sell.
We expect that age Eastland Creek as Bill mentioned 2.0 products increases throughout 2001.
Moving on to operational metrics.
Good morning.
Total kilograms sold excluding bulk increased seven fold the 15035 kilograms from 2053 kilograms in their prior years fourth quarter.
The overall average net selling price program.
Good in bulk sale was $8.78 U.S. or $11.43 Canadian.
Compared to $7.52 U S four $9.79 Canadian and acquire years fourth quarter.
Increase was due to a shift in product and channel mix.
Gross margin for Q4.
Excluding non cash inventory reserves and returns was 29%, 29.5% compared to 31% third quarter.
20% in the fourth quarter of 2018.
Our GAAP gross margin, including non cash reserves with a negative 120%.
As previously described inventory reserves are primarily related to extract extract feedstock and supplier with kind of prepayments.
Over the past couple of years, we've generated sufficient attachment extracted product.
We do expect demand for extract production increased significantly due to Canadian these two products being available as well as the rollout of additional retail locations. However, we have been conservative in our forecasted demand due to the slope and version of the listen to the legal Mark.
We expect gross margin to increase sequentially going forward as you can greater scale benefits the positive product and channel but.
Particularly in the second half year with international medical and 2.0 products in Canada.
Moving on to expenses.
Total operating expenses increased by $135 million compared to the prior year.
Which included $112 million noncash impairment charges, primarily related to our PBG agreed.
Due to delayed clarity of the FDA regarding CBD products than we.
We thought this was a prudent to reserve against the fair value this intangible asset.
We also expect receiving additional $37 million Q1 of 2020 led to an amendment to reach agreement, which allows us the benefits of triggering last tranche of the agreement.
Having to issue approximately $83 million that stock cash.
In exchange for this amendment of our agreement, we will not receive the annual guaranteed minimum cash.
We also reviewed our goodwill and our cannabis business for impairment there were known parents stake.
Additionally, we incurred a mile recurring tax charge were approximately $8 million, which include our gene expenses in the quarter.
Next I'd like to explain the gain on acquisition related costs.
Because we are the early stages of this industry. There's lot of uncertainty regarding forward revenue forecast, which is why restructure acquisition with a large mix the pronounced and other performance based metrics.
Based on actual results furniture, and that's what the harvest that this is did not achieve their full our house.
So in accordance with gap, we adjusted our earn out liability down which created a gain and acquisition related activities were $29.1 billion during the quarter.
This gain reflects saving some additional purchase price of otherwise been paid.
The net loss for the quarter with $219.1 million for $2 from 14 cents per share compared to a loss of $31 million for 33 cents per share fourth quarter of 2018.
As previously described we incurred non cash charges.
$80 million comprised of 112 million for impairment and 68 million for inventory scripts.
We reported adjusted EBITDA loss of $35 million compared to a loss of 13.3 like dollars in the fourth quarter last year.
The increase in the adjusted EBITDA was probably due to operating expenses, increasing faster than the gross profit contribution as well as some nonrecurring charges.
We expect our operating expenses to decrease materially in 2020 as a result cost reduction actions taken in February of 2020, and continuous review of our cost structure that remains on go.
Turning to the balance sheet.
We ended the quarter with cash and cash equivalent to approximately $97 million and close the $60 million senior credit facility February 28 2020.
With a two year turn.
We continue to believe with sufficient capital and access to capital to execute our growth plans.
And we achieve positive EBITDA, which we expect Q4 2020.
In reviewing the cash flow for 2020, we expect her catch requirements for operating cash flow $35 million to $45 million.
Cash interest and principal payments of approximately $40 million and Capex between 25 $35 million for a total of between 100 $115 million.
We expect the cash flow to be positive in 2021.
We expect there would be a use of working capital in the first out of here, which then provides a benefit second half the year, we tried them in.
Another change and the balance sheet during the quarter include the new lease accounting pronouncement, which added about $30 million to both assets and liabilities for the quarter.
Long term, we continue to expect to capture sizable share the global cannabis market.
With anticipated gross margin opportunity at 50% range and adjusted EBITDA margins of 25% to 30%.
As new markets her at it we will invest to develop those markets, which may have short term impact on margin, but also provide for greater long term revenue upside.
In summary.
We continue to believe we have a long runway for growth with multi path for shareholder value creation.
Brendan Michael and I are now available to take your questions.
Operator.
Thank you to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.
And our first question comes from Chris carry with Bank of America. Your line is open.
Hi, good evening.
Hi, Chris Hi, Chris.
Hi.
So.
Clearly there was a material step up in Opex this quarter.
And you had just noted mark that you expect that too I think you put it decreased materially.
In 2020, and so I guess in the context of.
Expectations for Opex to come down.
It sounds like you're still kind of implying that you can get to over 40 gross margin in 2020, though it feels like we're kind of a far away from that place today, but but can you can you help me bridge the gap between what you just did on the quarter and how you think you can still get to Q4 Twentyx EBITDA.
By yearend.
Is that over 40% gross margin correct, how do we think about opex coming down.
And then I suppose revenue assumptions or just the plug there. So I realize that's kind of a standard modeling question, but you know I think it's important enough to start out with that and I just have one follow up.
Yeah, Chris So first.
Your point is there on the Q4 DNA, we had a couple nonrecurring items I'm charges in there of about $8 million to $10 million, probably closer to $10 million and what the biggest piece of that was $8 million was tied to some tax cost.
Tied to some Rs users some equity you instances for some cross border, there's a pretty unique situation, but it wasn't $8 million charge during the quarter for that specifically and then there was another million and a half regarding some legal fees tied really to some act acquisition type transaction. So those would.
Not be recurring so first you're going to cut off a roughly 9 million and when you look at their kind of runway right and then we had some changes in our DNA a as we announced a as Brendan mentioned up 10% on the head count side, we expect DNA to get into the $40 million to $45 million range closer.
The 40 by the end of year, which is actually when you look at total SGN a for 2019, it averaged 37 and a half I know at the last quarter with higher because of some onetime cost, but we actually we'll see a little bit of an increase from 2019 kinda on average for the quarter a two in the 40 to 45.
Five range and so yes, we do expect gross margin to move.
From where we're at today there was some cleanup items in the quarter, a we were on track.
We were on trend to increase a couple hundred basis points, two to 300 basis points per quarter, we'll see some stronger increases. This this year and the visibility we have on that is the throughput in our existing facilities are going to increase substantially with with no in increasing.
Space, So we'll be able to absorb more those fixed costs. Secondly, we will be ramping up our Portugal facility. So so we do expect gross margins closer to the 40% to 45% range and as you said a the revenue is kind of that that last plug.
Okay. That's that's very helpful. Thanks for that and then.
Yes.
Just one one other on you know you had Brendan I think it was you that had said that you could look at optimizing some of your footprint and I don't know if that was.
Kind of regarding opex or whether there was something a bit more strategic there and and if I could I I guess the way that I think about this is.
Your all in the industry producing so much of this flower and and there's going to be a volume game there.
Certainly it's it's a notable part of categories long term, but there's not a lot of evidence that.
The matters to brands.
And so you know if there's all this extract out there in two point I was really were all this is going.
Is that comment you know a function of you looking at how much capacity do you have in the expansion plans that you had before and thinking maybe you don't need to do that in Canada or did that I misread that and if I did if you could just talk about broadly.
2.0 trajectory from here. Thank you.
Yeah in terms of optimizing a footprint, it's doubtful that we would invest additional capex in building out additional capacity inside of of Canada, certainly cultivation capacity.
We have been investing in.
In our facilities for canvas.
Phase 2.0 products and what what you'll see quarter by quarter throughout this year is.
The facilities that we operate will will become more efficient if you think about what we experienced in Canada six years ago.
What we experienced in Canada, a year and a half ago with the launch of adult use and really in Q4 with the launch of two to know products.
We're just making a whole bunch of stuff, we've never made before and the first time you make it is never you're never the most efficient it's like turning on one of our cultivation facilities and yield goes up a with but each harvest and so the first time, you make a chocolate bar or the first time you a first time, we made a.
Beverage in candidate, it's it's not as efficient as the 10th time of the hundreds time.
You operate that particular facility, so we'll get will optimize our footprint.
Optimize our our yield.
Optimize our unit costs throughout the course of this year.
In terms of in terms of phase at 2.0 products.
The second the second part of your question you know alongside our partners. It wouldn't beverage company Hypermarcas. The only it turns out of the only license producer to ship Edibles Bates and beverages on on day, one of phase two legalization and as of.
The week of February 28, fluent a food and beverages shifts.
The first and only sparkling beverage and in the market and so.
This food and beverage products in sparkling beverages are in I believe six six provinces today.
Okay. Thanks, I'll get back end, Hey, yeah, and except for one final point there except for the the canned beverages. We've had reorders on all of the phase two products and the reason I wouldn't hasn't had them on beverages that is that there.
Ah two now.
Thank you and our next question comes from Michael very with Piper Sandler Your line is open.
Thank you.
Try to understand pricing dynamics, a little bit better and.
Well sell disclosure is helpful.
But I think I'm looking all this right.
Sequentially. Your book sales went down I think you've got to your kilograms per revenue still even with a little bit of of 2.0 products catching tail end of year I.
Can you help us understand what some of the drivers are and how to think about the total company price mix view and.
Is there a personal pressure is it mix driven where some of the key moving parts, we should be focused on.
Yeah, Mike Michael.
I think most of that will be mix driven so when you look at the bulk of the bulk came down pretty dramatically in Q4 versus Q3, and we expect it to be again somewhat nonexistent and 2020, so that does take some of the pressure off from the they ever overall average pricing.
Actually the beginning part of the year, we actually made some pretty good margin on bulk just because it was us.
Product the.
Available, but as far as the 2.0 products. We did ship in December It was the last couple of weeks of December. So the impact. So Q4 was negligible someone's relatively small dollars a few shipments here and there, but it's a you'll see more of an impact going forward from an ASP standpoint, so Mitch.
This will matter. So I don't use 2.0, ER and international medical markets, we expect those two to be the fastest growing segments.
Which have a positive impact and I guess piece going forward.
Well, so I guess I still don't see what the real drag is somehow bulk sales falling.
A headwind suppressing I would think that's low low price per Gram am I wrong.
Now you are correct. So that the headwind is on the flower side, so flour pricing, especially when we talked about our lower priced a flower offerings that we put in the market last quarter. Those are lower priced and those are meant to compete with the illicit market and those are going to be at lower asps.
Like I said as mix changes going forward with more 2.0 and more medical you will see overall as piece come up.
And just one last one on this.
The premium, but higher THC flower and is not necessarily slowness, but it seems to be does it still the consumer a lot of times is.
Where you have the pricing power.
Did that shrink meaningfully as well how much were you able to supply that and just how big did your did you value segment grow out you know just to get a sense of how they are proportionately and the level of mix drag we should expect going forward.
Yeah, so the value segments been a larger part of the mix in Q3 and in Q4, which drove down the overall is fees.
What we've done with our higher THC percentage products are higher quality products, there's really been going to the medical markets.
And the medical markets and that's all coming from from the Nymex or from our facility in Canada as our facility ramps up now and Portugal, you'll see more of that shift that allow us to you keep some of that product the higher value products here in Canada as well so yes, the the greenhouse.
This product is a bigger percentage of our volume and a better bigger percentage of our overall don't use revenue.
And that's primarily will change as the 2.0 starts to kick in.
Okay. Thank you very much.
Thank you. Our next question comes from Rupesh.
With Oppenheimer. Your line is open.
Good afternoon, and thanks for taking my question.
So I was hoping to I guess dive a little deeper into how you guys have been brought the Canadian International medical markets for this year anymore color you brought on the topline trends or how you guys. You've got the growth ramping in both segments are up here.
So on the Canadian medical.
We actually saw it decreased this year versus last year that decrease was primarily due to supply concerns really in the first half of the year as you can see in Q3, we kind of caught our footings back and then Q4 slightly turned back down just for some again, having to allocate product to the different markets.
In 2020, we do expect to see strong growth and that market.
Gross back to about a 4 million dollar level per quarter in revenue so north of every quarter of this year.
For Canada medical for International Medical we expect to see a significant growth in the second half of the year and a slower ramp in the first half of the year.
So second half would be or we do expect to see some significant significant growth.
And then one follow up question. So clearly the on the CBD brunt of U.S., there's there's sort of been there's been some challenges given some the delays from the FDA. How are you guys. I guess going forward is approaching us CBD. At this point is it is it just slowing down investments or any more color there until about how you guys are approaching about.
It's definitely slowing down a slowing down a bit investments until we have some sort of clarity from from the the FDA.
Until.
Until the Sta.
Provides us with some some sort of clarity.
We'll continue to.
Invest in Manitoba harvest.
From a from a have foods perspective.
And continue to meet with as various retailers to discuss the Manitoba harvest.
CBD products and portfolio, but most of the most of the retailers certainly from an Ingestible perspective, our are still sitting on the sidelines.
Great. Thank you.
Thank you. Our next question comes from Vivien Azer with Cowen Your line is open.
Hi, This is Steve Steinman pinch hitting for Vivian Tonight.
Right and you mentioned off the top you guys want if you all piece that you're ready to go right away, both vapor and in edible oils, but he's kind of provide an update on your 2.0 supply chain and how long do you think it's going to take before we start seeing equilibrium and its respective market in particular for edibles given the out of stocks that we are.
In the market today.
Yeah, I think they take longer than most people thought.
Frankly, we were.
We were positively surprised by demand.
Yes, we were we were expecting.
We were expecting something similar to October 2018, when it when there were so many hopefully lps entering the market with so many different products.
And that really just hasn't happened this time, a and so we're we're racing at this point too.
Increase our our supply of.
Hey.
Edible and beverage products.
And so we're we're expanding our our manufacturing lines ER and increasing our shifts so that we can I get more of those products.
To market.
Yeah, we were surprised not only by the demand, but the lack of.
Really the lack of competition it seems like a lot of the Lps just decided to sit on the sidelines.
Yeah.
All right that that's helpful. It's again, it's a good problem, but it's still a problem.
Agreed in terms of value drive flower do you have a sense of how of what your share is in that market or how youre competing.
And it just teasing out some of March commentary about batches in pack.
On Sps what portion of your dry flower volumes come from either the fashion the value.
So as far as marketshare and it really varies by province.
And there's a couple of provinces, where we're in the top couple a couple of points or the comp top couple areas.
As far as the mix of overall product. It's it's one of the largest pieces of our mix today again I expect that the change.
Because of the 2.0 products now 2.0, and just in Q4 was like I said effectively one shipment to the provinces.
Several provinces, but the dollars in for one weeks or two weeks worth of sales are pretty small in Q4, you will see that increase in Q1. So the mix of though the value segment of products will come down as those other segments go up.
Okay.
Well understood and last one from me what expectations are you currently baking in for store openings in Ontario, with the province, indicating they're going to approve 20.
Store authorizations beginning in April how how much are you baking into your plan.
So our plan I think those around 800 stores today in total.
I think Ontario has and what 40 fiveish.
And I think is Quebec is pretty similar.
We expect the full at the ended the year to be just over a thousand locations.
With Ontario.
Probably doubling whether out today, but we don't we're not planning a significant increase in locations.
Just from an execution standpoint, we just want to be conservative.
Good.
Obviously, if we get too if we get to 1100 1200 50 stores by the end of year at that will be positive.
But we see.
We've been burn before bye.
The lack of store retail openings and so we're taking a little bit of a conservative view as at this point.
Thank you. Our next question comes from Aaron Gray with Alliance Count Global Your line is open.
Hi, Thanks for the questions I'm. So first what I just want to jump back in terms of the question does that early on bulk can you just talked about the volume increase during the quarter thing goes up about 40% I just want to know exactly how much of that was driven by both because it looks like that was good amount of the volume increased and then how.
Back to think about the run rate for volume going forward and I know, it's a little bit difficult with 2.0 product coming online, but any color there would be helpful. Thanks, you're exactly right. The bulk drove a lot of the the volume, but not the dollars right. So it and bulk is and different types of products and so.
So this ball police, we effectively so lots of byproduct, which had lots of weight, but not a lot of dollars to it.
We expect that to have less of an impact going forward, especially in the 2020.
Okay, great. Thanks, and there's one other question. It's been asked a couple of different ways want to kind of put all together just as we touch on your expectation to hit the EBITDA positive by Fourq 220, and specifically on your topline expectations <unk>, what would you expect the mix to be between you know.
Canadian adult use medical international in Manitoba, you know I know, there's a lot of variables there, but you know how best do you think about you know the drivers of where you are today and we expect to be in Fourq you in order to hit that target.
Yes, So I think if you look at the just in general overall.
Doubling of where Q4 was for 22019 doubling that for 2020.
And the key drivers of that growth are gonna be more on the cannabis side.
So that the adult use we expect to more than double Canadian medical we expect to actually increased less than double a slightly less international medical we expect to grow significantly more than double a and bulk effectively going away. So you'll see that international medical and adult.
Use we're going to be the main drivers for next year on the upside we expect to see some growth and have a one one growth area is just having a full year's worth we only had 10 months worth of of activity, but as far as the overall growth is going to be and just based growth is going we are on 10% plus proration for the full year.
So so hopefully that gives you a little bit more color.
Alright, great. Thanks, that's helpful I'll jump back in the Q.
Thank you. Our next question comes from Tami Chen with BMO capital markets. Your line is open.
Yes. Thanks, I'll check one question I don't think we have a cash flow statement right. Now. So I think you ended the quarter with just under 100 million, which is similar to the end of Q3. So I just wanted to understand the obviously, we can see where the cash burn is that just where the on the sources came from particularly the ATM I'm wondering.
How much did you raise on that during the fourth quarter. Thanks.
Yes, so we raised about 70 million in the fourth quarter.
Okay. Thank you those all for me.
Thank you. Our next question comes from Graham.
Fiedler with eight capital your line is open.
Hi, good afternoon, and thanks for taking my questions here I.
I wanted to ask about the inventory price adjustments I know there were some commentary regarding whatever related to earlier in the call, but I was wondering if you know the bid price adjustments, taking this quarter do you see that as pretty complete at this point are you still taking ongoing assessments of the the inventory balances at.
And we could potentially see some other sizable adjustments in the future given you know there the shorter term outlook on terms, what you're expecting on the market dynamics. Thank you.
Well, we look at price adjustments and reserves for returns.
I think if you look at us versus some of the others, it's relatively on the smaller side.
This quarter was around 4 million and most of that has just been reserves for potential reserves based on what the inventories are out and.
At the provinces so.
We have done some price discounting and it's been mostly on the oil type products or tincture pipe products as opposed to taking returns we discount on the products that would sell through and not take a return.
In some of the returns were receiving from some of the Approx relatively small dollars.
Compared to again, what we've seen in the industry.
Okay. Thanks, and then just wanted to shift gears off with respect to the international medical revenue and understood. The variance. There you mentioned that you had a bulk sale in the previous quarter.
A lot going on.
For any assets in Portugal, right now, but as we think about that ramp and the expectation of more than doubling.
Baton medical revenue just trying to balance that you know the discussions.
In terms of the amount of demand that that various companies are expecting any international market versus when are we going to see continued proof of that demand increasing quarter over quarter, you know expecting pretty sizable gains on that revenue line at what point of the year would you expect in 2020, when we can really start to see that excel.
Great. Thank you.
Yeah, we expect to see that acceleration really in earnest in the second half with here.
Actually if we have more supply more high quality supply, we'd be able to sell it every time, we send flower to Germany. It sells out in a couple of days. So it's been more of a supply problem than a demand problem for us.
So that's that's been the challenge so we just need some we need more high quality supply weeks, which we expect to produce have more capacity coming from Portugal.
Okay. That's it for me thank you.
Thank you. Our next question comes from Andrew Carter with Stifel. Your line is open.
Yeah, Thanks somewhere to kind of at kind of drilling a little bit on the canvas 2.0 products. We're obviously seeing a lot of out of stocks. So first question is are you seeing more of a normalized ordering pattern versus what you saw kind of in the 1.00 market and kind of give us an idea where are your supply chain is at this point are those products incremental gross margin or do you.
Still have some fixed cost absorption to go that would be helpful. Thanks.
Maybe I'll start and.
Mark will will finish.
Yep.
We saw a different a different ordering pattern in a in December than we did.
A year ago October.
A year ago October all of the provinces, we're placing very large orders to.
Build out their supply chain.
And keep product in their distribution centers this time around.
There were much smaller orders.
But what what happened was we had reorders essentially as soon as our initial product showed up into those distribution centers. So is almost as if they were testing to see who could actually make this stuff and who would actually ship it.
And so the orders for those those 2.0 products, they're just they're coming faster than what we saw a year and a half ago answered. It is it's not normalized is nowhere close to being normalized.
It because as soon as we ship the 2.0 products too.
The provinces.
And put them on shelves they disappear.
Within a number of a matter of days and so [laughter]. It's it's a good thing, but we're trying to increase our manufacturing capacity capacity rapidly. So that we can ensure that that we capture market share and capture a shelf space.
And from a costing standpoint, we've put our plan in place and kind of built some inventory we thought we'd be in great shape to have we're building to three or 400% of our plan, but it's sold out a lot faster in the Reorders came off faster. So we were we were probably more conservative this time around as well as a provinces.
Being more conservative versus the first time and from a cost absorption standpoint, we're really inefficient today, just because now we're trying to scramble to catch up and and just pushed as much through as possible.
We're putting new lines in or an additional line and I think our chocolate side.
And we'll we'll we'll give more efficient as those start to stabilize and we're not just rushing everything out and now that now that we know what demand is and we're seeing orders in reorders.
And increasing our capacity we will.
We will further automate those different manufacturing lines, we too conservative approach in terms of the equipment we ordered.
The packaging that we ordered.
And so so you'll see more efficiencies.
Throughout our supply chain, which will drive down our Cogs.
Thanks, I'll pass it on.
Thank you on our next question comes from Scott is fortunate with Roth Capital Partners. Your line is open.
Yeah. Thanks for taking the questions. Most questions have been answered <unk>, but real quick are you seeing any hardware issues on the vape side coming from the Crown virus and China suppliers are how's your supply side of things from the 2.0 side of things.
Yes, that's that's one of the that's one of the areas, where there is some impact and it's really on the.
Branded hardware.
Yes.
One of the things, we did that turned out to be a smart.
But maybe not intentional was we ordered a significant inventory of the vape hardware that was unbranded so that we could put whatever brands.
We're doing well.
We could put that branding on the hardware and so we do have some inventory that's unbranded that we can now brand in our facilities and that gives us a little bit of.
So pressure relief valve as we're waiting for additional hardware that come to us from from various international sources.
Okay. That's it for me thanks.
Yes.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to Brendan Kennedy for any closing remarks.
Thanks, [noise] I cant complete this call without paying a few words about marchesani that back in March of 2018, we recruited mark out of.
18 days of retirement to be our CFO.
In July of 2018.
Mark completed his fourth IPO.
When you helped make till Ray the first canvas company to complete an IPO in a major U.S. stock exchange.
Over the past 20 years I estimate that Mark has participated in.
Between 70 to 80 calls.
70 to 80 quarterly earnings calls.
Mark have enjoyed making history with you [noise].
And look forward to continuing to work with you and your new strategic development wrong and thank you for your hard work and dedication until right.
I think our dedicated employees and team members.
For all of their hard work improving patient.
Consumer lives through.
Through the power of cannabis in hand, we appreciate everyone's questions and participation on today's call have a great evening. Thank you.
Okay.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect everyone have a great day.
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