Q3 2020 Earnings Call
[music].
Good morning, My name is Ken and I will be your conference operator today.
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 for the craft a free and my math results.
Third quarter ended February 20.
2020.
Today's call or Irwin, Simon and Coral Martin by now everyone should have access to the earnings release financial statement, Mdna and Investor presentation withdrawn Bill available on Investor section of the free as website at Www dot to free Inc. dotcom, the financial statements, having filed with SEDAR and Edgar before I begin please remember.
During the fourth of this call management May make forward 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. Some notes described any forward looking statement.
Please note the tax I've, a free 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 as such there may be brief delays cross shop or other minor technical difficulties during this call.
Paul and we think in advance for your patience and understanding and I look you're trying to call over Erwin.
Thank you so much KD 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 ranch trend profit improvements in 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 or players go to all those affected by this virus and that includes plenty of people.
As a situation has continued to rapidly evolving our number one priority has been a jury to 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 continued 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 candidates 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 like regulators to help eliminate you listed markets.
At the same time, we have a tremendous responsibility at a free it 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 and prevent the spread of cobot nicely.
These include but are not limited to staggering work schedules redesign work facilities to ensure appropriate social distancing.
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 them.
At a free a one we've had decelerated and implemented a planned wage increase for all hourly employees and implement did a company paid lunch program for all employees.
We're also very pleased to have not had any layoffs and the vast majority of operational employees continue to report to work each day to maintain production and shipping schedules. In fact, we are even hiring 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 neither.
Like many consumer package goods companies, a free or also experienced prior to the walk down consumer demand at the beginning in place that the government Big government mandates.
More recently consumption has returned to more normalized pre cobot Nike levels for all regions, except you back or cannabis sales remain that even a higher level.
Our Canadian medical candidates has experienced increase in demand since he outbreak of devices.
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 farm that his experience a 50% sales increase.
Please.
Our team has taken steps to secure supply and is closely monitoring the situation should any countries in new you changed your border policy as a result of 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 cash positions because compelling consumer brands as well as diversified global business.
Our Q3 results demonstrate this with the hard work of our strong fee.
We generated a 65% increase in net sales revenue from prior quarter for 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% and adjusted EBITDA loss from business under development decreased by 20% in the quarter.
In an industry pull a cash burns, we're pleased with our ability to generate consistent results.
During the month of January we also raised approximately $100 million in capital to 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.
Yeah.
A cornerstone of our long term strategy is to be focus on the highest returns priority that 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 license and operating at 100%.
A free at Diamond is already in its second crop I want to thank the mastered Marty brothers our partner here for all their helped 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 $1.
We're excited about a tremendous growth opportunities. We now have as a result of 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 GMP 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, a free up 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 codes 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.
A free and maintain a 77% share across all brands on Veight in Ontario.
We increased our national share in each of our last four quarters.
We continue to make progress in Ontario 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.
A free his success will be contain we'll continue to be driven by our differentiated portfolio of brands products aimed at the lighting distinct consumer segments.
We look forward to launching or edibles beverage and topicals 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 he learnings and implement them on market specific bases in Germany, Latin America, including Colombia.
Argentina, Paraguay as well as other international market.
Before I turn the call over to Carl I want to highlight yet another way of Korea is doing this part to support local communities seniors healthcare workers during this health prices.
We're very pleased to have a major donation to the Erie shores community Hospital. This will help them acquire additional healthcare 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 in 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 the free.
Our core value of supporting the communities to which we belong especially 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 accelerated.
Data insights and understanding of the consumers' preference, we believe we're well positioned to capitalize on these changes in the cannabis marketplace.
I would like to thank and a huge thanks 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. During two we remained focus while navigating through this on precedent time and take decisive action.
Adapter businesses, while protecting our employees help.
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 mention otherwise.
Also some of the financial metrics discussed on this call our non I FRS 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 or prison provisions for future sales returns.
As Irwin discussed we continue to execute on our growth initiatives.
Prioritise profitability with long term growth and success in mind.
Especially now that we are in the week of a macroeconomic 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 of the a free of team has become even more evident as a coven 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 of traditional industry data points related to covert 19. They are important to keep paying for a free as we move forward.
These include the.
The Ontario, Alberta, and British Columbia control boards were close to deliveries in shipments for a week at the end of March for year end inventory accounts.
The Ontario control board temporarily canceled two weeks of purchase orders from all license producers with 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 Covance 19 restrictions came into place.
And the sales at their brick and mortar locations are up 40%.
Further demonstrating what urban referenced with a free is sales being higher in Quebec compared to pre Covance 19 restrictions.
Additionally, our medical sales are up 18% since coven 19 restrictions came into place.
Although we proactively decrease selling prices, 10% outpatients managed 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.
And 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.
[noise] difficult times requires strong leadership.
And they require communities coming together to support one another.
I had 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, we purchased 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 box in the third quarter.
And an incremental 1360 basis points on our adjusted cannabis margin.
These figures are based on assumptions set out in the mdna, including an all in cost of sales and dried can't candidates 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 THC dominant harvested candidates and trim in inventory and 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 THC 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 of Diamond harvests and annualize units 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.
Almost 20%.
From the prior quarter to $144.4 million.
This net revenue was 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 program 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 so dollarssixty nine gram.
We continue to work to lower these amounts.
And are pleased that the completion of a free environment of the free Diamond facility has already aided and lowering our cost per gram.
Adjusted can't them as gross profit increased to 23.7 million in Q3.
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 sales 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 of diamond instead of amounts purchased on the wholesale market. We believe we could have recorded an additional 7.6 million of gross profit and adjusted EBITDA in the third quarter, and an incremental 1360 basis points or an adjusted cannabis March.
Yeah.
These figures are based on assumptions set out in the mdna, including an all in cost of sales of dry 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.
[noise] SGN a cost of 50.9 million in Q3 were 1.7 million higher than in the prior quarter.
The increase in S. Junaid was primarily related to a 1.8 million dollar increase and transaction costs.
During the quarter, we require 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 loss per share of 13 cents.
[noise] 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 a fourth 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 on hold we still have approximately $30 million to spend on our German expansion.
And 40 million to spend on our Colombian expansion.
Further we anticipate and 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 are 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.
The U.S. expansion or other income statement accretive opportunities.
And protect us from any adverse effects.
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 CFC 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 flaws in 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 problems as 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 convenient 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 the 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.
Freia continues to be on matched on a variety of financial metrics, including our record of consecutive quarters of positive adjusted EBITDA focus unprofitable 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.
At a free or 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 continue 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 actually begin the Q and a session 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 keep our first question comes from the line of Owen Bennett with Jefferies. Please go ahead. Your line is open.
Morning, guys hopeful well and just a couple of questions. Please festival and on the Capex and what that you got keeping cost and the demo color on not and on linked to that and are you still building jammie out and content. So linked to that one small and I think on.
Hello.
On engagement case shipments in Q4 into in dealing with oil and is that kind of latency depending on the often jacoby. Thank you.
Karl you want to take that just in regards to Capex I think the big thing is here.
You know, we're always 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 a 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 you know we you can always spend capex and.
I was at 5% of sales each year et cetera, but you know 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 in taking out costs and become a much more efficient so our our greenhouses are in good shape.
Theres 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 to that today.
Our lending you on 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 and our letting this delay impact that project.
But where we have opportunities to deferred capex and and the starting a new projects. We have we have ceased those pieces.
And I don't think to put that FX is it I don't think its deferred capex. So much. It just looking at the return on invested capital and where we where we need to spend capex to really get efficiencies out there and.
And there's plenty of Capex, you can spend but.
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.
Yeah, So clearly some some strength and in different areas.
I guess the one part you know that that I'm just trying to reconcile right is this dynamic.
Where EBITDA.
Is improving sequentially, but free cash burn has deteriorated to sequentially and it was just doing the math, it's it's about the widest got we've seen.
Between EBITDA and free cash burn on on on on record 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 or the cash flow statement as well and then I've a follow up.
Okay. So so Chris the free to 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 or an increase in working capital again next.
Quarter and part of what I said during my portion of the discussion.
Hi, as as a for you Diamond continues to ramp there's five six weeks of additional.
Harvest that become on that or haven't 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.
The 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 [noise].
And on top of that you're also seeing us as Carl talked before buying cannabis.
Some other producers and building inventory, which a lot you know 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 and now it's 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 in cannabis. 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 just as my follow up and you did you know alluded to it.
There are I guess.
So just.
Functionally right. So can you did produce.
I believe over 30000 key loads in the quarter, so you're continuing to have nice harvest.
And so you know just just functionally.
Was it that what you are producing would not necessarily the SKU that you needed for retail listings and that's why you went out in the market. The purchase product Im just trying to understand you know the gap between what was produced in what was sold and the decision to purchase wholesale.
Well and effectively just so I can understand how we get the cannabis gross margins back to where they were as you transition to more of the sales coming from Bureau, and product produced thanks, so much.
Okay. So Chris I think it's important to remember there's always that almost one quarter delay between when you harvest something and and when you realistically haven't had one has a sale.
Last quarter, our harvest were not 31000, and so we I, we identified that there were opportunities on the demand side. The Phil if we had more product we didnt have it because of free of Diamond license was later they won't be a thoughts we went on in and we bought that candidates.
Just but did was just to kind of replace that whole.
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, so 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, but timing gets dried it's it gets a radiated it goes through your packaging process in a clear as all the key way 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 implies a pretty healthy on scaling of the business in the fourth quarter.
Would that be put off two quarters getting what what's 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 for thanks for asking the question on the wholesale product we are in 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 this in kind of the fourth quarter implied a pretty healthy kind of EBITDA margin in the business Asacol. The 19 I get that it included <unk> a couple of things included step wise, increasing cannabis a lot more internal production.
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 seed business start start to scaling or is that just with so much uncertainty around coven 19.
It's really even difficulties and say that at this point.
Well I think.
<unk> well I'll also Earl its 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 you know six brands gaining share.
And continue 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 the free at diamond coming on.
We will have the ability to sell a lot more products.
We have sold close to 100000 Vapours.
And we'll continue to sell a lot more of the products.
We don't have them, yet, but we will Rowley, we'll be rolling note.
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 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.
Ecommerce, 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 elicit market because today within Canada, 75% of cannabis still goes through the illicit mark.
And that's true you know ultimately, there's seven 800 stores in Canada 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 want to kind of ask about overall kind of sales price. You know you guys saw nice little uptick during the quarter and there's been a lot of conversation the market about more competition, especially in kind of deep value.
Don suddenly a real nice job of increasing your market share you know what's your own brand. So can you talk about some of the market dynamics there on 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 your 2.0 products continued rollout.
Yes.
I'll take some of it and 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 I've 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 what we've been getting 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 you know 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 lower product and accepted in regards to price.
You know the Big thing is you have to promote you have to drop the prices when your product does not sell it.
And that's not in our case rate now that we've not had to go out 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 and I really think thats a function of how we've priced all of our brands and when you look when you look in each segment that those brands are competing against.
There are they're all priced competitively against the other other brands in the space, we're not trying to set 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 orbis 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 had 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 you know all the puts and takes you know you do have some more stores that have come online. Some continued market share gains, but obviously lot of unknowns with Covance, which has been impacting for you know about a month now if everything worried about stay as.
Now for the remainder of the quarter in terms of curbside pickup delivery and what sort of closing on how would you see in terms of.
Purchases from promises how do you expect kind of state sales to trend sequentially. So any color there will be helpful. Thanks.
So you know.
We pulled guidance air and there were there was a reasons 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. You know some are seeing things swap summer scenes sales go down some are just trying to be careful to make sure that they don't have excess amount.
Some inventory in this piece and so I think you're seeing a move at the 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 of its its.
They are more is it and effective 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 pilots. The RBC. Your line is open.
Thanks, Good morning, guys I wanted to follow them wanting to wholesale.
Morning.
A 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 is 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 an opportunistic in London.
So I think I said dream Arrow, our 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 leftover. That's that's going to be available for Q4, our intention is not to be in that mark.
And we have.
You know the capability it frees up to 255000 kgs from our two facilities.
Buying more on a long term basis doesn't make sense.
You know it just it made sense in this and there's very limited short time opportunity.
Okay. That's helpful. Thanks, and then my second questions on the derivative side. It sounds like you've had good results from your day portfolio. So far I'm just wondering how do you think about keeping your share lead once additional competitors horizons at what point do you expect to launch year, 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 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 or what consumers want and that they are done right.
When it comes to vape 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 meet your differentiate ourselves that way.
And I think it's important listen our brands 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 some in the sales trend. Thank you Pablo.
When when you talked about the M&A side of things can you clarify that a little bit in terms of looking at distressed assets in kind of though I mean, what specific specifically are you missing unrelated to that you only own 51% of diamond or does it make sense to widen it 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 the assets 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 and I think.
No that's gonna 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 Hain, putting hain together 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 did partnership is not only only 100%. It's also owning 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 to we know it just just to be clear.
To remind us of Ah in this every quarter that you have your full lineup of their income so vapours 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.
In a definition does so how much pro like you would hello, there into into may quarter versus if everybody. Thanks, well so far.
It was minimal and really didn't start till January and some in February but I'm.
The quarter the April.
The March April may quarters are the big quarters.
We're going to be rolling no 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 for baby.
Understood. Thank thank.
Thank you.
Our next question comes from the line of Graham kindly 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 you know kind of from the extraction angle counted downstream packaging and given the commentary on co.
Hi, good 19, as well as the Capex I'm just wondering if that's going to impact any incremental licensing that might be required to ramp up production of base as well as given the market conditions does that will that inform or 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 could they realize cannabis is going to be.
Something that's.
Here to stay.
So there is opportunities in partnerships opportunities in the innovation we're seeing.
A lot of new technology out there.
And we look to improve product would improve performance and vaping will be a product it's going to use in so many different occasions.
And in regards to or 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 put SEC.
Right product and we got the way product and they should be rolling out in the second half.
Our fiscal year 2021.
Thank you and just to clarify a in addition, when talking about licensing I'm in 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 yeah I'd be as the Kogut 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.
Our license that we're waiting for a 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 of 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, or and then Carla congrats on a very encouraging quarter here. Thank you want 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 why with lot of down downward surprises us 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 I 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 talking at is ahead of the curve given what many anticipate is going to be a commoditization as the a as the secular evolve I think that your comments on the asked that you're not as bearish on that particularly with your with your product lineup, but just just to mitigate navy potential.
Feature in risks of impairments or you know just given how much capacity is out there.
So I think if 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 is.
And so our actual you know the real cost before you get into the artificial accounting costs of fair value are 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 transparent.
The on in the Mdna, its just put us in a better position in a we proactively are looking at where market prices are.
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 arch pump on a little bit previously, but when it comes to the candidates 2.0 rolled out I'm just confirming that it seems like that that big healthy growth you saw in adult usage was more than the dry flower. So I imagine there wasnt sort of any sort of step function increase this.
Quarter on based 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.
But the fourth quarter was you know 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.
And then in the back half of 2021, our second quarter third quarter is when the could win the edibles.
And gummies and other products.
Got it thank you.
Thank you.
Yeah.
This concludes the key when a session for today's call I will now turn the call back over to management.
Thank you very much kenzie. 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.
<unk> 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 there's other medical aspects of it et cetera, and I think what you'll see today was Korea, playing a big part.
Just think what we've been able to achieve within the year.
Regards to our brand building in regards to our cash situation our balance sheet building note a pre at diamond good completing a 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 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 province.
A brief today is in good place we have revenue, yes brands, we have cash and we're running every single day.
We everyday think about the safety upper 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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