Q1 2020 Earnings Call

Welcome to the balance company's first quarter 2020 financial results conference call.

This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero under telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host ever at night Executive Vice President of corporate development in capital markets of the bounds company. Please go ahead.

Thank you operator.

Good morning, and welcome to the balance company's first quarter 2020 financial results Conference call.

A replay of this call will be archived on the Investor Relations section of the balance website at Www Dot the balance company Dot com slash investors.

Before we begin please let me remind you that during the course of this conference call balance management May make forward looking statements. These forward looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations.

For more information on the company's risks and uncertainties related to these forward looking statements. Please consult the company and Ya M. DNA and other regulatory filings available at Www Dot see Dar dotcom.

Any forward looking statements should be considered in light of these factors. Please also note that as a safe harbor any outlook. We present as is as of today and management does not undertake any obligation to revise any forward looking statements in the future for a reconciliation of non-GAAP measures discussed.

Please consult our mdna filed on SEDAR.

Joining me on the call today are Mr., Tyler Robson, Chief Executive Officer, Mr., Chris Biden, Chief Financial Officer, and Mr., Jeff Salads pregnant.

With that I would now like the handover the call to Tyler Tyler. Please go ahead.

Thank you everyone and welcome to everyone has joined our earnings call to discuss our results for the first quarter for the period ended February 29, 2020 I.

I would like to begin by sharing our most important solidarity draw the listeners and their families that together, we navigate these unprecedent times.

The frontline workers, including those in our health care systems across the country and beyond we thank you for yourself with dedication and helping US fight our way through this pandemic. What we were anyone can control is the overall impact. This will have on our communities businesses industries and overall our society as a whole so we're focusing on what we can control which.

These are committed to our commitment to working to protect communities by assisting where we can ensuring those for acquired cannabis products and services continued to access access them, both safely and efficiently.

During the first.

So products to serve and services to patients and consumers has been our mission since inception of the company and is reflected in our brand our recent rebrand, which we announced in December.

The end of Q1 is marked our first quarter out of the balance company. Our rebrand represents much more than just a corporate name change it signifies the evolution of our business into a leading cannabinoid based product development and manufacturing company position to capitalize on the evolving industry on the global scale our rebranded reflect.

Our growth and transformation over the past few years, which culminated in us achieving a new strategic positioning for the launch of Canada's 2.0, and accelerating the scale up of our white label capabilities during the first quarter.

Revenue for the first quarter of 2020 increased to 32 million a significant year over year increased from 2.2 million in the first quarter of 2019 gross profit was 18.1 million were 56.6% of revenue in first quarter 2020, compared to point 9 million or 38.3% of revenue in the first quarter 2019 adjusted EBIT.

That was 14.3 million or 44.7% of revenue for the first quarter 2020 compared to a negative adjusted EBITDA of 2 million in the first quarter 2019, we're pleased with these strong results, which demonstrates the continued advancement of our growth strategy admit the challenging market backdrop. The decrease in gross profit margin and adjust.

EBITDA margin were expected as we rollout our white label program. The business segment offers great opportunities you engage further with our customers who are looking to launch new and innovative product format, but bringing more conservative margin profile going forward with that said, we are expecting aggregate EBITDA growth to accelerate with the bulk of our growth coming in fiscal.

Q3 in Q4 as a significant number of our new products of the shelf.

We recognized that over 19 pandemic is evolving situation and we're currently running our business with the houses health and safety of our employees as a top priority now more than ever before we're committed to remaining a valued and trusted partner in our customers to our customers. Despite the challenges. We expect this market to bring with this in mind, we continue to leverage the flexibility of our plan.

Form to create a win win scenarios in our partnerships manage contract that extraction volumes in month to month and drive additional revenue through our White label program. We also recognize the urgency in preventing preventing the transmission of the virus. During this time and recognize the significant responsibility we have to ensure our communities our care for to help the name.

And wide effort to bring Colvin 19 under control, we are using our existing extraction production line capabilities to distribute products that have the potential to fight transmission of the virus and alleviate essential supply shortages, we are bottling and donating 40000 bottles of hand sanitizer in various forms to healthcare workers across Canada. We also have don't.

One of these are very personal protective equipment, such as gloves gown sanitizing wipes and from our existing supplies will continue to do everything in our power to support those on the frontline the fight against over 19 to our investors I would like to reassure you that we're confident in the strength of our working relationships with our customers and our ability to service them and these.

Well time, we will strive to can you continue to provide transparent effective communications to all you throughout the next several months of this can as the situation continues to unfold I'll now turn the call over to Jeff Fellows President of the balance company to dive deeper into our operational achievements in this quarter and the outlook on the rest of year as well as provide more details on how we're adapting to the current.

Ironman I'll be available to answer questions at the end of this call Jeff over to you.

Thanks Tyler.

First quarter fiscal 2020 wasn't profitable a pivotal point for the balance company in the midst of a challenging market environment. We continue to hit many critical milestones in the strategic development of the company. We believe our efforts in this quarter will present significant revenue opportunities later, this year and beyond and have greatly furthered our goal of being a leading cannabinoid based products company delivering next year.

Duration products to our customers are.

I'm going to start by recapping, our achievements in the first quarter and talk about the trends, we're seeing in the candidates market before going into our outlook for the remainder of the year, which will include the initiatives. We've put in place to adapt to the cobot 19 pandemic and the impact we're seeing so far.

Throughout quarter, we leverage the flexibility of our extraction platform to help our customers navigate increasing complexity in the market while at the same time accelerating the scalable for white label capabilities. These efforts included launching a number of new product formats, such as hydrocarbon based offerings with the intention or bringing these high demand products to customers at the beginning of the third quarter as a result.

Both of these efforts, we now expect wasn't able to exceed over 50% of revenues in Q3 2020 earlier than our previously expected timeline of Q4.

We process 19962 kilograms of dried canvassing have biomass in the first quarter of 2020 inline with the trends identified on previous earnings conference calls our processing volumes remained flat as our production mix shifted to a number of smaller lot runs in order to help our customers launch a broad assortment of products into the kind of us to final market.

His transition also resulted in an increase in our revenue per gram of input to $1.44 program in the first quarter of 2020 compared to $1.25 program in the fourth quarter of 2019, and 61 cents per Gram in the third quarter of 2019 revenue program is expected to continue to increase road 2020, as a number of white.

Contracts continues to grow and revenue from extraction contracts returns to growth what contributes to a smaller proportion of total revenue.

The company has 25 skews across five different product lines and its development pipeline and expects us to grow throughout 2020 to meet demand for its customers for kind of is 2.0 products, including base and edibles concentrates kind of assumptions beverages Topicals tinctures capsules.

As the industry matures not just in Canada, but globally part of our strategy to produce differentiated innovative and high quality products is to acquire and develop proprietary technologies for the customize delivery of cabinets. During the first quarter, we expanded our exclusive license for this sourced by bounds in motion technology to include Europe, Australia in Mexico.

In addition to Canada, representing a nearly 20 times, increasing the addressable population exclusively available devolved and its customers.

This was followed in late February by the end out sort of our first international shipments of white label products to customers in Australia.

National shipments will consist of three skews of tinctures totaling over 3000 units and are expected to be shipped in the coming months pending receipt of necessary import and export permits.

During the first quarter, we also signed a multiyear extraction of White label agreement with several help therapeutics and a multiyear product supply agreement with the value.

In addition to extraction services valves will provide emerald health one of the leading players in the medical market with White label services, including formulation mixing and filling for Vbloc vaporizers soft gels and pictures were looking forward to helping them expand their product portfolio over the course of Europe.

The Valeo has agreed to purchase a minimum of 40 kilograms of THC or CBD in your one and two of their contract in either distillate or sourced by valve bound the Malaysian followed by 50 75 kilograms in subsequent years for use in the production of edibles.

Most recently in Q2, we launched.

Most recently, we launched cannabis infuse beverages through a white label partnership with anyone kind of its company a subsidiary of iconic brewing, which were first to market in Ontario.

The demand for quality products is becoming increasingly evident in the market and we're proud to be able to differentiate ourselves with our innovative offerings, enabling us to capture market share and then power customer brand development in a strict regulatory environment.

In particular, we believe that isolate will continue to gain traction that future demand is currently underestimated our process allows for the manufacturing a very high purity of isolate which speaks to our advanced technologies and positions us well to take full advantage in this emerging market opportunity.

This will lead to further development of our white label product offering for both our licensed and unlicensed CPG customers.

Now I'd like to move onto the current market volatility and get some further color on the impacts were seeing on our business in Q2.

Like many we're seeing challenges in the current market environment with several of our customers experience reduced workforces and temporary decreases in cultivation output, which have resulted in reduced demand for extraction services retail demand for kind of us has surged during the call <unk> 19 pandemic and while we are currently anticipating strong white label sales going into the second fiscal <unk>.

It's funny, we are currently unable to predict the full impact these market challenges will have on our second quarter results.

That being said, we continue to benefit from the flexibility of our platform the quality of our out but I mean experience of our team in assessing opportunities both in the near and longer term with a breadth of new products on the horizon, a white label platform that surpasses, even the largest Canadian canvas companies a diverse customer base and early signs of extraction.

In volume recovery, we're well positioned to adopt to ever changing environments and consumer demands are strong cost position does not leave us complacent as our team looks to maximize capital allocation to generate the highest return on invested capital for our shareholders.

As Tom mentioned, we cannot control the overall impact of a pandemic well we can remain focused on the factors within our control with this in mind, we are taking a five prong approach to navigate the current environment.

First maintain the health and safety of our employees is Paramount.

Secondly, ensuring adequate supply supply of critical business inputs to drive production third identifying communicating at executing on business priorities.

For eliminating or delaying all lower priority projects and expenditures and five opening appropriate communication channels to ensure all of our stakeholders stand form with our progress.

In the near term, we've turned our focus to our domestic operations that have temporarily slowed our international expansion efforts as a result at the global impact of the pandemic.

This focus includes getting our K two facility in Cologne, and our greater Toronto area operations up and running and continuing to further our our IP development activities. While we remain confident in our balance sheet. We believe this is the correct course of action in the short term mitigating risk, allowing us to focus on our core operations and potentially setting the stage for even more attractive.

In investment opportunities as we emerge on the other side of the current market challenges.

I'll now turn the call over to ever night Executive Vice President of corporate development and capital markets to discuss our Capex plans in more detail and some of our other initiatives to bring value to our shareholders.

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Thank you Jeff.

As our company grows we recognize the increased responsibility we have to communicate both effectively in transparently to be investment community given the height heightened levels of uncertainty in the market. This is now even mortuary than it ever wasn't for.

Our philosophy has always been and will remain to maximize return on invested capital for our shareholders is shown in our targeted global expansion strategy, which focuses on developing distribution channels and near term revenue opportunities with shorter payback periods.

Rather than an asset heavy model during this period of market uncertainty.

With recent events and large stimulus packages being issued by country countries around the world. We believe this may accelerate cannabis legalisation as governments look for tax revenue in future quarters and years to come.

Although Jeff mentioned that we are temporarily we temporarily slowed our global expansion efforts in this environment, we've expanded our international team and we'll be opportunistic for strategic strategic undervalued assets that we can get at a discount in years to come.

With that said, we still expect <unk> global cannabis revenue within 2020 with the potential for facilities on the ground internationally in 2021.

We continue to focused largely on intellectual property IP related initiatives as we see an increasing attractive pipeline of opportunities that we can leverage throughout our growing global platform.

From an investor standpoint, we have hit many significant milestones in Q1 that we expect that will help us increase the liquidity of our stock and enhance shareholder value, including securing DTC eligibility for our shares traded on the Oh Tc Qx.

This will bring us closer to increasing trading volume and liquidity in the United States, and allowing us to reach new investors in larger markets.

We also announced a normal course issuer bid in the quarter, allowing us to purchase and cancel up to 6 million 275200 and for a balanced common shares from the open market purchases from time to time, which will be funded with cash on hand.

We have not yet purchased any shares under the normal course issuer bid, but intend to be more active in the coming quarters has allowed by the plan and as appropriate in the market.

Most recently in Q2, we announced that we received conditional approval on March 25 to graduate from that CSX venture to the trial stock exchange another major milestone in our plans to bring value to our shareholders as we gain access to a wider group of investors indexes exchange traded funds as well.

Analyst coverage opportunities.

And now we're excited to announce that on April 14th we were recently granted official approval by the Cmax do Onquest and we will officially start trading on the Troms stock exchange. This Thursday April 16 under the ticker symbol V al and S.

Our belief is that company fundamentals, including cash flow generation will be the main driver of long term shareholder value. However, with these major milestones in place we increase our ability to reach new sophisticated investors not only as a profitable company, but as a leader in the cannabis space.

As discussed in our last conference call, we're working towards increasing our manufacturing capacity at our Pommies facility North of Toronto, and we're budgeting for approximately 10 million of capital expenditures at that facility.

Once complete we will ramp white label activities for beverages, edibles and source by balance in the greater Toronto area, starting at the end of fiscal 2020.

The planned capital expenditures to bring the facility into full operation are fully funded with cash on that.

The K two facility in Kalona is on track to ramp up operations in the second half of 2020. Once this facility comes online it will expand our 425000 kilogram extraction input significantly and add increased scale to our number of a number of our manufacturing capabilities.

In the second half of 2020.

With that I will now turn the call over to Chris by then CFO you talk about our financial results.

Yes.

Thank you ever.

Based on the operational achievements highlighted earlier in this call consolidated revenue increased to 32 million for the first quarter ended February 29, 2020, a significant increase from 2.2 million in the first quarter of 2019.

Revenues comprised mainly of proprietary and industry, leading extraction and white label manufacturing services oil and oil based products destined for kind of is 2.0 market and analytical testing revenue.

Revenue from the candidates operating segment increased to 31.6 million in the first quarter of 2020 compared to 2.2 million in the first quarter of 2019 as a company continued to focus on processing cannabis and head biomass sourcing both winterized and distillate oil for our partners in China.

2.0 products and scaling up the white label product formulation and manufacturing to include tinctures and big rights.

During the quarter, we did experience a moderation and extraction volume and frequency of shipments, which we anticipate continuing through the second quarter of 2020 as a result at the current operating environment with several several of our customers experiencing reduce workforces and temporary decreases in cultivation output in response to that.

Cobot 19 pandemic.

Looking forward to the back half of fiscal 2020, we anticipate extraction volumes to begin to strengthen as additional equipment comes online, including expanding our hydrocarbon capabilities.

Additionally, in first quarter 2020, the company generated 0.6 million in revenue from analytical testing. So the company ISO 17.25 accredited labs, including 0.1 7 million intercompany testing revenue.

A significant increase from the 0.1 million in revenue in the first quarter of 2019.

With our continued revenue growth in the first quarter and timing of certain sales of oil and oil based products destined for cannabis 2.0 market.

Customer trade receivables increased to 42.1 million at February 29, 2020.

These trade receivables, 67% or held with five health, Canada license partners of the company.

To give some additional context on our accounts receivable aging.

Based on the turns of the agreements with our license partners, we expect to collect outstanding receivables within 30 to 90 days of invoice.

Subsequent to the ended the quarter. We're pleased to have already collected or have trade payables were the same partners for 54% of these receivables, which supports the already strong cash position of the company and speaks to the strength of our current relationships with our industry partners.

With revenue from branded customers set to overtake license partner revenue later in the year, we expect revenue collection to become more stable as provincial retailers will form a larger portion of our customer base and planned our platform continues to become more diversified.

Consolidated gross profit increased to 18.1 million or 56.6% of revenue for the first quarter of 2020 compared to 0.9 million or 38.3% of revenue for the first quarter of 2019.

Gross profit from candidates operations for the first quarter was 17.7 million or 56.2% compared to 0.8 million or 35.9% in the same period in fiscal 2019.

Gross profit margins for the candidates operations were impacted in the first quarter of 2020 by write down of inventory for 2.4 million related to cannabis purchased and process, which which the cost of these two specific lots of inventory exceeded the net realizable value.

Prior to this write down in inventory kind of its operations realize the gross margin of 63.9% of revenue in the quarter.

The analytical testing operations on increasing gross profit for the first quarter, two zero point, fourmillion or 72.3% compared to 0.1 million or 69.6% and the same period from fiscal 2019.

Operating expenses for the quarter were approximately 11.6 million compared to 7 million in the same period in 2019.

The increase from same period in 2019 is primarily attributable to higher depreciation and amortization costs.

The reason wages and research extraction and labs supply costs as a company operation to meet demand for services in 2020.

These increased costs were partially offset by lower share based payments and advertising and promotion costs in the first quarter of 2020.

Adjusted EBITDA was 14.3 million or 44.7% for the first quarter of 2020 compared to negative adjusted EBITDA of 2 million in first quarter 2019.

The company recorded a tax provision in the first quarter of zero point Threemillion.

With the continued ramp up of profitability one of the company's skews remain taxable after utilizing all available on capital loss carry forwards.

The company can you continue to deploy strategies to effectively manage the overall tax structure of the company and reviewed this tax structure on an ongoing basis.

For the first quarter of 2020 company posted net income of 2.5 million or two cents per share compared with net loss of 6.4 million or seven cents per share in the same period in 2019.

The company had $44.3 million in cash and short term investments as of February 29, 2020, compared with 58.7 million November Thirtyth 2019.

With that I'll now turn the call over to the operator open the lines for the Q1 day.

Thank you at this time will be conducting a question and answer session.

If you'd like to ask a question. Please press star one telephone keypad a confirmation total indicate your line is in the question Q.

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We ask that you limit your questions two questions. Initially so that we have time to speak with as many of you as possible.

If you have additional questions. Please rejoin the queue and we will endeavor to come back to you later in the call.

Our first question comes from the line of David could Apple with Altacorp. Please proceed with your question.

Good morning, Congrats on the quarter guys and thanks for taking my question here a couple of questions for you.

But you've mentioned both in your press release and also you've alluded to in your prepared remarks. This morning.

Well the covert 19 pandemic bring some uncertainty pure next quarter I'm, just not completely understandable can you maybe elaborate on how you're gearing up and preparing for the uncertainty in Q2.

And really being able to deliver in really good next subsequent quarters 63 in Q4.

Sure. David This is Jeff I'll take this one and just to note for the call Albie directing all the questions to read members of the team just to make sure where officiating we're not talking over each other but if you have specific people that you'd like to start to your question toward please feel free to do so.

So David as I said in my comments.

The scripted comments for the beginning of the call.

The first step that we we looked at in assessing what we should do in the contract. So the market was first and foremost make sure our employees are safe and secondly that we had all the critical business inputs in the supply lines. We needed were in place to make sure. We continue to operate but the next part of that strategy was to then take a look at our our our plan for that.

Sure and strategize around which were the appropriate priorities in the context of what we're seeing in the market.

At the end of Q1 and into Q2 and into Q2 as you as we said in our remarks, we started the notice that slowdown in our pulling extraction services and then decided at that point to pivot our efforts to white label program. So you'll remember that we had originally anticipated that base extraction would represent the majority of.

Our our revenue for the better part of 2020, but in light of the slowdown we ramped up activities in our white label and now believe that those efforts will put even more deferred dividends later in the year and as such that the White label program will represent a larger part part of our revenue much sooner than originally anticipated.

And that means things like.

The our hydrocarbon extraction, a broader portfolio of other white label products.

And things like bringing ISIL it ER in larger quantities to the market.

Okay. Thanks for that Josh and I know just a follow on question unrelated here the stuck to the accounts receivable almond accounts payable we do know that the both increased in this quarter. So I'm. Just wondering if you can ship I know Chris you gave some color on this but are you able to shed some more lights on that.

Yeah, Chris.

Yes, certainly.

So I kind of as I My remarks earlier in the in the call and as we disclosed in our in our financial statements are our receivables.

Our comprise.

With 67% of them meet up with our kind of five largest partners.

Kind of of that balanced 55% about balance we were able to subsequently received.

After the quarter.

You know, that's a little bit lower than what we received.

The end of Q4 are largely just based on the timing of when we reported Q1 and we had more time obviously.

Between the end of Q4, and when we reported our year end results.

So as far as our overall kind of philosophy and strategy with respect to receivables.

We're very proactive in how we're looking at those managing those relationships on a on a daily basis.

As part of our kind of review for the quarter, we did provide a provision of over 358000.

We see that currently as our exposure at this at this time.

We have worked with a lot of our partners kind of around timing of payments and have extended some payment terms with some of our partners.

And kind of through that process Havent had.

Any of them Miss kind of any of the commitments they made with respect to.

The payment obligations that we have have set up so don't foresee any additional risk with respect to those balances that at this time.

And David that's very helpful. Just every day, it's ever here just a follow on from an expectation on a modeling standpoint like for all of 2020 were forecasting that every single third party customer is under 10% or forecasted revenue. So.

The diversification that Jeff talked about.

In opening remarks, we'll continue to be a strength for us going forward as well as branded products out of these third party like we have a license producer category and then we kind of have the branded products category, where we have CPG customers.

Like I I Konik.

Burn to et cetera, we continue to see a lot of demand growth or not and if you look at our expectations and forecast for Q3 and Q4, our branded products actually exceed the revenue from license producers.

And were paid by the potential retailers in that case, where we get the revenue and then we actually pay a royalty back to those license partner. So I think that way more stable of an environment and diversified into the back half and and then going forward from an HR as a percentage of sales you're going to see that come down here.

Significantly as we have that diversity going into the back half just for for your modeling and just to understand the provincial payment dynamics for investors.

Currently provinces on average pay after 60 days, so our customers get that money and then pass but that means that we're getting paid between 60, and 90 days, where a lot of those customers and that and that's why the receivables are coming in at that time.

As Chris mentioned, because they are laid on payments would they have been timely on those so just for your expectations on modeling going forward.

Very helpful. Thank you for the color and I'll hop back in the Q.

Thank you. Our next question comes from the line of Neal Gillmor with Haywood Securities. Please proceed with your question.

Yes, good morning, guys.

Maybe one to start off with your comments on the on the revenue per Gram, obviously, you've had a very noticeable.

Increase from Q3 through Q1 of this fiscal year.

And your comments that you expect trend higher can you provide any sort of color on whether you expect this the same sort of rate of growth or is that going to sort of moderate as we move through 2020.

Yes, thanks Neil.

I'll take this one and then others can add on a buck so it right now as we look forward, it's a little too early for us to really great color on exactly where that.

Revenue per Gram is going to go obviously, it's going to depend on our product mix different products will will deliver different revenue per gram dynamics.

We have but we appreciate from an investor perspective, and from an analyst perspective that.

You're going to need additional color on how to forecast as implant is going forward and as the trends in the market and we get a better handle on how the markets developing we fully intend to help with better guidance in that regard, but in the short term here, we're still trying to get a better handle on.

What products are going to driving which demand as we move through 2020 or.

Okay and Neil it's just it's just that remain maybe just add like I reiterate what Jeff said, it's tough to model today, but we can you can expect with more white label products in Q3, Q4, and as they become more of our revenue stream naturally that dollar per Gram will increase and it's just as Jeff said different products have a different dollar per gram.

So beverages are really high dollar per gram, others range, but as more white label come online, we expect that said the increase over time.

Okay. Thanks, guys for that maybe.

Maybe just on the expansion in Cologne I think in your prepared remarks, you commented on.

Being complete are being operational in the second half or 20.

When that comes online obviously increases your capacity does it have any change or impact on your cost structure for for your operations at all.

Obviously this is Jeff and are going on maybe I'll start with this one.

Others can jump in obviously you guys your volume increases your efficiency increases and with the additional facility online we do expect that.

So we'll be able to run larger lots to be able to spread the production platform over a larger area and that should drive efficiencies for us.

But again it will depend on.

In the short term what the product mix is coming out of there and how.

Call that demand sort of filled about facility over the course in 2020.

Great. Thanks, very much guys.

Thank you. Our next question comes from line of Janney Capital. Please proceed with your question.

Thank you. Good morning, My first question I've heard you mentioned that you're expecting branded partners to exceed LP and the second half of 2020 in terms of activities is just under the expectation that you will find new partners or is it mostly existing partners increasing their volumes.

So thanks, Thanks for the question Jenny so so as far as its both right. So we expect I think you're going to seems you two year, both our number of contracts expand as well as the exact existing partnerships, we have youre going to see more scale and more product growth on those platform. So it's a it's a two pronged answer.

Act on growth on both fronts.

Got it. Thank you and then just in terms of.

Inventory on hand.

Just wondering what's kind of the Abbott shelf life of the inventory and.

Cobot potentially creating a slowdown or are there ways to kind of extend that shelf library to mitigate any inventory expiring.

Ever.

Yes, so the inventory obviously increase this quarter that that's in preparation for the 2.0 products that we work. We're obviously gearing up for more branded sales. We just it's got to be in more of the revenue, which those branded partners don't have their own dried Canada. So we went out and prepared for that and especially if you look.

At hydrocarbon January Jenny you need specific inputs with hydrocarbon you to higher turpin profile in the actual cannabis itself. So it's important that we supply that now and get ready and we're not taking on that on ongoing price risk for our customers.

And which I worked out really good in this environment now that we had adequate levels.

Good to kind of answered your question on the stability of the products long term drug candidates like obviously, it's different on how you store it but call it three to six months.

See degradation overtime oil and in distillate, you see way less degradation. We don't have actual studies on on a long term as an industry, but people have held on hands for years. So as as license producers in this industry I think theres over 400000 kilograms of dried capacity on People's balance sheets, they have to make a decision either.

They let that expire or they turn it into distillate.

And actually get longer shelf life, which is an opportunity for us.

As a extraction volumes kind of start picking up in Q3, Q4, and we're already seeing conversations with some of our customers or that there are starting to plan for that.

As 2.0 products I wrap up.

Got it thank you Patrick Thank you.

Thank you. Our next question comes from the line of Paul Trotsky with partners. Please proceed with your question.

Hey, guys. Thanks for taking my question.

Oh, just a quick point on on the inventory. So you know in preparation of.

Hydrocarbon and all that heading into the back half of 2020. So are we getting normalized levels. Now are you guys feel like you need more on hand.

Oh, sorry. This is Jeff so maybe I'll take this one so it's obviously, it's going to depend on on opportunities, we see a four but for pricing or product that we're looking for in our demand profile as it continues to grow.

But I would think occurred levels should be pretty steady going for the next several quarters.

But as the demand continues to grow that certainly does have the potential to increase especially as our volumes increased.

Okay, Great and then just a quick went on Oncomine. So if I missed this but can you give them the timeline sort of on capex at that facility.

Yeah, so that we as ever said in his remarks, we're forecasting.

Around plus or minus $10 million in capital expenditures to bring a facility online and that will largely take place over 2020.

No three quarters.

Okay, great. That's it for you. Thank you.

Thank you.

As a reminder, if you'd like to join the question Kim Please press star one at this time.

Next question comes from line of John Chu with debt capital markets. Please proceed with your question.

Okay.

Hi, Good morning. So my first question is just on.

How moving towards the White label is changing the payment telephonics, you're getting paid from the provinces you said.

So I'm just curious if there's any risk.

What we've seen going on on the LP side, where we're seeing from sale is being returned sales return provisional price adjustments and whatnot.

Are you at risk of that given that he payment is coming from the proper profile.

Well, maybe Tyler will give you a chance to jump in here and what would your revenue.

Yes, absolutely Joe is it's a loaded question because at the end of the day, we don't have a solid answer yet we haven't seen any return to product or any issues, yet, but obviously, that's something we need to mitigate going forward. So at some point I would say, we will be exposed to that but again, because our products our value added and we're really doing custom manufacturing.

We're not really the ones taking a liability if the partners that are so we're not really both the.

Higher end of that spectrum.

And John small lots are low it lowers your risk as well right.

Correct, yes, so we basically mitigated as much risk in began selling smaller loss of smaller volumes different provinces, rather than basically overburdening. One promised at a time and that's why we've gone strategically to each province, and have negotiated supply agreements with them direct.

Okay.

Effort and helping our yeah, yeah, just maybe a common to like on the 2.0 product side.

We've seen last returns and more demand obviously, it's early inning.

Even on our beverage front initial shipments we set out we're sold out in Ontario, So I think thats, an encouraging sign so for our branded partners coming online, especially in different companies have like.

Theres more bankruptcies and everything else I think there's a lot of market share up for grabs offer them to define themselves and it's our job obviously just to differentiate their bank branding put their best foot forward.

Into that provincial supply chain as Carol mentioned.

Okay. Then my second question is just in terms of you talked earlier about.

Expanding your footprint internationally by as early as 20 to 21. So I'm just curious what do you need to see from a market development perspective.

Aren't that move because we're seeing a lot of LPG make the jump at that too early and it's obviously they've had to scale back. Shortly thereafter, so I'm just curious what do you need to see in a specific market can make you want to make happen and then that required investment that.

Thereafter.

Yeah, Thanks, Sean I'll start with disciplined so.

First as a boat has ever it said in his remarks, it's about distribution. So the first conversations we have we know what we can do we know that we can put a volatile box anywhere and that we know what's coming out of that box and all the quality fashion. So what were what we need to make sure. We can do was obviously sell and distribute the products in the new markets. So every market conversation starts with distribution.

And then we work back from there and say Okay. Now we have our distribution partner, we have the opportunity what's the right way to enter and what's the right sized facilities. So any international expansion redo will start small and grow when they occur in the context of the market. So there will not be any big swings there will not be any large invest.

It's on international perspective, it will be start low go slow and make sure that we're able to funnel the products everyone through to the right distribution channels.

Okay, and just to add to that like our internal what we look for in the near term revenue and what's the payback period. We don't view this as put an asset down and wait for the market to legalize it's like Jeff said that revenue first dynamic where we find distribution and then build it out accordingly to optimize that supply chain after.

Words.

Okay, great. Thank you.

Thank you. Our next question comes from line of Kimberly headland with Canaccord. Please proceed with your question.

Okay, Thanks, guys and good quarter.

Most of my questions have been answered, but maybe could you comment if you're seeing any weakness in your average totaling rate.

Maybe Tyler will give I want to you.

Yes, absolutely at this point, we're not seeing any weakness in tolling rate again, depending on the form factor that the product you're going for each each type of extraction has a very different payment structure, whether it's two epilogue, all our hydrocarbon hydrocarbon we're actually seeing almost a fight for capacity because everyone wants to participate in that value add service.

Yes.

And with our contracts, we actually created that the escalating scale based on volumes quantity and duration of contract. So we've already built it into our expectations on tolling and the only thing I'd say the demand for capacity in hydrocarbons is far more significant or superior than we we ever thought.

Great.

And then maybe differently as Genie side. Its Q1, a good run rate that we should be looking out for the year or do you expect that to ramp up that's you know that the new facilities come on.

Uh huh.

Chris buys a maybe we'll turn that once you, yes, definitely I can speak to that I.

I would say on the M&A front I think in the in the short term kind of through Q2 and into early kind of Q3.

Q1 would be a very good indicator of what our run rate is going to be and I think obviously as we kind of transition and extend our footprints.

Next door, we will see some increases.

As we bring that facility online.

Into kind of the latter half of.

The year.

Okay, great. Thanks, so much.

Thank you. Our next question comes from line of Robert Fagan with Stifel. Please proceed with your question.

Hey, guys. Thanks for taking my questions here and congrats on that quarter.

I just wanted to touch on the.

Decrease in volumes that you're seeing in that quarter and spilling into Q2.

And whether that's attributable in your mind to two co bid.

Or perhaps just the more gradual rollout of 2.0 products, obviously, we've seen reports of demand surging.

At retail for cobot.

Related reasons, but.

How is the role of 2.0 going into your view like assuming it was kinda like a 10% to 15% share of market in the early months of this year and how do you see that progressing as a percentage of overall market demand this year.

So maybe I'll take a for shot at that and then and then we can pass it off but.

So I'd say first off I think that it would be we'd be.

Oversimplifying to say that the slowdown was all related to to the covered crisis I think if we're looking at our partners and their inventories and et cetera in the contracts of the certainly I think there will be a compounding factor in terms of you know if I was I would want to work through the inventory I have in the context current market without.

Extending additional working capital.

So I think that there is a dual effect going on there, but from a canvas to probably know product perspective, we continue to think that we've only just scratched the surface on what the demand for those products will be particularly as new products are to hit the market new form factors I mean, we still have a lot of exciting things that we haven't our pipeline that we haven't even got to market yet.

So we continue to thanks, Doug.

The the growth of the chemistry panel market is really only started.

And and Rob just to expand on what Jeff said, I think with the smaller like a lot sizes for the different skewed in 2.0, that's why we saw a moderation as well going into that so in Q3 Q4, our expectation is more oil products are selling is the demand in the kilograms in the back half from a volume standpoint will increase again.

So obviously the moderation is happening now and.

What I'd say broadly on the 2.0 segment I think as more market.

Products come on like hydrocarbon and you look at the U.S. and you see that 50% in the market. Almost is is oil base 2.0 products and we really haven't had that in Canada, and even with retail sales in January being $154.2 million. So we're at a 1.85 billion annualize industry, but we really have.

Even scratched the surface on to point out product. So you can see as that grows I think there's a very large opportunity for 2.0 products they become 50% of market and our view long term as people want those more convenient backing instead of rolling and joint in their homes. They want to conveniently takeout abate pad or a customized beverage with our source technology and they were.

Want that convenience. So I think it has the opportunity be greater than 75% of all sales down the road. So I mean, that's that's our view and that's how we're preparing for it.

And maybe I could I just one more point as we're looking at I mean, obviously, we're excited about the opportunities we have from white label perspective, and and the current market really gave us an opportunity to accelerate that program, which is great but.

On the on the base extraction side, what conversations we're having now and we're starting to hub with our customers, both new and existing customers as well. This crisis has brought to the forefront is the need to focus on core operations and the conversation we're having with him is that the extraction services. We we provide may not be.

Core through a number of those parties. So as we look to the back half a year I don't want to make it seemed like we don't believe our extraction services will be in demand. We believe they will be in demand and we believe that we'll be able to continue to develop the value added services and partners that we have.

As those parties begin to focus on their core operations and we report just in the short term, we wanted to make clear and be transparent that the short term that dynamic may not play out in Q2, but we're certainly excited about the opportunity that provides us in Q3 in Q4.

Okay, great. Thanks, Thanks for that a color. It's a sounds promising does follow up question is.

With the evolution of the mix shifting towards the White label category and forgive me if this a rookie question but.

Hi, how do you see or a procurement prices trending alongside that with the obviously a probably.

An excess of of supply in the in the wholesale market currently.

Tyler.

Yes, sorry, so the excess supply in the market. So when you really look at our platform.

It's again, a little convolute, depending on the product, we obviously see the overall.

Price per Gram go up depending on the did form factor, it's going to end the delivery system and what a lot of people don't understand about the last part of the Canadian can Canada sector is a lot of that product is inferior. So I truly believe that there's low volumes of quality product that we would use it to basically put into our hydrocarbon line and then that would be still sold at a premium so.

The overall market doesn't really affect us as far as different types of extraction or different form factors, but obviously, we will capitalize on on low grade product.

Bring into different form factors like this litter islip and that's one thing I think a lot of people aren't paying attention to is the overall margins on islip. Once you really start talking about different form factors are different delivery system. Every CPG company. We're currently talking too is the in high demand for isolate it has the most on wanted and has the high potency in the long shelf life.

Our isolate also is probably the most potent in Canada, and then to be honest I'd, probably put it up against anybody in the world. So when we're really looking long term I would say the shift is to hydrocarbon and islip.

And we were not going to be affected long term by the commoditization of like the low grade cannabis.

Okay, great. Thanks, guys.

Thank you. Our next question comes from the line soccer, Sir with Raymond James. Please proceed with your question.

I'm wondering Jane thanks, so much for taking my question just really on that one quick question for you at looking at the commitments on your Mdna.

When you outlined that the company adds commitments for have been candidate biomass totaling almost 75 million over the next couple of years.

I think were given sort of the date means that our anticipated with Cowen 19 in terms of demand how how confident are you able to meet those payments over the next couple of years.

Telling me barrels over that when do you.

Yes, Im confident we can meet the demands.

At the end of the day, but the big thing for US is demand is far superior than we ever expected. So when we started the company called early 2012.

We didnt know hydrocarbon is going to be such a significant factor at that time, we really didn't have any trends to go off of Colorado in California at the time.

So we're doing our best to scale up core platforms for US and then we're moving away from difference Axio too so we're comfortable and our capabilities, but on the global platform, we will have to keep expanding and have a global footprint.

Part of it you is like you look at logistics of shipping out of Canada into the European Union for example.

If you're going to be much more user friendly to have a footprint in the EU eventually so.

Work, we're comfortable with the scale up a we need to continue to grow to meet global demand.

Okay, great that and I think mitre thanks much.

For Jim and I think is that just add that add to that comment like what we don't want to do is take price risk. So when we have contracts and we're in negotiations and I think that I mentioned that we're seeing a ramp up on islip Cape.

Demand globally, we want to make sure we have that input and especially when you go to hydrocarbon again I'll reiterate that you need a higher talking profile you need a a certain cultivars screen. So we want to go in source that today and that's what we've done over over that time.

Thank you. Our next question comes from the line of John to with days are done capital markets. Please proceed with your question.

Hi, I guess, one last follow up question. So on you mentioned that you expect a lot sizes increased in the second half the year, but im curious what's the rationale for that that's most customers are still trying to get a feel what form factors and brands resonate with consumers.

The fact that probably isn't enough sales data at this point really getting that comfort buffer yet and also because they don't want to be over flooding any particular products and enrich the products being returned supplies curious.

What's the rationale for taking a lot high they should increase in the back half of the here.

Sure John So it's really a sliding scale so while on on mass.

I would agree with your comment that people are trying to figure out what products make sense, but there are successes. So our products that are doing well and there are parts are leading categories and they are in many cases products or we are manufacturing.

So there is initial signs that the views.

They'll start to focus on some of these higher.

Higher selling products. So we that's why we feel comfortable saying, we believe that goes a lot sizes will continue to increase over the course in Europe, but at the same time you are correct that.

The market is still trying to figure itself out and so that's not an absolute statement, it's more of a sliding scale.

Thank you Thats it for me.

Thank you ladies and gentlemen, we have reached the end of our question answer session. I'll now turn the floor back over to try to Robson CEO for closing remarks.

Thank you operator to close I want to reiterate a key differentiator that separates the balance company from its peers, our intellectual property investment our company made an IP in its early stages has already has already and will continue to both benefit our business and our customers as cannabis 2.0 market evolves, our cannabis derived terpene.

Database has set our customers may pens apart from others in the marketplace in our top ranked among provincial retailers and are sourced by balance a motion technology, which aided in our ability to be a first first to market in Ontario with beverages allows consumers predictable experiences to zero kind of estate order or color and a predictable onset offset I prefer.

Matured, our proprietary technology and our event R&D.

Capabilities allow us to bring high quality differentiated products to the market and it is evidenced that our existing and prospective customers are recognizing this demand increases through fiscal 2020.

We only expect this demand to continue.

As we bring hydrocarbon products, including crumbles waxes shattered live resins and other concentrate enter the market starting at the beginning of Q3.

The third and fourth quarters, a fiscal 2020 will allow us to showcase our capability as a leading cannabinoid based product developer and manufacturer. We're just getting started here Downs company in closing I'd like to thank everyone on the call today for your ongoing support, allowing the balance company to grow as an innovator in the cannabis industry and serve our customers safely and efficiently we wish safety.

To all listeners and their families with that I'll ask the operator to close the lines.

Thank you. This concludes our our conference today. Thank you for your participation and have a wonderful day.