Q3 2020 Earnings Call
Joel to begin momentarily until that time your life will still remain on hold thank you for your patience.
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This time I would like to welcome everyone to be a free a inc. Q3 quarterly investor call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session for analyst and or Investor firms only if you would like to ask a question. During this time simply press Star then the number one on your tell.
Without keypad, if he would like to withdraw your question press the pound key. Thank you Ms. Katie Turner you may begin your conference.
Thank you can be good morning, everyone. We appreciate you joining us to the crops if.
Results for the third quarter.
Hi, 2020 on today's call or Irwin Simon in car.
By now everyone should have access to the earnings release financial statements and DNA and Investor presentation, which arndale available I Investor section of the free as website at Www Dot <unk> Inc. dotcom the financial statements have been filed with theater and Edgar afford began please remember that during the fourth of this call management may make for.
Looking statements. These statements are based on management's current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect and actual results could differ materially from those describe any forward looking statement.
Please note the tax of a brief earnings release and the financial filings issued yesterday for a discussion of the risks and uncertainties associated with such forward looking statement I'd also like no. If it were conducting our call today from our respective remote location.
That's there may be brief delays across all our other minor technical difficulties. During this call and we think in advanced for your patience and understanding and I like to turn the call over to Erwin.
Thank you so much kt and good morning, everyone. We appreciate you joining us today to discuss our strong third quarter financial results.
Before I get into our robust sales growth ran strength profit improvements and strong balance sheets and cash flow I'd like to comment on cobot 19, Global health crisis, and what we're experiencing across our operations and the industry.
First and foremost or thoughts our prayers to all those affected by this virus and that includes 20 people.
As a situation has continued to rapidly evolving our number one priority has been ensuring that health and safety over employees and their families.
Our leadership had a plan in place ahead of this and I'm proud to say, we took decisive action and execute it will work.
We're fortunate that all our facilities have been de sensual by their respective governments. This is a privilege and a responsibility we do not take lightly.
It's a privilege to continue to be fully operational across our Canadian and international International operations as we serve our value patients and consumers providing them with our medical adult use cannabis products, we remain committed.
Providing best in class products and services during this time in need and uncertainty as a result cobot Nike.
And we will continue to work with local provincial and federal regulators to help eliminate elicit market.
At the same time, we have a tremendous responsibility at a free to our employees their families and communities. We operate in we took decisive action and implement heightened safety measures in our facility protect us again.
The spread of cobot nicely.
These include but are not limited to staggering work schedules redesign work facilities to ensure appropriate social dispensing and significantly enhancing sanitation and regular clean procedures.
We are immensely grateful to our employees that work in our production facilities and have proactively taking action to reinforce our appreciation and our commitment to that.
I had a free a one we've had decelerated and implemented the plan wage increase for all hourly employees and implemented a company paid lunch program, where all employees.
We're also very pleased where I've not had any layoffs and the vast majority of operational employees continue to report to work each day to maintain production and shipping schedules and but we are even harder for certain operational roles.
Our team continued to work closely with our global supply chain partners to prevent and minimize any potential business disruption.
In Canada, we Cook preemptive measures to ensure alternative supply sources that needed.
Like many consumer package goods companies.
We also experienced prior to the walk down consumer demand at the beginning in place that the government the government mandates.
More recently consumption has returned to more normalized pre cobot Nike levels were all regions, except you back we're cannabis sales remain that even a higher level.
Our Canadian medical candidates has experienced increase in demand since he outbreak of the virus.
In Germany as many of you know Cc pharma is an important distributor of pharmaceutical products and as you would expect we have seen such increase in consumer demand for our medicines, we experienced solid growth in Q3 for the month of March Cc pharma is experience up 50% sales increase.
Our team has taken steps to secure supply and as closely monitoring the situation should any countries in new you changed your border policy as a result coal with Nike.
Our team has accomplished a lot.
On all fronts and as I said before what a difference a year makes last year. This time doing our earnings it was a totally different story.
Adam Ria, we're setting ourselves apart from the rest of the cannabis industry.
We have generated some of the strongest sales growth we have one of the strongest balance sheet and cast because this is compelling consumer brands as well.
Her supply global business.
Our Q3 results demonstrate this with the hard work over strong fee.
We generated a 65% increase in net sales revenue from prior quarter, our fourth consecutive quarter of positive adjusted EBITDA.
Consolidated adjusted EBITDA on the quarter more than tripled the 5.7 million from the prior border.
Most notably adjusted EBITDA from cannabis operations increased 78%.
Adjusted EBITDA loss from business under development decreased by 20% in the quarter.
And then industry pull a cash burn we're pleased with our ability to generate consistent results.
During the month of January we also raised approximately $100 million in capital.
Further build and strengthened our balance sheet, we continue to possess an industry inevitable balance sheet and cash equivalents to fund plan Canadian and international growth as they say cash is king.
A cornerstone of our long term strategy is to be focused on the highest returns priority that prioritized for us.
Our our growth has enabled us to be one of the only profitable publicly traded license producers in the industry.
We believe we have the appropriate capital structure for business and this provides us with strong financial flexibility well into the future. This continues to further differentiate a free in the cannabis industry.
In Q3, we demonstrated our ability to continue to be a leading producer with both the real one and a free at diamond fully licensed in operating at 100%.
Ria Diamond is already in its second crop I want to thank the Master Marty brothers, our partner here for all their help to make sure this happen.
In Leamington, we're consistently working to generate greater yields and lower cost. We're pleased that in Q3 cash cost per gram decrease to below a one dollar.
We're excited about a tremendous growth opportunities. We don't have as a result of are expanding our total annual domestic production capacity in Canada as well as our strong medical and adult use brand sales extraction capabilities.
And our ability to export you G.M.P. products and white label opportunities.
From enhancing our global team our brand building activities new facility in production capabilities to investing in new systems and technology.
Korea is well positioned for future growth.
We have compelling brands for patients and consumers across broad demographics with five high quality brands, including so they really good supply broken coast and of course, our freedom medical brand.
We are increasingly connecting with consumers through our medical and adult use brand positioning and innovation to drive growth.
We added 100 basis points to our market share in Ontario. During Q3, we added 400 basis points to our share in Alberta.
Ria maintain a 77% share across all brands on Bates in Ontario.
We increased our national share in each of our last four quarters.
We continue to make progress in a material for the month of March a free ahead number three or three of the top five brands. Good supply was number one so late was number two and risk for according to owes yes.
Oh for his success will be content will continue to be driven by our differentiated portfolio brands products aimed at the lighting distinct consumer segments.
We look forward to launching or edibles beverage and toppy goes in the near future.
We believe the quality of our brands remain on match in the industry. We have a strong foundation in Canada, where we expect momentum to accelerate the strong foundation also helps us to leverage key learnings and implement them on market specific bases in Germany, Latin America, including Colombia.
Argentina, Paraguay as well other international market.
Before I turn the call overdue Carl I want to highlight yet another way of Ria is doing this park the support local communities seniors healthcare workers during this health prices.
We're very pleased to have a major donation to the Erie shores community hospitals. This will help them acquire additional health care equipment in resources. We've also implement a program where employee volunteers and Leamington purchase.
Deliberate purchase and delivery groceries and other necessity is seniors and healthcare workers. During this difficult time, it is great and important for us to get back.
We're thrilled to have made contributions to the communities and the people that support our.
Our core value of supporting the communities to which we belong in specialty in these uncertain times serves as a driving force behind our strategic decisions and outlook.
In summary, our mission is clear to be the Premier global consumer package goods cannabis company with our medical and adult use cannabis brands. We are building brands that we believe resonate with consumers today and well into the future.
Consumer behavior has already is changing but this change has been a celebrate.
Data insights and understanding of the consumers' preference. We believe we are well positioned to capitalize on these changes in the cannabis marketplace.
I would like to thank and a huge thing.
To my leadership team the board of directors and our associates around the world.
For all their efforts in achieving sustainable results and their tireless work to continue that has kept up Ria moving forward I'm proud of the entire team's ability to really to be rain focus while navigating through this on precedent time and take decisive action to it.
Dr businesses, while protecting our employees health.
With that I would like to turn the call now over to Carl.
Thank you Irwin and good morning.
Please note all financial references are in Canadian dollars, unless I mentioned otherwise.
Also some of the financial metrics discussed on this call our non I ever as measures and refer listeners to the company's mdna for an explanation as to how the company calculates those metrics.
I want to start by highlighting three key items from our results.
These quarterly results do not.
Include any impairments.
Inventory write downs.
We're pretty provisions for future sales returns.
As Irwin discussed we continue to execute on our growth initiatives and prioritise profitability with long term growth and success in mind.
Especially now that we are in the week of a macro economic uncertainty as a result of the coven 19 global pandemic.
We are pleased with our financial results.
Particularly our cannabis revenue growth.
Sequential positive adjusted EBITDA.
Positive operating income.
And our ability to maintain a strong balance sheet and cash position.
The strength, so it'll be a free of team has become even more evident as a covert 19 health crisis continues.
We're doing everything we can to continue serving our customers and executing our strategic initiatives.
Irwin provided an overview of the disciplined and well planned actions we've taken across our business.
And I also wanted to highlight a few additional industry data points related to covert 19, they are important to keep paying for free as we move forward.
These include the.
The Ontario, Alberta, and British Columbia control boards were close to deliveries and shipments for a week at the end of March for yearend inventory count.
The Ontario control board temporarily canceled two weeks of purchase orders from all license producers or the assesses its inventory balances and is generally expecting lower volumes due to covert 19.
The Alberta control boards Replenishments are down 40% since cobot 19.
In BC retail stores have or our voluntarily closing on covert 19 concerns.
Importantly, MBC they are trying to convert their brick and mortar locations to click and collect.
Conversely in Quebec ecommerce sales are up 200% since covert 19 restrictions came into place.
And the sales at their brick and mortar locations are up 40%.
Further demonstrating what urban referenced with the free is sales being hiring come back compared to pre cobot 19 restrictions.
Additionally, our medical sales are up 18% since coven 19 restrictions came into place.
Although we proactively decrease selling prices, 10% help patients manage current cash flow concerns.
There are many variables related to this global health crisis, and we will continue to monitor them closely and react where and when needed appropriately.
From a liquidity perspective.
We believe we have more than sufficient funds for at least the next 12 months.
Our cash balance at the ended the quarter was $515 million.
We maintain undrawn line of credit facilities of just under 4 million.
And then account receivable balance that is largely with crown corporations totaling almost $80 million that is due within the next 60 days.
Our accounts payable balance at quarter end was 137 million.
We do not have any debt maturities occurring in the next 12 months.
Our next maturity is in June of 2021, and it is less than $1 million.
We do not anticipate any issues with our debt covenants.
Further to proactively preserve cash.
In this operating environment, we ceased.
All material new Capex projects in mid March.
And have eliminated.
Over $4 million from our anticipated sales marketing and promotion spend in the fourth quarter.
Difficult times requires strong leadership.
And they require communities coming together to support one another.
At a free up our team is up for the challenge and is executing everyday.
Before getting to our financial results I would like to take a moment to discuss the supply and demand challenges we faced this quarter.
As we previously discussed.
The receipt of a free of diamonds cultivation license last November occurred later than we anticipated.
This delay led to reduction in the amount and variety of finished product to meet market demands for our brands.
As a result.
And as we announced last quarter, we supplemented our own supply by purchasing wholesale flower for resale.
During the second and third quarters repurchased almost $30 million of dried flower on the wholesale market.
Of which approximately half was sold during Q3.
The sale resulted in approximately $20 million and net revenue with a gross profit of over $5 million.
If we were able to produce the product ourselves.
We believe we could have recorded an additional $7.6 million of gross profit and adjusted EBIT in the third quarter.
And an incremental 1360 basis points on or adjusted cannabis margin.
These figures are based on assumptions set out in the Mdna included an all in cost of sales and dried Ken cannabis program of $1.69.
At the ended the quarter, we maintained almost $14 million of purchase dried flower in our inventory.
All of which we anticipate selling in Q4.
As discussed in our last quarterly conference call.
Last quarter, and we identified an excess amount of extraction grade.
HC dominant harvested candidates and trim and inventory we plan to try to sell in the wholesale market during Q3.
We also identified that we had a shortfall in CBD oil.
We're going to look to the wholesale market for replenishment.
As a result, we sold $10 million of excess lower potency extraction grade.
See dominant harvested cannabis and trim.
Which the customer excepted title in control to even though we are temporarily storing the product for the customer.
We also purchased 7.5 million of CBD distillate.
The two transactions were with the same counterparty.
We confirm that these transactions are the only transactions we have engaged in with a third party extractor.
In the third quarter, we harvested approximately 31000 kilograms of cannabis.
This includes a partial quarter of harvest from a free at Diamond.
Extrapolating for the last two weeks of a free at Diamond harvests and Annualizing. Its harvest suggests that a free as facilities would've harvested at an annualized production rate of 175000 kilos at the end of the quarter.
Our financial results continue to demonstrate our ability to continue to gain share.
They demonstrate our continued focus on leveraging our cultivation expertise into lower cost per gram.
And our focus on remaining adjusted EBITDA positive.
Net revenue in Q3 increased 96%.
Over the prior year period.
And almost 20% from the prior quarter to $144.4 million.
This net revenue is comprised of 88.3 million of distribution revenue.
55.6 million of it cannabis revenue.
And point 6 million of insurance recoveries.
Distribution revenue increased almost $2 million from 86.4 million in Q2.
And cannabis revenue increased 65%.
From 33.7 million.
Adult use net revenue increased 54% from the prior quarter to 44.7 million.
Wholesale revenue was $11 million.
We do not anticipate this level of wholesale revenue occurring next quarter.
The company sold 14014 kilogram equivalents of cannabis in Q3 up 98%.
Compared to 7062 kilogram equivalent sold in Q2.
Adult use cannabis accounted for 8171 kilogram equivalents and medical cannabis accounted for 1352 kilogram equivalents.
The average gross selling price of adult use cannabis increased to $5.46 per gram in Q3.
Compared to $5 in 22 cents program in Q2.
Primarily as a result of a shift in product mix.
The average gross selling price of medical cannabis exclusive of wholesale.
Decreased to $6.41 per Gram in Q3 compared to $8 in 16 cents in Q2.
Primarily related to the introduction of a compassionate pricing program in the quarter.
During the quarter, our cash cost per Gram decreased from $1.11 last quarter to 93 cents.
Bringing our cash cost per Gram back under one dollar as it has been in the past.
Our all in cost per Gram decrease from $1.98, a gram dollarssixty nine gram.
We continue to work to lower these amounts.
And are pleased with the completion of a free environment of the free Diamond facility has already aided and lowering our cost per gram.
Adjusted candidates gross profit increased to 23.7 million in Q3 has.
As a combined result vote increased sales and a reduction in costs.
Adjusted cannabis gross margin was 42.7% in Q3 compared to 56.6% in Q2.
The decrease was primarily due to the sale of cannabis that was purchased from other Lps and the lower margins recorded on wholesale revenues.
As I mentioned earlier in my remarks today had we been able to sell product cultivated into free at diamond instead of amounts purchased on the wholesale market. We believe we could have recorded an additional 7.6 million of gross profit an adjusted EBITDA in the third quarter, and an incremental 1360 basis points or an adjusted cannabis March.
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These figures are based on assumptions set out in the mdna, including an all in cost of sales of dried cannabis program of $1.69.
Adjusted distribution gross profit increased slightly to 11.4 million in Q3 from 11 million in Q2.
Adjusted distribution gross margin increased slightly to 12.9% in Q3 compared to 12.7% in Q2.
As DNA costs of 50.9 million in Q3 were 1.7 million higher than in the prior quarter.
The increase in SGN aid was primarily related to a 1.8 million dollar increase and transaction costs.
During the quarter, we were quite reclassified marketing salaries and wages from marketing and promotion costs to general and administrative costs consistent with all other corporate salaries and wages.
Operating income in the third quarter was 8.7 million compared to a loss of 9.6 million in the prior quarter.
We are extremely pleased to have returned to operating profitability.
An important milestone.
And our financial success.
We reported net income of 5.7 million or two cents per share compared to a net loss of 7.9 or loss per share of three cents in Q2.
And a net loss of 108.2 million or 43 cents per share in Q3 last year.
Further for the year to date, we reported net income of 14.2 million or six cents per share compared to a net loss of 33.3 million in the prior year.
Or a loss per share of 13 cents.
In an industry full of cash Burns and heavy adjusted EBITDA losses, our focus remains on generating positive EBITDA.
For the quarter, we're pleased to continue our trend and report I.
Consecutive quarter of positive adjusted EBITDA.
Consolidated adjusted EBITDA in the quarter more than tripled.
To 5.7 million from the prior quarter.
This includes adjusted EBITDA from cannabis operations of 6 million.
And adjusted EBITDA from distribution operations of 2.6 million.
But partially offset by an adjusted EBITDA loss from businesses under development of 2.9 million.
Down from an adjusted EBITDA loss of 3.5 million in the prior quarter.
Most notably adjusted EBITDA from cannabis operations increased.
78%.
And the adjusted EBITDA loss from business under development decreased by 20% in the quarter.
Moving to liquidity as Irwin said.
We continue to possess an industry enviable.
Balance sheet made even stronger by our $10 million capital raise in the quarter.
Including a strong cash position robust capital structure within our industry that provides flexibility during uncertain macroeconomic conditions.
And a cap table with minimum potential dilution.
As of February 29, 2020, the company had cash of $515.1 million to fund plan Canadian and international growth.
And deal with any cobot 19 pandemic related financial impacts.
While all new material Capex projects are currently and home, we still have approximately $30 million to spend on our German expansion.
And 40 million to spend on our Colombian expansion.
Further we anticipate another 25 million to $50 million may be necessary for working capital investments.
These working capital needs are likely to decrease over a reasonable time period.
As a result, this leaves approximately $400 million plus the cash generative generated from future operations, all of which is available for future strategic initiatives.
We believe this is more than sufficient to take advantage of any attractive.
Distressed asset sales in Canada U.S. expansion.
Other income statement accretive opportunities.
And protect us from any adverse effects of cobot 19.
In Q3, we increased our cash position by more than $17 million.
Cash inflows included net proceeds of 99.7 million from our equity raise.
9.7 million from the continued liquidation of our non core investments.
4.5 million from increases in CVC farmers drawdown on its line of credit.
Approximately 800000 related to capital asset sales.
And 400000 related to warrant exercises.
Cash outflows in the quarter included approximately 54.4 million for investments in working capital.
38.3 million in Capex.
And a 2.5 million dollar opex burn exclusive of changes in our working capital.
Included in the investments in working capital, where the already mentioned purchases of dried flatten the wholesale market of approximately 30 million.
Turning to our outlook for fiscal 2020.
Absent cobot 19.
We believe we would have achieved our guidance previously provided however, the uncertainty around the global pandemic has now made it very difficult for us to accurately forecast our yearend results.
This includes the risks associated with EU member states closing their borders to exports.
And the uncertainty with respect to cannabis purchases in the major provinces we serve.
All as more fully disclosed in our Mdna.
As a result, we are suspending our previously announced guidance for revenue of 575 million to 625 million.
And adjusted EBITDA of 35 million to 42 million for fiscal 2020.
I would now like to also provide further comment on what urban referenced on a free is positioned within the cannabis industry.
At this point in the industry's history. It is become convenience to blame a combination of industry oversupply and lack of retail rollout for poor sales growth.
We believe these statements are too simplistic in nature.
We believe we have found and believe we can continue to find pockets of industry under supply.
They are there for the taking.
The key is to be able to identify them.
Possess the capability to supply them.
And build brands products and product line extensions around them.
We believe that through our data insights and understanding of consumer preferences, we are well positioned to continue to take advantage of the opportunities. These undersupplied markets provide.
A free it continues to be on matched on a variety of financial metrics, including our record of consecutive quarters of positive adjusted EBITDA focus on profit of profitability.
Operational efficiency and cannabis revenue.
Our strong cash position will support our strong performance.
An underlying our ability to hold out through the uncertain times ahead.
In summary.
I had a free we have the greenhouse space.
Cultivation expertise.
Extraction capacity.
Automation technology.
Differentiated brands.
Product innovation and raw materials to position us for success.
As we gain scale, we will gain efficiencies in Canada.
Those efficiencies will allow us to build out international distribution for our medical and adult use cannabis.
We're pleased with our financial results this quarter and we continue to execute on our strategic priorities, namely a stronger more profitable company as we continued to provide support to our employees and the communities. We operate in during these difficult times.
We believe that a free is competitive advantages brand strength strong balance sheet.
And the resilience of our employees continue to position the company well as we navigate through these challenging times.
We remain confident in our ability to create long term shareholder value.
That concludes our formal remarks Irwin and I are now available for your questions Kenzie back to you for questions.
Thank you as we begin the Q in a fashion for today I would like to advise everyone to please limit yourself to one question and one follow up only if you wish to remove yourself from the Q. Please press the pound key our first question comes from the line of Owen Bennett with Jefferies. Please go ahead. Your line is open.
Morning, guys hopeful well and the couple of questions. Please festival and on the Capex and what kind of Patrick that keeping siege comes to add a bit more color on that and linked to that and are you still building Gemini out.
I wanted to link to that one small and I think on units.
Engage location then in Q4 end to end geopolitical and is that kind of latency depending on the often jacoby. Thank you.
Carl you want to take that just in regards to Capex I think the big thing is as here.
You know, we're all we spent capex enhancing and upgrading our facilities.
And.
Just we pulled back on lot of those things we are finished a free diamond.
There's some things in the processing area will continuously do at a pre one.
In regards to Germany.
It is just about finished and.
We will get that up and going I was there a couple of months ago.
But.
Well you can always spend capex.
You know is at 5% of sales each year et cetera, but.
We have just step back and sort of say wait now our facilities are in pretty good shape, where can we more or less invest capex, taking out costs and becoming much more efficient. So our our greenhouses are in good shape.
There is some work that we need to do on processing, which will continuously do and we will get Germany in each which we're very very close do that today.
Carl anything you want that.
I'd just reiterate Germany continues to move move forward most of the work is done.
And there is a bit of a disproportion between the works that started in the cash we've paid at this point, there's some cash payments that are coming up shortly.
We we are very focused on being ready for the German market as soon as possible that are letting this delay impact that project.
But where we have opportunities to deferred capex and and the starting of new projects. We have we have ceased those pieces.
And I don't think to put that effects. It's I don't think its deferred capex. So much. It just looking at the return on invested capital and where we need where we need to spend capex to really get efficiencies out there and.
And there's plenty of Capex, you can spend but you know.
We will not spend capex unless it gets our hurdle of return on invested capital.
Okay, great. Thanks, a lot appreciate it.
Thank you.
Our next question comes from the line of Chris carry with Bank of America. Please go ahead. Your line is open.
Hi, good morning.
Good morning.
So clearly some some strength.
In different areas.
I guess, the one part that that I'm just trying to reconcile right is this dynamic.
Where EBITDA.
Is improving sequentially, but free cash burn has deteriorated sequentially. It was just doing the math. It's it's about the why this GAAP, we've seen between EBITDA and free cash burn on on on record and.
And I'm just trying to understand you know as you look forward on on working capital commitments.
Or maybe.
If you could offer some insight on why this is the case this quarter and when this positive EBITDA starts to flow through.
And show up on on the free cash flow statement.
Cash flow statement as well and then I've a follow up.
Okay. So so Chris the free the free cash flow decrease in the quarter is really being driven by our investments in working capital I think it's important to remember that we had a free a one coming online with its first harvests and we expect to see.
An increase in working capital again next quarter as part of what I said during my portion of the discussion.
As as a for you.
And continues to ramp there's five six weeks of additional.
Harvest that become on that Havent reached a point, where you can release them to the public that number is going to build it then goes into accounts receivable to control boards, where your weightings at least 60 days to collect on it.
That's really what you're seeing this quarter.
If you if you exclude the investment in working capital in the quarter.
Our Opex burn was a was less than a two and a half million dollars.
And on top of that you're also seen us as Carl talked before buying cannabis.
Some other producers and building inventory, which like some of that has not been sold through yet.
So you're not seeing the cash net return here and that's a big number that is there so.
The Big thing and this again as we move into some of our biggest quarters. So if you look at it free at Diamond now is come on so we've had to invest in regards to the grow there.
We bought as Carl talked about close to $80 million are so outside candidates. So we're investing cash to ultimately.
To turn it into product with margins and you know that cash will come back in the next 30 60 90 days.
Okay.
Understood.
And then just as my follow up and you did.
Alluded to it.
There.
I guess you know just.
Functionally right. So can you did produce.
I believe over 30000 key loads in the quarter, so you're continuing to have nice.
Harvests.
And so you know just just functionally.
Was it that what you are producing was not necessarily the SKU that you needed for retail listings and that's why you went out in the market. The purchase product I'm just trying to understand you know the gap between what was produced in what was sold and the decision to purchase holes.
Sale and effectively just so I can understand.
How we get cannabis gross margins back to where they were as you transition to more of the sales coming from your own product produced thanks, so much.
So Chris I think it's important to remember theres always that almost one quarter delay between when you harvest something and when you realistically haven't out has a sale.
Last quarter, our harvest were not 31000.
And so we identified that there were opportunities on the demand side to Phil If we had more product we didnt have it because of free at Diamond license was later there will be a thoughts we went in and we bought that cannabis right. Just but did was just to kind of replace that.
That was that was going to happen in Q3, as we knew harvests were ramping.
For us that would be available to sell in Q4, but just weren't available in Q3 kind of goes back to that five six week delay. After you harvest something before that product is in a position to really go out the door time. It gets dried it's it gets a radiated it goes through your packaging process in a clear as all of the Q a in Q.
Tests, including microbiology pesticides potency all the different tests that were mandated to do by health Canada.
Okay makes sense. Thank you both.
Thanks.
Our next question comes from the line of Andrew It's harder with Stifel. Please go ahead. Your line is open.
Yes. Thanks, just a couple of questions number one on the $11 million in wholesale can you quantify by chance how much that helped kind of profitability in the quarter and appreciate you kind of kind of mentioning kind of getting that you would have achieved the guidance after kogan, 19, but which implied a pretty healthy on scaling of the business in the fourth quarter.
Would that be put off two quarters getting what kind of the impediment. There is it getting really all 100% internal supply moving away from wholesale getting a good run rate on a second gen products. Thanks.
So.
Andrew Thanks, Thanks for asking the question on the wholesale product, we earned about a 10% margin.
On that and that basically falls directly to the bottom line.
On the EBITDA site.
And I apologize, but I missed the second half of the question, yes, sorry, I'll ask it just a little bit better I would say in the income in the fourth quarter implied a pretty healthy kind of EBITDA margin in the business Asacol 19, I get that it included a couple of things included step wise, increasing cannabis a lot more into.
And I had that right and then obviously second generation products will be much more meaningful I mean is that is that delayed two quarters I mean, when when do we really start to see the business start start to scaling or is that just with so much uncertainty around coven 19.
Really even difficult even say that at this point.
So I think.
Great well also Earl.
You know when you're in different rooms, but.
You know step back for second I think as you saw the increase in the third quarter and that will continue.
When you have our six brands gaining share.
And continued to gain share.
That's going to be you know a big lift upon our sales the other thing is.
One of the biggest problems is just haven't products to sell has now with a free at diamond coming on.
We will have the ability to sell a lot more products.
We have sold close to 100000 beeps.
And we'll continue to sell a lot more based products.
We don't have them, yet, but we will Rowley, we'll be rolling node.
Our edibles.
And and that's going to be a big part of it but I think the big thing is which is key to consumer has really accepted our product likes our product.
And it's just having product the supply for them.
Each quarter more and more stores come come online.
And I think the other big opportunity as we look at it is clear can pick as we sell more and more product.
You know through.
E commerce, but the biggest opportunity for US is we came out with good products. Good pricing goods selection. Good supply were taken sales away from the listen market and that's the key here is how we take sales away from illicit market because today within Canada, 75% of cannabis still goes through the illicit mark.
And that's you know ultimately there's seven 800 stores in Canada the today.
Going after that and listen market going after the online market and additional retail stores opening.
Hi, good guys I'll pass it on thanks.
Thank you thanks, Andrew.
Our next question comes from the line of Aaron Gray with Alliance Global Partners. Please go ahead. Your line is open.
Hi, good morning, and thanks for the question.
I guess first off I, just wanted to kind of ask about overall kind of sales price you guys saw a nice little uptick during the quarter and there has been a lot of conversation in the market about more competition, especially and kind of deep value.
Suddenly a real nice job of increasing your market share with your own brand. So can you talk about some of the market dynamics there.
What you're seeing in terms of pricing pressure and how you feel like that should evolve over the next couple of quarters, especially.
As you are 2.0 products continued rollout thanks.
I'll take some of it been Carl take the other part of it.
Number one.
Our sales team.
Working with.
Southern Glazer have done a great job with boots on the street has done a great job of getting display and getting products and I think the big part of it is just we've got more and more product.
Get into the stores.
The Big thing also is the relationships in that we've built and displays.
I come back and say, where the quality of our product.
Has continuously improved and increased with our flowers with R. Bates and.
When you gained share so distribution is number one innovation is is number two and consumers, becoming more and more aware of our products and know our products and accepted in regards to price.
The Big thing is you have to promote you have to drop the prices when your product is not sell it.
And that's not than our case rate now that we've not had to growth there and discount our products because our product or sell it. Our biggest complaint is you can find our products are where the stock.
Carl you want to add anything.
And.
I'll just I'll just add that.
We haven't we haven't seen the pricing pressure as Irwin said.
I really think thats a function of how we priced all of our brands and when you look when you look in each segment that those brands are competing against.
They're they're all priced competitively against the other other brands in the space, we're not trying to sit out there and and take the number one number two selling price inside of a segment. All all of them. We are we are kind of median or slightly below it and I think thats, a big part of our success as well.
Alright, great appreciate that.
And certainly seems evident in the market share gains if I could just squeeze in one more.
Just as we look at the fourth quarter can certainly appreciate the decision to suspend guidance, but as you think about all the puts and takes you know you do have some more stores come online. Some continued market share gains, but obviously a lot of unknowns with Covance, which is impacting for you know about a month now with everything word about stay as.
Now for the remainder of the quarter in terms of curbside pickup delivery and what sort of close.
How would you see in terms of.
Purchases from Protestants, how do you expect kind of state sales to trend sequentially. So any color there will be helpful. Thanks.
So.
Hey, we pulled guidance air and there were there was a redone a reason we did that are we suspended the guidance. There are there is just so much uncertainty.
Individual control boards, when you talk to them some arsene things swaps summer scenes sales go down some are just trying to be careful to make sure that they don't have excess amounts of inventory.
This piece and so I think you're seeing a movement that control boards to lower purchases on an individual purchase with a greater cadence of purchases just add just to be safe they've learned they've learned from what happened in the 1.0 rollout that just buying product because it's a it's available is going up.
Active strategy for them.
And Thats and that's that's what we're seeing but it just it does it puts us in a position where.
We're just unable to comment on what that what that looks like other than providing the pieces we provided in the call.
Where we gave you the to the little pieces in each individual country of what we're currently experiencing the real problem is nobody knows what we're going to experience tomorrow.
Hi, Great appreciate that.
Our next question comes from the line of Johnson Park RBC. Your line is open.
Thanks, Good morning, guys I wanted to follow them wanting to wholesale.
Morning.
Follow up on the wholesale question from from earlier at what point do you think you'll get to sourcing all of your product internally that likely to be in fiscal Q4 or later in 2020, and then selling wholesale can you talk about market conditions, there and the sale that you had in the quarter. I mean do you view this is somewhat sustainable or should we view it as kind of opportunistic in London.
So I think I said dream Airwatch remarks, we don't anticipate duplicating that wholesales sale. It was kind of a one time position, we had access inventory and in one very specific part of our inventory and we wanted to make an adjustment there and so we sold it to someone who is looking for it.
As it relates to purchase flower, we have taken advantage of that market went at proactively benefited us.
That was that was primarily in Q3 and with and we have a little bit left over that's that's going to be available for Q4, our intention is not to be in that market we have.
You know the capability it frees up to 255000 kgs from or two facilities.
Buying more on a long term basis doesn't make sense.
It just it made sense in this and is very limited short time opportunity.
Okay. That's helpful. Thanks, and then my second question is on the derivative side. It sounds like you've had good results from your date portfolio. So far I'm just wondering how do you think about keeping you share lead once additional competitors arrive and at what point do you expect to launch your edibles and Topicals portfolio I saw was mentioned.
And the empty and just trying to get a sense when when we might see that thank you.
So I think some of the Q2 products that you're going to see come online.
You know it at the end of the first half of the year, we have some other ones that we continue to move forward with.
That will follow after that.
We want to get these right.
We we did a critical analysis last year, we looked at our capabilities.
We looked at what the market wanted and we saw a huge opportunity for us on Veep and said, we're going to get that one right.
And we're going to just do one and then we're going to move to each additional area and when we do it we're going to do it right.
And so we've taken a little bit slower focus than some people have to make sure that weve the products that we release and where consumers want and that they are done right.
When it comes to Veep and differentiation, we believe it's about the turpin blend and so we've been we've done a lot. If we did a lot of testing on alternate flavors and things like that.
That would be appealing to consumers.
And and we continue to future differentiate ourselves that way.
And I think it's important listen our brand stand for something and when we came out with a product they've got to meet the standards. Our brands from uniqueness is not a me too products and that's what's going to important but we came out with I think there's a lot to you know companies going to play.
The decline to get products out there.
And with that we're going to get the right product something different something unique and products that we're going to be able to get pricing and value for.
Okay. That's great. Thank you very much.
Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Please go ahead. Your line is open.
Good morning, everyone and congratulations on the on the quarters for should in the sales trend. Thank you Pablo.
When you talked about the M&A side of things.
We find that a little bit in terms of looking at distressed assets in Canada. What specific specifically are you missing unrelated to that you only own 51% of diamond.
Does it make sense to bite out of 49% at some point, especially as you begin to use a facility.
Thanks.
So number one I think you know listen there's lots of.
Investment that.
Since that may make sense.
To be a part of a free and where we'll look at that were where does that come from and I think as we look at.
There is opportunities within.
Medical there's opportunities with another processing, we have a tremendous amount of grow we have over 265000 kilos that we can grow today.
But I think with any industry consolidation is important and consolidations going to happen then I think.
That's going to be something that's going to happen in the cannabis industry, that's going be happened, where there's a smart opportunity.
And you know Pablo and he putting hain together it was 55 acquisitions so.
That's something we'll look at where is there an opportunity to buy distressed assets or assets that are way undervalued.
In regard in regards to a free at Diamond we have a great partners in the master nineties.
And I think partnership is not only only in 100%. It's also only and having partners at really can be helpful with your growth [noise].
Really helpful. In regards to how your run the facility. So there's no need for us to growth there and by the other 49% because right now we're able to get.
Good grow good products and good partners or why would we spend our money to do that.
Understood and just a follow up on 2.0, just just to be clear.
I remind us of in this every quarter that you have your full lineup bidding, Pennsylvania or was it rolled out through the quarter I'm just trying to I understand most with launches won't be until June as you just said, but.
He is in a different in terms of how much pro that you would hello, there into into may quarter versus if everybody. Thanks, well so far.
It was minimal and really Didnt start till January and some in February but.
The quarter the April.
March April may quarters are the big quarters.
That we're going to be rolling up product and that's where you know.
The majority of our base will be in the next six months.
But this this will be a good sized quarter baby.
Understood. Thanks.
Thank you.
Our next question comes from the line of Graham Kreindler with eight capital. Please go ahead. Your line is open.
Yes, hi, good morning, and thank you for taking my questions here, just as a follow up on the derivatives.
I'd like to get extra provide some color on the production capacity right now for derivatives and 2.0 products kind of from the extraction angle counted downstream packaging and given the commentary on cobot 19, as well as the cap ex Im just wondering if that's going to impact any incremental licensing.
That might be required to ramp up production abates as well as given the market conditions does that will that inform any speed up or slowdown of product launches as we see what happens at the brick and mortar angle here. Thank you.
So there maybe some other licenses and opportunities out there as continuously we're looking at.
Interesting technology up there.
And.
You know better vaping opportunity. We're also looking at potential partnerships out there.
As you know some of the.
Other companies that do they today realized cannabis is going to be.
Something that.
Here to stay so there is opportunities in partnership opportunities and innovation, we're seeing.
A lot of new technology out there.
And we look to improve product improve performance and vaping will be a product it's going to use in so many different occasions.
And in regards to our other products.
Again, we we've been a little slower than some of the other companies but.
It's been because we want to make sure we protect that right product and we got the way product.
They should be rolling out in the second half.
Our fiscal year 2021.
Thank you and just to clarify in addition, when talking about licensing.
Particular with with Health, Canada are there any areas that you're currently waiting.
For licensing that's going to help on the processing side of things and as the Coca 19.
Situation impacted any of the expected timings of of when you might receive that licensing if that's the case.
Nothing significant we're always potentially looking for license agreements certain processing rooms uncertain processing areas, but it's not like.
I'd license that we're waiting for free at Diamond or nothing that we're waiting for from a free a one or something like that.
There could be some small licenses were looking for in certain rooms within a free a one.
For free at Diamond, but nothing that will hinder any of our growth in any of our major processing.
Okay I appreciate the color. Thank you very much.
Thank you.
Our next question comes from the line if not Bottomley Canaccord Genuity. Please go ahead. Your line is open.
Yeah, good morning, earning Carla congrats on a very encouraging quarter here. Thank you to go back call to some of your commentary with respect to the.
Lack of write offs and impairment. So that's something that obviously has been challenging in sector wide with lot of down downward surprises by many of your peers. So just curious on on maybe the rationale is the philosophy and when you guys bring that biological off that into inventory.
Don't know if you can get the details of pricing assumptions, but maybe just the overall the methodology of how you're confident that the way you're costing that is ahead of the curve given what many anticipate is going to be a commoditization as the as the secular evolve I think that your comments on the past that.
Bearish on that particularly with your with your product lineup, but just just to mitigate maybe potential future risks of impairments.
Just given how much capacity is out there.
So I think the one of the key pieces is that when we when we started as a company. We've always taken most likely the most conservative view of fair value and as a result, we haven't had to pay the price that other people have had to pay for that aggressiveness.
We've been very clear and transparent in our disclosure in our financial statements our cost structure has been lower than everyone else's.
And so our actual the real costs before you get into the artificial accounting costs of fair value.
Our generally lower than everyone else in the industry to begin with and then when you when you pair that with being very careful on the value that we're writing the product up too, which again, we provide full transparency on in the Mdna.
It just put us in a better position in a we proactively are looking at where market prices are on for all of our products and you know if we if there is a if there is a future need to adjust in the fair value that we write the product up to we'll we'll deal with it that and but at this point.
Those values have been easily recoverable.
I think it's just a function of not being aggressive early on.
Got it that's very helpful. And then just a quick follow up I think you at our public on this little bit previously, but when it comes to the candidates 2.0 rollout just confirming that it seems like that big healthy growth you saw in adult use was was more in the dry flower so.
I think there wasnt sort of any sort of step function increase this quarter on base and if anything we should anticipate a bit of that in your and your final of fiscal quarters here.
Exactly I mean, there's some vapours in the quarter.
The fourth quarter was.
The quarter, we're in now which ends the end of May is where the big step up is in baby sitting in our first quarter in 2021.
And then in the back half.
2021, our second quarter third quarter is when the with the edibles.
And gummies and other products.
Got it thank you.
Thank you.
This concludes the Q and a session for today's call I will now turn the call back over to management.
Thank you very much Mackenzie. Thank you everybody for today's call and spending time and listening to us.
Listen it's been.
Just a year now that I've taken over as.
CEO.
And.
It has been a really really interesting year, it's been an interesting industry.
And I've really enjoyed working with the people out of Korea I've enjoyed working with our board of enjoyed very much working with our consumers are analysts in the financial world.
It's an industry that has tremendous amount of legs in so many different areas, whether its recreational whether its medical.
Whether theres other medical aspects of it et cetera, and I think what you'll see today was the Korea, playing a big part.
I think what we've been able to achieve within the year.
In regards to our brand building in regards to our cash situation our balance sheet building note a pre at diamond good completely free a one building out Germany.
Building no, let Tim and completing with that so with that just as you give us more and more time, just think what we will be within the cannabis world.
There will be consolidation there will be additional partnerships that came in.
And of Korea will be a big part of that but I think the most important thing is we are are in changing times.
I've never seen this in my lifetime I Hope I've never see was something like this again in our lifetime I think one thing we got to take into effect.
The consumer will change purchasing habits will change.
The way, we socialize with people.
What we do with their employees, how we sell products.
Bria today is in good place we have revenue you have brands, we have cash and we're running every single day.
We everyday thinking about the safety of our employees.
Think about what's going on in the world and how we get back and we will continuously get back in every way we can.
So with that I'd like to tell everybody please be safe.
Please social distancing.
Stay home relax enjoy some great recreational cannabis enjoy some medical.
And.
You'll be safe happy.
And look forward to talking here real soon so thank you very much for today's call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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