Q1 2020 Earnings Call

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Ladies and gentlemen, this would be operator today's call is scheduled to begin momentarily until that time Airlines will again be placed the music old. Thank you for your patience [noise].

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I would like to welcome everyone to decline is group's first quarter 2020 earnings conference call today's call is being recorded.

This time I would like to turn the call for two shamefully ball Investor Relations. Please go ahead Sir.

Thank you Italia and thank you for joining us today to review Kronos group's first quarter 2020 financial and business performance today I'm joined by our Chairman President and CEO, Mike Ornstein, our CFO, Jerry Barbato and argue VP of legal and regulatory Affairs, assuming show Girls group issued a news release announcing our financial results This morning, which.

Filed on our Edgar and SEDAR profiles. This information as well prepared remarks, we'll also be posted on our website under Investor Relations.

Before I turn the call over to Mike I would like to remind you that our discussion. During this conference call will include forward looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results could differ materially from those projected in the forward looking statements, including as a result at the factors described in the cautionary statement and risk factors included in the company.

Earnings release, and regulatory filings, including the company's most recent annual report on form 10-K, and quarterly report on form 10-Q, which any forward looking statements made during this call are qualified in their entirety.

In addition, during this call certain financial measures, maybe discuss that are not recognized under U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management and planning forecasting valuating business and financial performance, including allocating resources.

Reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the FCC, which is available in the press room section of our web site. The Kronos group Dotcom. These non-GAAP measures may not be comparable to measure used by other issuers I'd also like to note that we're conducting our call today from our respective remote don't take.

And as such there may be brief delays cross talk or minor technical issues. During this call. We thank you made advanced for patients and understanding we will now make prepared remarks, and then we'll move onto question and answer session with that I'll pass it over to Kronos Group CEO, Mike Ornstein.

Thank you Jane and good morning, everyone.

As a cold at 19 pandemic continues to affect global market and people around the world. We hope that everyone is staying safe and well during this time.

We'd like to start this call by addressing how cold. It 19 is affected up and how we as a company are adapting during this time.

Our top priority continues to be the health and safety of our employees and our consumers as well as ensuring that we secure our supply chain.

As we mentioned on our most recent call we have assembled a global cross functional internal taskforce led by me.

We've been monitoring the situation daily in order to implement modifications as the situation evolves.

The company implemented business continuity plan to supports employee base, while continuing to develop and produce reliable high quality products that meet and exceed the need to consumers.

As of today, our manufacturing facilities remain open as governments in the regions, where we operate have designated our business as essential.

We are maintaining our work from home policies for certain employees until further notice and we have a strict no travel policy, including between our sites, which are deemed a central.

And our manufacturing facilities, we enhance hygiene and sanitation practices modified schedules and have maintained social different thing protocols.

As circumstances varied by region in country, we're working diligently to continue to act in accordance with all of clickable guidance from local federal and international health and governmental authorities and we are prepared to make additional operational adjustments as necessary.

We have donated surplus and 95 math gobbled. They shield had now and facial replacement from our peace natural campus to the Collingwood and very yet very area hospitals.

Additionally, the large Jones team has distributed skincare products to nurses and doctors working in hospitals in New York, Miami, New Orleans in Houston.

As a company, we feel fortunate to contribute and honored to get back to our communities and frontline healthcare workers to support them and their effort to take care of cobot 19 patients.

We will continue to closely monitor the rapidly evolving overnight keen situation as well as how the opening of different regions will impact the business, our consumers employees and our supply chain.

As you know my focus and the company focused on creating long term shareholder value by developing disruptive intellectual property and building iconic brands.

I encourage long term thinking and especially in today's environment, we need to be planning for the future.

Our value will come from technology breakthroughs and branded sales that helped build and strengthen our relationship with our consumers.

We believe it the best way create value for the supply chain is by working with contract farmers and suppliers to support our capacity needs in global markets.

During the first quarter of 2020, Cornhuskers Cronk contract manufacturing joint venture in Latin America, Natura achieved significant operational milestones.

As a reminder, natural where they 50 50 joint venture between Chronos Group and AG I, a company with multi generational expertise in managing industrial scale horticultural operation for export from Columbia.

Natura completed construction of a state of the art extraction facility designs of GMP standards.

Naturally we're also gain preferential access to four cultivars registered with the Colombian Agricultural Institute.

One of the have drains is plant in mid February and harvest at the end of April.

With his extraction and processing facility also coming online natural whereas R&D Department has developed its first commercially available tempt derived CBD distillate, which was granted a non controlled substance ruling by Columbia's narcotics control board streamlining efficient process for export.

Natura successfully completed its first tax act passed export United States in early March.

The JV is focused on accessing new markets and product expansion, including developing additional both offerings attempt derived CBD distillate and water soluble helped drive CBD solutions.

Despite this being a small test shipment, we're very pleased with this joint venture and believe our approach to building a world class low cost scalable supply chain with partners like natural era positions Kronos group to develop new business and trade channels and geographies like Latin America and other markets globally.

Let's now turn to discuss our latest developments in Israel.

Subsequent to this quarter in April 2020, Kronos group completed its first export the bulk dried flower coupled with Israel in order to sell teeth naturals branded cannabis products for distribution in the Israeli medical market.

Gross Israel will begin to build a distribution network and brand presence in this rapidly growing medical market.

Concurrently with building our brand presence, we have worked with our JV partner that kibbutz gone from well to bring the front with Israel facility online and we are encouraged to this operation will become a growth driver for our business in the back half of 2020 and onward.

We have received the necessary regulatory approvals to produce manufacture and sell dry cannabis flour and are waiting approval for a pre roll than oil products.

Which we are expected to receive throughout 2020.

I want to provide a bit of color on these Israel medical market and why we're looking forward to bringing peace naturals branded products to patients, which are expected to become available sometime in the second quarter of this year.

Israel's taking several steps to optimize and expedite the patient access process for medical cannabis and we're excited to join this thriving regulated market.

The cannabis usage rate in Israel is among the highest in the world and the medical patient Count Israel is expected to grow rapidly, which represents an excellent opportunity for our business to grow in this market.

In 2016, the Israeli Ministry of Health published a medical cannabis information booklet and guide which includes the methodology intended for doctors to prescribe candidate.

This is meant to guide and assessing customizing treatment with medical candidates.

Many doctors and these really health care system have been trained and certified using this clinical methodology, which enables them to provide treatment and issue patients licenses for possession and use of medical candidates.

The Israeli medical candidates agency currently grants personal medical cannabis permits and prescriptions to patients to treat a variety of medical conditions.

And unlike the Canadian medical candidates programs patient filled prescriptions directly through pharmacies.

Do you think sophisticated legal framework for medical candidates in Israel, coupled with a less established black market due to Israel stringent border controlled makes an exciting and potentially lucrative opportunity for Kronos group.

In April Kronos, Israel entered into a collaborative agreement with cancel analytics a candidates research company dedicated to developing scientific intellectual property medical products and technologies.

Under our agreement cancel intends to develop a commercial cannabis analytical testing laboratory onsite the current of Israel.

Cancels led by establish candidates researcher professor DD myriad from the technique on Israel Institute of Technology.

Professor Mary intends to operate the laboratory and conduct in house commercial analytical testing for Kronos, Israel and third party Cline.

Once operational the labs capabilities are anticipated to address the current gas and need in the Israeli market for accurate end to end candidate analytical testing, both domestic sales and export to certain international markets.

We are delighted to partner with Dr. myriad again and to bring this expertise to the Israeli market.

[noise]. Another initiative, we remain excited about is our intellectual property work with gingko by work and our commitment to investing in cutting Ed breakthrough technologies in can Avenue innovation.

Every day, we moved one step closer to our vision of creating culture can have in noise at scale using fermentation.

Go has already filed patent applications, which pertain to the fermentation who can avenue in order to protect the intellectual property work, we have developed to date through this partnership.

As previously noted we are the exclusive global perpetual license the intellectual property covered by the patent applications for the eight target can have in wide outlined in our agreement with Gingo.

In the first quarter 2020 furnace fermentation received an R&D license from health, Canada and received additional kidnapping only producing strains from get go by works.

Subsequent to the quarter end kroner fermentation successfully fermented one of our target can Avenue CPGA using the can Ave. It's strange in our when in fact R&D lab.

Kronos fermentation will continue using these trains to optimize downstream processing and scale up procedures in advance of receiving the final strains and commercial processing license both of which are required for commercialization.

This groundbreaking work has the ability to transform our business and disrupt the industry in a variety of ways.

First it will allow us to be more cost competitive as we rollout derivative product as consumer demand shifts from flower to derivative products lowering the cost of active ingredients will become critical to compete effectively against our peers in the elicit market.

Second from as it can avenue ins will deliver more consistent products like other consumer packaged goods companies in order to develop trusted cannabis brands that resonate with consumers. It is critical that we deliver the same experience each time, a consumer interacts with our product.

We expect the fermentations platform to provide us with the manufacturing for Scitor precision to deliver consistent can avenue blends in product.

And third we plan to leverage where can avenue to provide differentiated products to consumers and become a leader in the growth of new product categories.

In the long run differentiated products will drive margin durability and market share where can have enjoyed will enable us to distinguish our products and existing categories.

Additionally, leveraging railing Avenue as the primary ingredient in new product categories will allow us to expand the addressable market.

Having accomplished a milestone has successfully fermenting economics waiting at R&D scale at our facility. We continue to be confident in our ability to commercially for mencken adenoids under our previously disclosed timeline at September 2021.

We anticipate these culture can avenue slides will one day not only be an integral part of our supply chain, but also help our brand innovation potential reached new heights.

This quarter, we continue to bring new innovative products to market and further establish our brand portfolio.

Our goal is to deliver high quality consistent can avidly products to the market, while expanding how consumers approach and shop within the category.

Early this quarter, our luxury hemp derive CBD brand Lord Zone launched the lower Jones asset mantle repair CBD moisturizer to the U.S. market.

Receiving facial moisturizer is formulated to help maintain this games acid mantle and rebalance the appearance of stress again.

The brand continues to deliver on its promise of authenticity to consumers, while launching new and innovative skincare products.

Toward the end of the first quarter, Lord Zone saw shift to the direct to consumer online channel as well as online sales through its partner sites as most brick and mortar luxury retailers have closed due to covert 19, and subsequent social dispensing orders.

As an online first business lower Jones has existing infrastructure in place to meet the online demand for hemp derive TBD products.

Despite our readiness to adapt to the changing landscape, both near and long term consumer behavior does not always shifted easily we believe the beauty category could have lingering impacts in regard to product trials and purchasing as consumers in the skin care category typically like to try and retail before they buy.

In the Canadian 2.0 market, our direct to consumer medicinal Canada's band piece Naturals launched new vaporizer devices in the first quarter. Our peace natural brand has always kept quality is a top priority and this commitment to quality hold through with our new vaporizer devices.

These devices aimed to deliver a premium XTRAC for consumers with Precyse can avenue, a concentration levels and terpene profiles for a consistent experience.

The premium Camus extract are made using CEO to extraction processes and each products have unique and aromatic blend which uses all natural terpene rich flavors.

Our peace natural batteries and cartridges are rigorously tested before sale and we received positive feedback on the products today.

We are proud of our uncompromising approach to quality, which is at the heart of everything we do.

As we continue to green more consumer insights into Canadian market, we look forward to developing innovative and differentiated products and meet the needs and exceeded expectations of our consumers.

Turning to distribution the Canadian market.

In Q1, we continue to supply the adult use market working with provinces and private retailers to meet demand during this time.

As cobot 19, it impacted global market and various industries and supply chain, we have begun to see a contraction in demand as Canada stores in various provinces have been either closed or are going through changes in how they are forced to operate.

In Canada, while certain canvas retailers are designated an essential business additional new measures have been implemented to permit click and collect and online delivery of candidates products to consumers.

Several potential purchasers have similarly implemented additional health and safety measures and reduce staff at onsite operations, including limiting delivery time slots, which has posed logistical challenges and create a reduction in purchase order fulfillment.

The slowdown in disruption faced by retailers is also in addition to quarantine measures and travel restrictions, which could impact the ability of consumers to readily access our products outside of the online channel.

These restrictions will continue to change in evolve, which create uncertainty in forecasting consumer demand and sales velocity.

As mentioned in the US well online sales continued most beauty and luxury brick and mortar retailers a temporary closure stores and boutiques. However, nor Jones has adapted during this time and has made and we'll continue to make modifications to meet the online sales demand in this environment.

Through these challenges, we continue to modify and monitor our distribution networks to bring quality products to market during its unprecedented time.

We understand this disruption is impacting everyone, but we're committed to providing our consumers with the level of consistency and stability with our product that they have come to expect from our brands and from us.

With that I'll turn it over to Jerry to provide discussion on this quarter's financial results and our remediation efforts.

Thanks, Mike and good morning, everyone.

Turning to our financial results the company reported consolidated net revenue in the first quarter of 2020 up 8.4 million.

A 181% increase from the prior year period.

Revenue growth year over year was driven primarily by increased distribution of cannabis products in the Canadian market and the inclusion of financial results of Redwood, Our us hemp derive CBD business that was acquired in September of last year.

Consolidated gross profit for the first quarter of 2020 was negative $6.5 million.

$8 million decline from the first quarter of 2019.

The decrease versus prior year was primarily driven by unfavorable pricing dynamics observed in the Canadian market that led to an $8 billion inventory write down on dry cannabis and Kevin extract within the rest of World segment.

As well as an increase in the marginal production costs at the piece actuals care.

Are you working towards operating at full capacity after the repurchasing other facility in the fourth quarter of 2019.

If we work to exclude the inventory write down of $8 million gross profit in the first quarter of 2020 would have been 1.5 billion, representing a gross margin of 18%.

As we noted in our fourth quarter 2019 earnings we anticipate inventory write downs to continue in the short term due to pricing pressures in the marketplace.

Reported operating loss for the first quarter of 2020 was negative $45.1 billion, representing a $34.9 billion decline from the first quarter of 2019.

The loss was due to a combination of factors.

Including general and administrative expenses as a result of increased headcount.

Sales and marketing costs related to the development of new and existing brands.

R&D expenses, mainly due to the costs associated with our gingko partnership and spending on innovation at the Kronos device last research and development Center.

Additionally, internal review costs of $4.4 million, which was included in Gionee related to the restatement of our 2019 financial statements.

Our consolidated adjusted operating loss for the first quarter of 20 to one which excludes the onetime internal review costs was negative $40.7 billion.

Turning to our reporting segments.

The rest of World segment reported net revenue in the first quarter of 2020 of $6.3 million.

The 108% increase from the prior year period.

Revenue growth year over year was driven primarily by increased distribution of cannabis products in the Canadian market, including the launch of cannabis vaporizers in both the adult view and direct to consumer categories.

Gross profit for the rest of World segment was negative six or $7.6 million, a $9.1 million decline from the first quarter 2019.

I want to take a moment to address the gross margin and the rest of the world's segment.

Discussed previously certain facilities at the Canadian piece Natural's campus have been partially re purpose from cultivation to provide additional space for r. and d. activities manufacturing of derivative products as well as increased bowls and warehouse capacity.

Separately, we're also continuing to ramp up our purchases from third party cannabis producers in order to fully realized the benefits of our asset light model.

That'd be worth to create an efficient global supply chain through 2020 and be on for a rest of world segment. We anticipate that gross margins will continue to fluctuate inexperienced pressure.

This is due to the current under utilization of certain manufacturing facilities that are being read purpose and the work still underway to streamline.

Our third party biomass supply chain.

We anticipate that these operational pressures will ease as our manufacturing and purchasing teams continue to make progress in these areas.

Turning to our Canadian cannabis Vaporizers, we made a strategic decision with our lawn to utilize contract manufacturers to increase speed the market at the onset of cannabis to Plano legalization.

Further we believe that contract manufacturing allows us to be more flexible and responsive to trends in the marketplace well also aligning with our asset light model.

We continue to work with contract manufacturers to reduce costs and streamlined inventory movement.

And we anticipate continued improvements to the gross margins of our base throughout 2020.

Reported operating loss and the rest of the world's segment for the first quarter of 2020 was negative $31.9 million, representing a 21.7 million dollar decline from the first quarter of 2019.

The loss was primarily driven by increased general and administrative expenses as a result of increased headcount.

Higher sales and marketing costs related to building and developing existing brands.

And higher already expenses in pursuit of our strategy.

Our teams in Canada worked diligently each day to properly configure enhance our cannabinoid supply chain, we are creating an industry, while simultaneously executing a strategy that differs from our industry peers.

We continue to believe in our strategy and its merits for long term value creation.

Turning to the U.S. segment reported net revenue in the first quarter of 2020 was 2.2 million.

Gross profit for the U.S. segment was $1.1 million, representing a gross margin of 50 per cent.

Reported operating lost in the U.S. segment for the first quarter of 2020 was a negative $6.5 million.

<unk> was primarily driven like increase sales and marketing costs incurred in relation to the introduction of several new U.S. have derive see beauty products under the lower Jones brand and an increase in headcount to support growth initiative.

Overall Cronos group reported decrease in that income from the prior year, primarily due to the change in fair value of the financial derivative liability associated with allergies investment, which is described in more detail in the 10 q.

In the first quarter the company headquartered in noncash gain of $113.4 million related to the change in fair value of these financial derivative liabilities.

What else continues to expect there may be significant reported earnings volatility primarily driven by the fair value quarterly adjustments related to the movement of Cronos group stock price.

Turning to the balance sheet. The company ended the quarter with approximately $1.3 million in cash in short term investments representing 171 million dollar decline from the fourth quarter of 2019.

The majority of the decline was due to the impact of volatility in exchange rate.

The U.S. dollars shrinking significantly against the Canadian dollar since the beginning of the year from a dollar Saturday at December 31st to $1.41 at March 31st 2020.

In the long term this is not meaningful to our business and we can expect to have fluctuations in currency in the short term and generally going forward.

Capital expenditures for the quarter or $7.5 million.

Spending include investments in our peace Natural's campus.

Cronos fermentation.

Or Israeli facility and device technology innovation that Cronos device lab.

Remain focused on deploying capital into discipline manner, and only in ways that aligned with our strategic priorities.

Lastly, I would like to provide you wouldn't update on our immediate <unk> remediation efforts in relation to the material weaknesses that we disclose last quarter.

We as a company are committed to instituting best practices for financial reporting.

Our management with oversight on the audit Committee has initiated a plan, which we are working diligently to phase in over the course of 2020.

I will now take you through some additional details of our mediation plan for each of the three material weaknesses, we disclose last quarter.

First we are making considerable enhancements to the quarterly review of our risk assessment model and risk controlled matrices well also establishing a risk committee that will give you the risk assessment on a quarterly basis.

Secondly, we are enhancing the delegation of authority policies to limit the number of groups that can authorize sales or purchases of inventory.

They're also establish interview process and an internal database to identify entities that are both vendors and customers of the company.

And lastly, we are in the process of creating and implementing a non routine transactions policy that will clearly defined nonroutine transactions with crier accounting memo completion, and will would cry or C.E.O. indoor CFO approval.

Business operators will be required reside formal business cases for all nonroutine business to business unbranded sales and purchasing.

These business cases will be review quarterly to ensure alignment with the objectives of the company.

We will also be expanding the sub certification process to additional members of management to ensure that nonroutine transactions correctly identified unaccounted for.

As we implement these controls they will be rigorously tested internally and by our independent auditor to ensure they are working correctly. We are confident in the remediation plan that we are implementing and believe we will be a stronger company as a result of this undertaking.

In closing, we expect to continue to invest in our strategic initiatives and we remain optimistic about our near term plans to achieve longterm leadership and they can have a space.

What's that I'll turn it over to Mike for closing remarks before queuing it.

Despite the challenges and uncertainty posed by the covert 19 pandemic remain focus in the business and agile.

Unless required to leave our homes.

Our brand portfolio continues to launch innovative products to consumers as we adapt to an online first distribution model in both the U.S. in Canada, we continue to reach our stakeholders and consumers, they're creating digital marketing.

We believe the admission of our company to improve lives through can adenoid innovation, resonates, especially well and we feel very fortunate to be able to provide consumers with our product during these times.

We remain well positioned and committed to generating sustainable long-term value for shareholders and they're confident 2020 will be successful building here for criminals.

Would that let's now open a line for questions.

If you would like to ask a question. Please press star one on your telephone keypad again that start then the number one.

The story or question press the pound key.

Please limit you yourself to one question in one follow up.

That is star wine.

The first question is from the line up Andrew harder with Stiefel.

Hey, Thanks, good morning want to focus in back on the Lord Jones, or the U.S. or the U.S. kinda platform kind of came in its down sequentially from from the last quarter and and essentially flat from kind of kind of what it wasn't a third quarter. There's a lot of moving parts, obviously shipments are down to some of the the stores that are closing, but what can you off.

And there's some new product launch as well what can you offer in terms of.

Growth from kind of existing <unk> customers in your direct to consumer channel or anything just to kinda offer some evidence that that brands kinda resonating and growing thanks.

Thank you Andrew.

Although it was a bit disappointing to see the decline in the U.S. business, we feel competent in the plans at the business has to <unk> corrected sort of X. rays, including.

A lot not limited to a building consumer awareness of new and existing products.

Ah such as like mentioned in the repair remarks are lower Jones acid mantle CBD moisturizing cream.

And an additional brand launched coming down the pipe in the second half of 2020, you know the U.S.D.V.D. market as a big opportunity for us.

And we look forward to sharing more of what we have in the pipeline and with our consumers over time no. The other thing I want to talk about is the Kobe 19 impact while we've we have a big d. to see business. You know, we do have many retail partners over 900, and a lot of those are closed right now and well some of that has shifted to some online platforms. A lot of these are.

Boutiques that don't have an online platform. So there could be some pressure definitely pressure and Q2 and we'll see.

What what looks forward and Q3 and Q. for.

He thinks and then just kind of talk about the other kind of key channel for your business.

I understand your outlook for Canada, you're you're you're you're indicating some pressure pressure to sales near term I mean, how are you thinking about the opportunity from Canada and kind of positioning kind of the business. This year is it should be thinking about short term decline, but a a very quick recovery wants to restrictions lifted or are you also maybe thinking about some lingering impacts obviously delay.

Retail roll out some closures just how're you think about the channels development and positioning for it over the next six months to a year. Thanks I'll pass on if that.

Sure. So I think you know a long term, we haven't seen anything that changes our our view of of how a marketer roll out and the next six months to a year I think things will be choppy no part of that part of the things we've seen as a sudden changes and and what distribution will look like in it it's pretty difficult.

Paint all of Canada with a in a broad brush just given a different approaches provinces have to responding to covin. So you know I think that we can see some some changes and product mix and pack sizes. You know when we just think about many occasions for you know consumer that they're going to be purchasing.

You know keeping in mind more at home. So I think convenience formats is something that long will be less of a priority. So maybe more of a shift towards flower.

And I I think we're we're actually still going to see some store girl you know we seasons doors in Ontario continue but I think it's it's.

Less of you know expecting declines and maybe just the while we were conservative and you know forecasting what the growth would be this year I think it's it's like.

Likely that it would just be the expected growth may not be there, but I think it's Ah you know get an AD that light model and the flexibility we have it anywhere.

Confident that strategy still right and that will be able to you know be ready to hit the ground running as soon as things start opening backup.

During next question I saw the line of Michael Library with Piper sand player.

[noise] morning, Thank you.

[noise] morning.

He's talk a little bit more about C.B.G. or C.P.G.A. and you mentioned you Wanna be position with differentiated products can you give us any maybe teaser of how that might look into what some of the the <unk>.

Things are differentiated and maybe specifically <unk> how to educate the consumer on how to understand.

Different from other can add noise.

Sure. Thanks take Great question, you know, we think C.B.D. will love similar consumer purchasing habits to C.B.D. like C.B.D. I think there's certainly still more research it's needed before making any specific claims.

I think what what will find is that a lot of the reason consumers might be purchasing C.B.D. they'll find that maybe they'll they'll get a better experience from a specific a need for from C.B.G.. So there that it will be some element of better fulfilling a when it.

Today, a T.V.D. consumers need, but I think there's still also the opportunity to expand some of the addressable Marcus I told them you can think of just the formats.

Being you know from just general anything that's not intoxicating that can adenoid to be kind of similar whereas T.H.T. would be you know and the other side. So we seen actually in in some small quantities T.V.G. being available and then strong demand in in the U.S.

I think that we need to have more supply before being able to predict uprising dynamics that we have seen it just given the scarcity being at a a a higher price point.

But you know we think there's two real ways that it was bringing the market. One is using C.B.G. is a a Lincoln Avenue.

You know being a unique category and differentiator and the other is including C.B.G. and highlighting it as part of a product mix with other <unk>.

Okay. That's helpful and just a quick follow up can you give a sense for what some of the you you mentioned you foresee inventory write down still to come. It can you give us inexpensive order of magnitude of of that risk is.

Similar to what was in this quarter is is more or less.

Yeah, we we don't get forward looking guidance.

So you know a lot of it depends on what happens in the Canadian marketplace with with fair value.

Or next question he's from the line and C.D.N.A., killing.

[noise] hi, good morning.

Follow up on the landscape in Canada, a lot of either.

You know value upright or no.

Can't operate what impact are you fall in terms of the overall pipe a landscape.

Right.

Sure Yeah, I think it's it's certainly something we're seeing and we're we're seeing price last density and you know certain categories and we we do and we have always expected that in a flower category will continue to see price compression.

You know, we think that from a platform for platform perspective.

You know a lot of the work that we're doing and have been doing an innovation you know it with fermentation won't position of very well to be able to continue to be price competitive and really be able to lead a in generating value from you know those types of the segments, but you know I think there's two.

Things that are really driving to change anything one is you know certainly and value you know you'd have less less costs, when you're able to spread out the amount of product into larger packed either but also the fact that and we had consumers that are at home right. Now I think you would see a shift the larger packs side is you know a route.

ER, regardless of the shifting drastic shipping prices. So we think it's it's those two things are certainly catching on and we don't we don't think that for a flower we're gonna see any drastic changes to that trend anytime soon when we look at at other markets legalize markets in the U.S. wouldn't.

Tennessee is the price starts out quite high.

When there is a high demand and low supply you'll see that price come down over time, and then in a certain point, you'll see the price start coming back up and moving towards an equilibrium as a you'll have operator start accidentally.

One of the reading that we've partnered with the new group of Cronus grow grow is I think their ability to to thrive in in other produce markets where are similar trends and you know that's that's sort of how we're thinking of the flower market shaping up in Canada.

That's really helpful thinking okay.

<unk> to that on you mentioned that shipped a bunch of Pat sizes with that I'm working with in place that start Monday expensive.

What we're cool and other category, but some of them on clay Foreign point My are you with that there will do.

<unk> you know so long as well at home isn't quite you're probably thinking about the evolution of consumer demand.

Thanks.

Sure you know, we we don't have enough data that way.

Substantiate that and I think.

Wow you know, we certainly can see that as a possibility. There are there are factors that are difficult to predict such as <unk> you know how much of the consumption in in in first thing will come from the legal versus illicit market and I think also the product, making the key thing for us to think about.

And we think of demand planning just giving the you know time to change packed sizes and change offerings and you know how long we think that would last for and only do factor and we're kind of looking at where I. Since we're in Canada, I'll say, the where the puck is going out where the puck is and you know.

I don't I don't know that staying shift towards a large pack flowers I that is where we see the value going for long term you know we do understand that there is some element of that but I think you know again going back to convenient than usage.

Some of the benefits from you know formats, we're very excited around where can means does matter quite a bit per year old. They pan animal I I think that had lots of an emphasis so are are you near term demand planning.

Is that there's just much more likely to be a mix ship then a overall product quality shit.

No next question, it's on the line of design in parallel with the C.I.E.

Thanks, Good morning, I want to follow up on easier question about a C.V.G.A. I think it's an interesting development. So can you talk more broadly about your bio since the strategy and let's say you achieve the milestones that that you reference Mike or even faster than you expect or are there are additional steps you need to monetizing commercials.

That research do you need regulatory approvals or or can you launch products as soon as you get them and it's this requires more work with technology or cancel Ah now I guess, just just ended that you could provide us with l. frame that strategy would be helpful.

Sure.

<unk> I think there's a few ways you can think about it you know the first if you think about T.H.C. or C.B.D. or you know, even T.V.D. were being able to see some limited data on how a products are used.

For products that we have out in the market today or even product that movie was launching regardless of affirming station anything other than flower you know, we're still able to just substitute.

For for men can add noise are completely fundable at the same exact molecule with with extracted from cultivation Nab annoyed.

So you know I think out of the gate being able to monetize is not something that we need anything outside of the commercial processing license at the facility.

In Canada that would just be the same is if we had a third party or sorry, like a second sight for extraction <unk>. The profit you need to go through a it's actually specifically outlined in C. 45 that.

For processing can adenoids can come from biosynthesis. So we see it as you know fungible and something that you can move in a supply chain instantly you know I think there is further research and work that we're doing now is when you're thinking of products, where we're using the rare can add noise as a as a lead.

So if we were to.

Launch a T.H.T.V. the bait pen, where T.T.V.'s primary <unk> noodle world formulation. That's <unk> research will still still working on now you know the skin care research attack me on certainly that you know work still needed to be done there. While we're excited about it we still have you know ways to go.

But the other way that we we leverage rare <unk> noise when I talk about.

Swapping into our supply chain.

If you were to look at the breakdown of ingredients and any yeah, yeah any popular cannabis product today.

<unk>, most Canada products today.

What you'll see is well T.H.C. and C.B.D. will be the two primary can Avenue way as you go down from a a lab print out you'll see that C.B.G.C.B.C.C.B.D.V.T.H.D.D. All the get go targets are actually in there and when you think of the entourage effect and what consumers look for for this differentiate experience.

When you say you know I want a white widow versus.

Northern lights, it's really those can add noise in the term means that are driving that unique effect and and that unique blend that consumers one and it just gives up the ability in our supply chain can be able to make sure that we provide that unique blend each time and and just deliver the same experience. So from that you know that perspective there aren't.

Changes, we need to make but certainly for new to world.

Noodle World formulations, there's still research you know, we'll we'll be doing and I I, you know suspect and hope that they'll be research, we'll be doing for years and can continue to build or innovation pipeline as we they're able to test and refining perfect offerings.

Alright, that's very helpful. Thank you for that and then my fault on on the brand building sides just wanted to get a sense. It's how you think about building brands in the current corporate environment, you've talked in the past about launching additional branch to read through the redwoods family or Redwood asset, but your your distribution partners.

Or pretty restricted right now. So this is this defer the brand launch any till 2021 or was that kind of the game plan anyway.

No I I think there.

There are certainly things that can cause delays and how we might otherwise launch or maybe an optimal launch.

But it is a reality we have to deal with that this this can stretch out for long periods. So you know we certainly have contingency plans you know we feel that when we when we look at the did the brands in the portfolio and think of just timing. There are there are certain elements.

The branded would lawn for we think we're able to get a awareness.

You know without having a what wouldn't be optimal without having a retail presence. So you know we didn't get it didn't really nato's and brand leveraging D.D.C. and being able to use social media. There are a lot of ways that we still you know can launch and plan on on launching D.T.C. course don't modern situation.

And if if that's.

The only available Avenue to us.

Your next question for me from the line of rubble.

<unk> with Raymond James.

One of my Jerry Thanks, So much for for taking my question. So congratulation on having tech transfer from gingko to to to win.

As of course, an important milestone in seems to be involving part of your strategy. So we're recognizing that B.B.

C.G.A. and and so one of the sort of little bit further into you know how many additional cannot Benoit do you expect to be transferred over to go into effect. So the over the next year and as you approach that September 2021 timeline.

Sure Yeah, Yeah, I think we.

Without without getting into specifics of of how many have actually been tech transferred to date I would just say we do expect that we would have you know by by next year in December 2021.

You know the all the can Avenue.

Transferred and the different strains I think for us the most important part of the of the milestone is.

It's just the general fermentation process and if you think about the just how similar our targets are as far as a molecule.

It's being able to start working on this scale up and and yeah downstream processing being able to work out what the case are and where a potential bottlenecks are from fermenting or harvesting or in a separation and just being able to get the conversion of.

You know of the strain to the bra off to the purified <unk>.

So you know that that process an important thing is is having a strain and aken adenoid, but the molecules are so similar that we don't see any different than what those those prosody is really going to be.

You know, we still back timeline why that we'll be able to bring things to market September 2021.

Great I think so that color and just a quick full of course, and then do you expect that those first generation products will be purely synthetic or do you think you'll be using a combination formulation of some synthetic as well as some botanically derived islip.

You know I think it's it's it's tough to answer and it could be you know a combination I do think that you know for a lot of products. There are some benefits to still having come to the fats and waxes and intervenes that are there, but ultimately you know what the product next will be it'll be dictated by like.

Tumors and so you know we think there are benefits to being able to make sure that we bounce out and make or opera inconsistent.

We we haven't seen that isolates products are necessarily something that there's a lot of consumer interest in today. So it would be either a combination of that can add noise that are fermented or a combination of for method and botanical, but I would that would say.

More likely from consumer research that in the early stages as we ramp up and think about run on run off times and and changing different Nab annoyed runs and working out efficiency is that it would start off with more of a blonde.

Your next question from the line of Oh wait a minute with Jeffrey.

<unk> and <unk> questions just on on the write downs in where you're expecting mole and additional calls.

<unk> that and why given that all your V.C. scrutiny on your report. It now you don't pay one law to write down hopefully like a lot of you'll pay it's easy thing.

Yep. Thank you all one in the morning.

Well as you can imagine you know this is a pretty dynamic time for the company as we're retooling our Canadian business for two point no products and expand on our third party bio mass purchasing strategy you know in a a point you back to the factors that we laid out in our prepared remarks, such as the the near term under utilization of the P.C. actually.

Campus and the stabilization stabilization of our third party, a bio mass supply chain.

You know essentially you've seen this with with other than the industry. Your gross margins can be impacted one facilities are not being utilized to their full capacity.

This is just a product of the fast there's not there's not enough revenue to cover the the facility six costs, we we see that improving as the year goes on.

<unk> one thing just also say would you know there are some still fixed price contracts that are that are being worked out and it's just our our expectation that will continue to see price impression.

On a supply died and I would add when when comparing their competitors. One thing just to be mindful of his believe that we only have one other competitor that is reports in in gap right. Now. So you know I think that we the way that we approach accounting is is slightly different than the majority.

Into competitors that are it's stoned or I forget.

Okay.

Hi, My <unk>.

Spoken about the ongoing shifts to evaluate the price compression given the the likelihood of seven right downtown so seen that there's little sell true feel flower right now and it remains one of the most expensive in the mall Yeah. I'm, just wondering I mean, <unk>, you're going to keep prices, where they are you going to lie within because of the locker.

<unk> <unk>, if it's the former supposed to pay a lot you almost.

In golf the flower business to in the hope of obviously you talk about the volume of caught up some when they start to to come pretty when you revenues materialized would that.

Yeah.

Yeah, I know I think just for a competitive reasons, we're not we're not going to speak to what our pricing strategy will will be going forward, but then of course something that we constantly evaluating want to make sure that we stay competitive in you know in the marketplace in our fulfilling consumer needs.

Your next question from the line of Matt bottom line with chemicals Orginally tea.

Yeah. Good morning, everyone. Thanks for taking the questions just wanted to to dig a little deeper in in the domestic cannabis sales or penetration. This court overlap. So I mean, you had something in your Simpson details in the prepared remarks, but you had a decent bump as a percentage going up to 6.3 million, but still in absolute dollars.

I would've anticipated potentially a bigger bump given the 2.0 product introduction. So you can maybe just give us some color on on the quarter of a quarter growth of lining up what happened with the the the bait and also how much contribution might have shifted to increments incremental international sales, it's still unclear to me how much.

Export inappropriate might have been in that number.

Sure So and I think one thing that to look at is.

You know how much how much I think we saw on growth a of a brand new sales in penetration I think.

No. We we have certainly seen a little bit of a a make shift you know given that purchases were or did not include 2.0 are included a small amount to point out and now you know now consumers, having the option of both.

But you know I think that things are things.

Well as far as how well the they tend to received something that we expect to ramp up throughout the year as far as international.

I actually haven't seen any changes in in demand for exports, it's really scheduling logistics, but when we look forward to fit growth in we are adding a new new region and I think when you think of all the different medical markets that have launched Israel is despite sort of being a new commercial.

Wise.

Marketed something where we've had a lot of infrastructure and and the regulators have done a very good job and making sure that it's so then a successful both for medical patients and for businesses. So we do expect growth they come from from Israel I would say starting initially with the you know the flower that we export.

But we do have our facility up and running and if it'd been able to get harvest out. So you know given the shortage there and what we seem to be a fair amount of demanded out having.

The black market compared to what we see in North America, we expect growth they come there, but I would I would say that it's not purely coming at an export market. It a lot of that will come from the domestic count cultivation, but depending on where demand leveled out it could still be a mix of export and domestic cultivation.

Got it thank you and interested to follow up maybe just any color on on pricing whether dollars are just as a as a as a ratio to what we what you've seen the Canadian medical market I know that the pricing you have historically in Germany was very favorable so just curious how that works in Israel.

Yeah, I think it's it's not going to be as high as Germany. I think Germany is is pretty unique I would say that you know we expect.

When you think of it and I don't Wanna Sound like you know economics professor, but there's not a unique barrier like there is in Germany because of the way the pharmacy system works and sort of a it almost freezes prices.

So you know we have seen and markets like this that there might be in a shortage of high price, but we're really focused on building a relationship with the consumers and patience and getting early market share of the market we plan on really leaning into.

So I would say prices are going to be closer to what you know we're seeing in Canada at least the way we think of setting prices, but we do expect the cost of production to be lower in Israel. Then I think we've we've highly that and in previous call just given the climate.

So you know we expect that there's still a good margin opportunity.

But over time, we would expect to see similar trends as far as product mix as what we've seen in Canada, because it's it's from a regulation perspective, similar with the key difference being going through pharmacies, rather than direct patient. So maybe it'll it'll shape out somewhere between where the adult use in the medical market in Canada is but I do think.

Germany is is its own category just given the more traditional form a model.

The final questionnaire from the line of grammar written letter with eight capital.

Hi, Good morning, Thanks for taking my question I, just wanted to follow up with respect to the the U.S.T.V. pipeline watch as expected for the second half of 2020, you know traditionally Lord Jones has been placed as more of a premium brand and I was wondering if there're any plans to.

Launch more of a mainstream or value type product given potential for economic had ones because of covert 19. Thanks.

Yeah. Thanks for the question Graham Ah most definitely you know Lord Jones, obviously plays in that Super premium a category with a high price and so as we look about the consumer segments that is definitely a a big opportunity for us as long as you go much more mainstream brand and that is definitely in our plan.

Okay. Thanks, and then Oh as a follow up questions here I'm just wondering given the recent developments at all tree on the changes and leadership. There you just provide a bit of color in terms of the relationship between the two companies and no any any sort of that.

<unk> during transitions or you know as a as a business continues to develop their that would be helpful. Thank you.

Yeah.

Sure I think.

There hasn't really been any any changes in Ah discussions no I think.

The the team that's that's there from our perspective as a team. It's you know it has been there since we've had the relationship.

So.

Jerry also probably you know uniquely connected to the people there, but I think that there's been a lot of consistency with with tenure or the you know executives there and so we haven't really had had many changes in discussion.

I think a lot of wood the last few months, we've been focused on is.

And getting a lot of help from a lot of a lot of the folks there and counterparts I'm just thinking through cobin things through potential impacts thinking through what you know best practice can be a manufacturer and making sure. We have the right procedures in place to focus on employee safety and how to deal with things. So I think it's been a very collaborative relationship.

I've been.

Right.

Very fortunate to be able to lean on their expertise and how to deal with.

Uncertain times, but high level at a there haven't been any any discussions and changes yeah I would add if it's been quite a seamless transition for us, but I think with the collaboration between the groups continues that is probably that increasing [noise].

Okay. Appreciate it thank you.

There are no for the questions.

Distance compared to today's conference call. Thank you for your participation you may now disconnect.

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