Q1 2020 Earnings Call
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Ladies and gentlemen disappeared operator today's call is scheduled to begin momentarily until that time Airlines will again be placed in music old. Thank you for your patience [noise].
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I would like to welcome everyone to be Clemens 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 Shane Leap All Investor Relations. Please go ahead Sir.
I can tell Ya 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 or 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 are 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 to 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 assists management and planning forecasting valuating business and financial performance, including allocating resources.
And as such there may be brief delays cross talk or minor technical issues. During this call. We thank you in advance 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 Microlensing.
Thank you Jane and good morning, everyone.
At the cold at 19 pandemic continues to affect global markets 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 has 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 the ball.
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 needs of 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 essential.
And our manufacturing facilities, we enhance hygiene and sanitation practices modified schedules and have maintained social distancing protocols.
As circumstances varied by region and country, we're working diligently to continue to act in accordance with all applicable guidance from local federal and international health and governmental authorities and we are prepared to make additional operational adjustments as necessary.
We donated surplus and 95 math gobbled, they shield had mounts and they should replacement from our peace natural campus to the Collingwood and very yet very area hospitals.
Additionally, the Lord shown 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 are 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 teens 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 in branded sales that helped build and strengthen our relationship with our consumers.
We believe it the best way to create value to 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 Onest good crop contract manufacturing joint venture in Latin America, Natura achieved significant operational milestones.
As a reminder, natural whereas a 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.
And that you were also gain preferential access to four cultivars registered with the Colombian Agricultural Institute.
One of the hamstrings implanted 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 pens derived CBD distillate, which was granted a non controlled substance rolling by Columbia's narcotics control board streamlined and 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 and hence derive TBD distillate and water soluble have derived CBD solutions.
Despite this being a small cell 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 physicians Kronos group to develop new business in 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 point, 20, Kronos group completed its first export a bulk dried flower dependents, Israel in order to sell teeth natural branded cannabis product for distribution in the Israeli medical market.
Going with 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 could we've gone from well to bring the criminals 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 dried candidates flour and are waiting approvals are 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 bring peace natural branded products to patients, which are expected to become available sometime in the second quarter of this year.
Israel's taking several steps to optimizing expedite the patient access process for medical candidates and we are excited to join us 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 include the methodology intended for doctors to prescribe candidate.
This is meant to guide in assessing customizing treatment with medical candidates.
Many doctors needs really healthcare systems 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 grant personal medical candidates 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.
The existing 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 chronis group.
In April Kronos, Israel entered into a collaborative agreement with cancel analytics, a cannabis research company dedicated to developing scientific intellectual property medical products and technologies.
Under our agreement Camisole intends to develop a commercial candidates analytical testing laboratory onsite the Kronos Israel.
Canceled led by establish cannabis researcher professor DD myriad from the Techni 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 clients.
Once operational the labs capabilities are anticipated to address the current gap and need in the Israeli market for accurate end to end candidate analytical testing for both domestic sale and export to certain international markets.
We are delighted to partner with Dr., Mary again and to bring this expertise to the Israeli market.
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 happen or innovation.
Every day, we moved one step closer to our vision of creating culture internationally the scale using fermentation.
Google has already filed patent applications, which pertain to the fermentation of 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 Avenue I outlined in our agreement with Kimco.
In the first quarter of 2020, Kronos fermentation received an R&D license from health, Canada and received initial can have annoyed producing strain from gingko bioworks.
Subsequent to the quarter end kroner fermentation successfully fermented one of our target can happen like CPGA using that can avenue a strain in our when in fact R&D lab.
Kronos fermentation will continue using these trains to optimize downstream processing and scale of 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 happen wins 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 experienced each time, a consumer interacts with our product.
We expect the fermentations platform to provide us with the manufacturing POSIDUR precision to deliver consistent can add to it blends in product.
And third we plan to leverage where can have analyzed to provide differentiated products to consumers and become a leader in the growth of new product categories.
In the long run differentiated product will drive margin durability and market share where can have an always will enable us to distinguish our products in existing categories.
Additionally, leveraging rare can avenue as the primary ingredient in new product categories will allow us to expand the addressable market.
Having accomplished the milestone has successfully fermenting economically 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 coulter can analyze 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 avenue at products to the market, while expanding happen sooner as approach and shop within the category.
Early this quarter, our luxury helped drive CBD brand lower Joan launched a lower Jones acid mantle repair CBD moisturizer to the U.S. market.
This using facial moisturizer is formulated to help maintain its 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 ended 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 Lord Jones has existing infrastructure in place to meet the online demand for hemp derived CBD products.
Despite our readiness to adapt to 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 candidates 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 at concentration levels and terpene profiles for consistent experience.
The premium canvas extract are made using CEO to extraction processes and each product 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 glean more consumer insights into the Canadian market, we look forward to developing innovative and differentiated products that meet the needs and exceeded expectations of our consumers.
Turning to distribution in the Canadian market.
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 and various provinces have been either closed or are going through changes in how they are forced to operate.
In Canada, while certain candidates retailers are designated an essential business additional new measures have been implemented to permit click and collect and online delivery of canvas 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 created 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 creates uncertainty in forecasting consumer demand and sales velocity.
As mentioned in the US while online sales continued most beauty and luxury brick and mortar retailers a temporary closure stores and boutiques. However, lower 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 or distribution networks to bring quality products to market. During this 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've 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 have 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 million 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 naturals carefully as we continue working towards operating at full capacity. After the re purposing other facility in the fourth quarter of 29 team.
If we were to exclude the inventory write down of $8 million gross profit in the first quarter of 2020 would have been 1.5 million 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 million, 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 cost associated with our Kingold 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 2020, which excludes the onetime internal review costs was negative $40.7 million.
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 use 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.
The decrease year over year was primarily driven by increased marginal production costs at the peak naturals campus as well as an inventory write down on dry cannabis and cannabis oil.
To address the gross margin and the rest of the world segments.
As 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 increase the bolt and warehouse capacity.
Currently we are also continuing to ramp up our purchases from third party cannabis producer.
In order to fully realized the benefits of our asset light model.
As we work to create inefficient global supply chain through 2020 M.B. on for a wreck the world's segment, we anticipate that gross margins will continue to fluctuate and experience pressure.
This is due to the current under utilization of certain manufacturing facilities that are being re 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 vaporizer.
We made a strategic decision with our lawn to utilize contract manufacturers to increase speed the market at the onset of cannabis two point no 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 improvement to the gross margins of our base throughout 2020.
Reported operating loss and the rest of worlds segments 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 expensive 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 for years, we continued to believe in our strategy and its merits for long term value appreciation.
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 loss in the U.S. segments for the first quarter of 2020 was a negative $6.5 million.
The loss was primarily driven like increase sales and marketing costs incurred in relation to the introduction of several new U.S. have derives D.V.D. products under the lower Jones brand and an increase in headcount to support growth initiative.
Overall Cronos group report a 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 recorded and noncash gain of $113.4 million related to the change in fair value of these financial derivatives liabilities.
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.
A majority of the decline with due to the impact of volatility in exchange rate.
The U.S. dollars strength insignificantly against the Canadian dollar since the beginning of the year.
I'm 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 parentheses in the short term and generally going forward.
Capital expenditures for the quarter or $7.5 million.
Spending includes investments in our peace Natural's campus.
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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 an 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 Oversights on the audit Committee has initiated a plan, which we are working diligently to phase in over the course of 2020.
I'll 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 so the quarterly review of our risk assessment model and risk control matrices.
I'll 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.
We're also establishing a review process and an internal database identified entities that are both vendors and customers of the company.
And lastly, we are in the process of creating and implementing a nonroutine transactions policy that will clearly defined nonroutine transactions with greater accounting memo completion, and we'll would cry or C.E.O. indoor CFO approval.
Business operators will be required reside foremost business cases for all non routine business to business unbranded sales and purchases.
These business cases will be review quarterly to ensure alignment with the objective of the company.
We will also be expanding the sub certification process to additional members of management to ensure that nonroutine transactions are 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 their mediation plan that we are implementing and to 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 can they can't have a space.
What's that I'll turn it over to Mike for closing remarks before queuing it.
Thank you Jerry.
Cross started 2020 off energized and determined to continue to execute against our strategic initiatives to drive sustainable growth and long term value.
Despite the challenges and uncertainty posed by the covert 19 pandemic remain focus in the business and agile.
And last 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 do can I have no 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 year for cronos.
Would that let's now open the lines of 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 yourselves to one question in one follow up.
<unk>.
The first question is from the line up Andrew harder with Stiefel.
Hey, Thanks, Good morning, well the focus then 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 core 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 confident in the plans at the business has to <unk> <unk>, including.
Lot not limited to a building consumer awareness of new and existing products.
Ah such as Mike mentioned to the repair remarks are lower Jones acid mantle CVD 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 is 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 you know 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 as 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.
You think send a 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 business. This year is it should be think 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 it.
Yeah.
Sure. So I think you know a long term, we we haven't seen anything that changes our our view of of how to market or roll out in the next six months to a year I think things will be choppy you know part of part of the things we've seen as a sudden changes in in what distribution will look like in it it's pretty difficult to pay.
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 in in product mix and pack sizes and no. One would just think about the occasion 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 will 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 girls you know we've seen in stores in Ontario continue but I think it's it's.
Less you know expecting declines in maybe just the while we were conservative and you know forecasting what the growth could be this year I think it's it's likely that it would just be expected growth may not be there, but I think it's you know given the AD that like model and the flexibility we have I think we're or.
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 want to be positioned with differentiated products.
Can you give us any maybe teaser of how that might look into what some of the the.
<unk> with differentiated maybe specifically, partly how to educate the consumer on how to understand.
Different from other can Abbott always.
Sure. Thanks take great question.
I think C.B.D. will do a similar consumer purchasing habits to C.B.D. like C.B.D.N.A., 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 reasons consumers might be purchasing C.B.D. they'll we'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 D.V.D. consumers needs, but I think they're still also the opportunity to expand some of the addressable Marcus.
So you can think of just the formats.
Being you know from just general anything that's not intoxicating the <unk> 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 CVG being available and and strong demand in in the U.S.
That we need to have more supply before being able to predict pricing dynamics that we have seen it I just given the scarcity being at a a at a higher price point.
But you know we think there's two real ways that it would bring in the market. One is using C.B.G. as a a leak an avid noise 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.
And you give us inexpensive order of magnitude of of that risk is it.
Alerted what was in this quarter is is more or less.
Yeah, we we don't get forward looking guidance.
You know a lot of it depends on what happens in the Canadian marketplace with with fair value.
Or next question is from the line and C.D.N.A. Kelly.
Hi.
Follow up on the landscape in Canada, <unk> and you can do you know value priced or yeah.
Operate what impact are you fall in terms of the overall pipe.
Okay.
Sure Yeah, I think it's it's certainly something we're seeing and we're we're seeing <unk> and you know certain categories and we we do and we have always expected that in the flower category will continue to see price impression.
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 more position I'm 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 segments.
But you know I think there's two things that are really driving the changes and 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 packs island, but also the fact that and we have consumers that are at home right. Now I think you would see a shift to larger pack size.
You know a relevant sorry, regardless of the shifting drastic shipping prices. So we think it's it's those two things are certainly catching on and and we don't we don't think that for flower.
See any drastic changes to that trend anytime soon.
When we look at that other markets legalize markets in the U.S. When you, 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 at a certain point, you'll see the price started coming back up and moving towards an equilibrium as a you'll have operator start accidentally.
One of the reading that we partnered with and Mooching group of Kroners grow is I think their ability to to thrive in and 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 and in Canada.
That's really helpful thinking okay.
<unk> to that on you mentioned the ship barter Pat sizes with that.
In place that's starting to look sensitive with what we're cool and other stuff.
But some of the more acquainted with one point. My are you went to me that there will be.
<unk> <unk> Jan Yeah, so long to stay at home isn't quite cool about the evolution of consumer demand.
Thanks.
Sure.
We don't have enough data that would.
Substantiate that and I think.
Wow you know, we certainly can see that as a possibility. There are there are factor that are difficult to predict such as.
How much of the consumption in in in purchasing will come from the legal versus lifted market and I think also the product, making the key thing for us to think about and we think of demand planning just given the the you know time to change a pack sizes and change offerings.
And you know how long, we think that would last for and we do factor and we're kind of looking at where <unk>, where the puck is going out where the puck is.
And.
No I don't I don't know that a stain 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 and usage.
The benefits from you know formats, we're very excited around or can means does matter quite a bit per year old they've pen animals.
That has lots of an emphasis so are are near term demand planning.
Is that they're just much more likely to be a mix shift N.A. overall product quantity shift.
No next question it on the line of design in parallel with the C.I.E.
Thanks, Good morning, I wanted to follow up on easier question about a C.V.G.A. I think it's interesting development. So can you talk more broadly boat 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 monetize in commercial.
Research do you need regulatory approvals or or can you launch products as soon as you get them. If this requires more work with technique on or or cancel Ah now I guess, just just anything you could provide us with l. frame that strategy.
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.D. or you know even T.V.G., we're been able to see some limited data and have a products are used.
For products that we have out in the market today, Oregon product that would be launching regardless of affirming station anything other than flower you know, we're still able to just substitute.
For <unk> can add noise are completely fungible at the same exact molecule with with extracted from cultivation of noise.
So you know I think out of the game being able to monetize is not something that we need anything outside of the commercial processing license at the facility I in Canada that would just be the same as 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.
M.C. 45 that.
For processing can add noise can come from Biosenses.
So we see it as you know fungible and something that can 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 about we're excited about it we still have you know ways to go.
But the other way that we leverage American Avenue words, when I talk about.
Swapping into our supply chain.
If you were to look at the breakdown of ingredients and any.
Any popular cannabis product today are saying, most Canada products today.
What you'll see is well T.H.C. and C.B.D. will be the two primary <unk> as you go down you know from a a lab print out you'll see that C.B.G.C.B.C.C.B.D.V.T.H.D. The all the gingko 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 Nab noise in the turbo means that are driving that unique effect and and that unique blend the consumers one and it just gives up the ability in our supply chain to 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 noodle 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 our innovation pipeline as we they're able to test and refine and perfect offerings.
[noise] Alright, that's very helpful. Thank you for that and then my focused on on the brand building sides. Just wanted to get a sense is how you think about building brand from the current coded environment, you've talked in the past about watching additional brands through through the redwoods family or Redwood asset, but your your distribution partners.
Those are pretty restricted right now. So this is 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 a long period. So you know we certainly have contingency plans you know we feel that when we when we look at the.
And the brands and the portfolio and think of just timing.
There are certain elements of the brand would launch where we think we're able to get a awareness.
You know without having a while wouldn't be optimum without having a retail presence. So no I didn't get it digitally native 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 I plan on on launching D.T.C. course don't Martin situation.
And if if that's.
The only available Avenue to us.
Your next question me on the line of our <unk>.
<unk> with Raymond James.
Ah morning, Mike Jerry Thanks, So much for for taking my question. So congratulation on having type parents are from gingko to to win silly that is of course, an important milestone in seems to be in of all be part of your strategy.
So we're recognizing that the the first came out but I did see P.G.A. and and that's a one or just sort of a little bit further into you know how many additional cannot Benoit Ah you expect to be tech transferred over to go into effect. So do you over the next year and as you approach that September 2021 timeline.
Sure Yeah, Yeah, I think we.
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 I transferred in a 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 the the molecule.
Being able to start working on this scale up and and you know downstream processing being able to work out what the Kinks are and where a potential bottlenecks are from fermenting or harvesting or separation and just being able to get the conversion of.
Of the strain to the bra off to the purified can have annoyed.
So you know that that process, an important thing is having a strain and <unk>, but the molecules are so similar that we don't see any different than what those those prophecies real are gonna be.
You know, we still expect timeline wise that we'll be able to bring things to market September 2021.
Great I think so the color and just a quick Paula Corpus 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 up some synthetic as well as some botanically derived islip.
Yeah, and 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 some of the fat and waxes and intervenes that are there, but ultimately you know what the product next we'll meal 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.
You know, we we haven't seen that I used to let 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 fermented N.N. botanical, but I would that would say.
More likely from consumer research that and the early stages as we ramp up and think about run on run off times and and changing different can Avenue I'd runs and working out efficiency is that it would start off with more of a blind.
Your next question from the line of one minute with Jeffrey.
Morning, Guy, So Paul well and <unk> question, it's just on on the write downs in where you expect the mole.
Cool like you're spending what you're thinking days that and and why given that all gives me see scrutiny on your report and now you don't pay one law to write down <unk> like a lot of you'll pay it seems to be dating.
Yep. Thank you all when in the morning.
Well you can imagine no. This is a pretty dynamic time for the company as we're retooling our Canadian business for 2.0 products and expand on our third party bio mass purchasing strategy.
Oh point, you back to the factors that we laid out in our prepared remarks, such as the the near term under utilization of the peace Deshotels 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 could be impacted one facilities are not being utilized to their full capacity.
This is just a product to the fact, there's not there's not enough revenue to cover the the facility six costs. We if we see that improving 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 just are.
Our expectation that will continue to see price compression.
Honest supply died and I would add when when comparing to 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 I think that we the way that we approach accounting is is slightly different than the majority of it.
Competitors that are still under I for us.
Okay, and then I guess not like <unk>.
Spoken about the ongoing shifts to value deprived compression.
Even the the likelihood of seven right down to seem that there's little Sellthrough feel flower right now and it remains one of the most expensive in the market I, just wondering I mean, <unk>, you're going to keep prices, where they all are you going to lie with them because of the lock yourself three main if it's the former supposed to pay a lot you almost writing golf.
<unk> in the hope of obviously you talk about the volume it caught up to them when they started to come pretty when you revenues materialized for nets.
Yeah, No I think.
For competitive reasons, we're not we're not going to speak to what our pricing strategy and we'll we'll be going forward, but then of course, it's something that we constantly evaluating want to make sure that we stay competitive in.
The marketplace in our fulfilling consumer needs.
Your next question from the line of Matt bottom line with <unk>.
Yeah. Good morning, everyone. Thanks for taking the questions just wanted to dig a little deeper in in the domestic cannabis sales or penetration. This corner rely so I mean, you had some in your symptoms details in the prepared remarks, but you had a decent both as a percentage going up to 6.3 million, but still in absolute dollars.
I would've anticipated potentially a bigger bumped 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 big and it also how much contribution might have shifted to incremental incremental international sales, it's still unclear to me how much.
Export in the period might have been in that number.
Sure. So I think one thing that to look at his.
How much how much I think weeks on growth a of brandy sales and 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.
Consumers, having the option of both.
But you know I think that things are things that are going well as far as how well the they've handled received and it's 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 export it's really scheduling logistics, but when we look forward to it growth in we are adding a new.
A new region and I think when you think of all the different medical marketed it launched Israel is despite sort of being this a new commercialized marketed something where we'd had a lot of infrastructure and and the regulators have done a very good job of making sure that it's something that 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 in but we do have our facility up and running and if it was unable to get harvest out. So you know given the shortage there and what we seem to be a fair amount of.
<unk> without having you know much for 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 as an export market. It a lot of that will come from the domestic on cultivation, but depending on where demand leveled out it could still be a mix of export and domestic cultivation.
Got it back. Thank you and then just at the 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 see in the Canadian medical market I know that's the price thing you have historically in Germany was very favorable so just curious how that works in 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 or in Germany, because of the way the pharmacy system works and sort of almost freezes prices.
So you know we have seen in markets like this that there might be in a shortage a high price by were really focused on building a relationship with a consumer than the patients and getting early market share at the market we plan on really leaning into.
So I would say prices are are gonna 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.
And I think we've we've highlighted that in in previous call just given the climate <unk>. 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 next is what we've seen in Canada, because it's it's from a regulation perspective, similar with the key difference being going through pharmacy is rather than direct patient. So maybe it'll it'll shape out somewhere between where the adult use in the medical market in Canada, and but I do think.
Germany is.
Its own category, just given the more traditional farm a model.
Your final question, if I'm the line grammar.
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 any plans.
To launch more days mainstream or value type product given potential for economic headwinds 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 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 you know plan.
Okay. Thanks, and then <unk> follow up questions here I was just wondering given the recent developments an old tree on the changes in leadership. There can you just provide a bit of color in terms of the relationship between the two companies and no any any sort of that discussions that have had during during transitions or you know as advantageous.
Continues to develop their that would be helpful. Thank you.
Mm.
Sure and I 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 and then a Jerry also probably you know uniquely connected to the people there, but I think there's there's been a lot of consistency with the 10 year of the you know executives there.
And so we haven't really had had many changes in discussions you know 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 coke there in counterparts on just you know thinking through coded 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'd, yielding so I think it's been a very collaborative relationship.
And I think we've been very.
Very fortunate to be able to lean on their expertise and how to deal with.
Are you on certain times, but high level I, there haven't been any any discussions and and changes yeah, I <unk> I would add as it's been quite a seamless transition for us, but I think with the collaboration between the groups continues that it's probably been increasing [noise].
Okay. Appreciate it think it.
There are no further questions.
Distance completed today's conference call. Thank you for your participation you may now disconnect.
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