Q1 2020 Earnings Call

Ladies and gentlemen. This is your operator today's conference is scheduled to begin momentarily until that time. Your line now they can be placed on musical. Thank you for your patience.

[music].

Come to village farms International's first quarter 2020 financial results Conference call.

Sure Dave electrons issued a news release reporting its financial results for the first quarter ended March 31st 2020.

News release, along with the Companys financial statements are available on the company's website at <unk> village farms Dot com under the investors heading.

Please note today's call is being broadcast live over the Internet and will be archived replay both my telephone and via the Internet beginning approximately one hour following completion of.

Details of how to access to replace our available in Yesterdays news release.

Before we begin let me remind you that forward looking statements may be made today during or after the formal part of this conference call certain material assumptions were applied in providing these statements many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results.

Thank you for materially from those expressed or implied in forward looking statements. A summary of these underlying assumptions risks and uncertainties is contained in the company's various securities.

Filings with the FCC and the Canadian regulators, including its form 10-K, but they are ended December 31st 2019, and the form 10-Q. The quarter ended March 31st 2020, which is available on Edgar and SEDAR. These forward looking statements are made I said.

Today's date.

Except as required by applicable securities laws, we undertake no obligation to publicly update or revise any such statements I would now like to turn the call over to Michael Julio Chief Executive Officer, a village arms International. Please go ahead.

Thanks, Michelle Thank you everyone for joining us today with me for today's call is filled swamps, chief financial officer stuff and we're feeling.

The agenda for todays call I'll start with a review of the highlights for the quarter, most notably the fifth consecutive quarter of profitability just on farms as we saw a significant quarter to quarter ramp [laughter] in retail brand itself [laughter]. She will then review our financial results and I'll return to discuss.

Why we remain so confident in the future of our company and then be happy to take questions [noise].

But before I start I, just before we view this quarter I'd like to provide an update I.

With respect to while operations, drawing coping 19 pandemic.

Oh, we are grateful to report that all not village bombs enjoy some facilities, whether Canada, you actually Mexico remain fully open an operational as they have throughout the pandemic.

The health and wellbeing about employees customers Bend is partners and their families continues to be our top priority. We're continuing to in here two additional health and safety practices have pulled municipal state provincial and federal Health Authority recommendations.

And above the already very high standard of hygiene practice isn't protocols are already in place as a highly regulated food producer.

We've always taken out well is one of the larger suppliers would be around fresh quality pros to North America and the consumers. We saw this very seriously, bringing that same dedication to pure sun pharma [laughter], but never have we take it out well more seriously danger in the current environment and I'd like to acknowledge all of our employees company wide who.

Working tirelessly to ensure help and save produce is getting to our retail partners and in particular I'd like to thank all those who played a role in helping US suite over 10000 families in Texas with donations of over 200 tons of produce throughout the state to local food banks in path.

Trees.

We are fortunate during this difficult time that we operate a central businesses that thus far have remained largely unaffected by the pandemic.

Now turning to pure Sun farms, which I remind you. We now have just shy of 59% as of April 2nd just some thoughts continues to clearly set the standard and the Canadian cannabis industry, the growing capabilities best in class facilities in operations cost of cultivation in a greenhouse.

Managerial not a jury alky men had brand performance and it continues to be one of the future.

After the boat Canadian kind of the suppliers not just this quarter, but now for five consecutive quarters. This performance is an unmatched in Canada.

As expected during the first quarter just on far I'm, sorry significant ramp up in sales volumes. Following its planned transition predominantly retail brand itself.

The fourth quarter.

Total net sales increased 25% year on year to just over 18 million with 8.5 million up that generated by retail branded sales to provincial distributors, that's 118% increase in dollar sales from Q4 on 879% increase in kilograms from the.

Fourth quarter as well.

I remind everyone that Q1 was just a second quarter of retail branded sales for Pearson funds.

Once you're well there's also the result of sales activity in the wholesale mark.

Well positive I do note that we expect wholesale sales to be lumpy for the foreseeable future.

The significant increase in retail branded sales in Q1 was driven by a number of positive factors dress enfant strike out of this product.

Continued to be favored by consumers in each of the three provinces that we are selling.

In Ontario during the first quarter pure some funds once again, so more dry cannabis than any other brand with the Ontario, Canada store, that's one both a volume basis and a dollar basis.

That makes the second consecutive quarter that pubescent sponsors a top selling brand with the O C S.

Each of the two quarters since its retail launch right out of the gate.

And once again, George Sutton farms have the top selling product with the Lcs by both volume and dollar sold.

In the first one months of the year up your son farms catch it for capped at 14.3% of the Ontario dried counted this market with market share jumping to more than 20% and the level of April.

Yes, sometimes go just to capture at least 20% of the dried candidates market nationally in Canada over the long term.

Yes, it's too early in the to say, but this is just a single month of data for Ontario alone, but we think it's a strong indication that we can achieve our goal.

Retail sales growth was also driven by the start of shipments for the retail market to withstand province, Alberta with pure some farms product [laughter] is having great feedback from both retailers and consumers.

At $60 per capita annual consumption, Alberta is by far the leader of the five largest provinces.

We are evidence of the critical role that bricks and mortar retail stores play and driving sales I will note here that the robust sales growth and brand performance in Ontario is in a market that remain significantly under served on a bricks and mortar store basis per capita sales and I'm chairs under $25.

And for additional content per capita consumption per capita consumption in the United States opened for two years or more or even higher than our murder would Colorado, leading the way at $99 fall back, Oregon 97 in Washington State is 89 as opposed to Ontario at 25 huge difference.

[laughter] recently drilled sinful I'm stuck in major steps towards launching its fourth province, receiving approval from this is Scott you want liquid gaming authority to sell to private retailers in that province. It is now preparing to begin shipping.

Like Alberta, Saskatchewan conscious well above its way, representing 6% of Canada, Canada sales, we just 3% of the population.

Q1 was also further confirmation of Pearson farms advantage around cost cultivation costs, what at all and cultivation cost for Q1, which as always includes depreciation expense of 88 cents per gram.

The average for the past four quarters to less than 74 cents.

And as a reminder, cultivation costs are higher during the winter quarters when yields are naturally lower as supplemental lighting is required you to few hours of Sun life and in the summer period.

We are confident that this industry, leading greenhouse cultivation costs will continue to not only support further market share growth in the legal market, but to capture a meaningful share from the elicit marketing.

Dealing directly with the unlisted market is what will truly drive sales.

It's the key near term strategy reports on forms and the tactics to achieve this are in place and working.

At the same time product quality strains in blends and don't see remain Paramount. The team is continually striving to even further elevate the already high levels of its products, while continually working to bring the cost of cultivation down even further to continuous improvement process that never ends.

And let me think safety, specifically around handling and pesticide use, especially now will increasingly become more important to consumers in tax revenue you paid by the illegal trade will become increasingly important to governments, which we think is good for the entire industry.

Finally on price there was no doubt that the number of Canadian suppliers need to contract for the health of the entire industry and we believe the calling trends in pricing in the pricing environment, which we are leading we'll see to this eventually.

In late March Christian forms launched its first large format value offering a 28 gram package with the same high quality that purist telephonics has become known for the product has the lowest price per gram of any dried cannabis product on the market in the three provinces in which it is currently so.

And I wanted just share with you some of the social media comments from consumers themselves, which underscores the strategy to take share from the illicit trade the first one.

Hello. After my good luck with the 28 Gram bag I acquired I'm, just curious on farms indicative blend pulled me back to the legal market. The fact that could purchase a 28 gram bag at a pretty reasonable cost mainly switch from the black market.

Another question. This is what the illegal market should fear. Another quote. This is how you can back the black market.

It is very quickly, becoming the top selling product in Ontario, and in the first month in the market by both volume and dollars value is even more important during these tough economic times when consumers a much more price sensitive and this product set to know CS record for sales volume for a single product drawing a one week period in the.

Right well category.

The success of Jetson farms 28, Gram offering is not a surprise we are increasingly seeing the market demanding high quality product everyday value price and the prevention distributors seem to be taking note.

For instance in April the Chief commercial officer for the entire Ontario, Canada store in an interview discuss the importance of price and quality and taking share from the legacy market and noted the Lcs had brought its pricing down by 25% since the beginning of the year.

Even gave a shaft gave out of shouted purist on farms by name.

We believe there is no better part of them Qs on farms to support the Lcs and achieving its objective and we very much look forward to continuing to play a leading level here.

Yes on farms can and will continue to be aggressive around pricing when it launches additional products and Tony.

Yeah, I'm kind of is 2.0 products and again with the key attributes of quality and safety in mining preparations for the launch of wire products in 2.0 products has accelerated and I'm pleased to report that we now expect I'll first while on 2.0 products to be launched this coming summer well I know everyone is eager to know the specifics.

Here for competitive reasons, we're going to wait until the launch just any more but it won't be law.

Now turning to our U.S. CBD program.

Ill now last call I discuss how outdoor fabs disappointment and really be will admit that following the federal governments decriminalization. That's happened CBD at the end of 2018, its very own agency that have failed to provide the regulatory clarity to enable laura eating companies to participate and help this year.

John but you in the realizes potential the industry has essentially come to a standstill pending the FDA, providing a clear path forward and we are now not only seeing companies dedicated to the space struggling, but fallon and it's clearly caused the large retail players to put breaks on their strategies for CBD products. The.

Economic impact of this foot dragging is especially egregious now when the economies in dire need of any and all drivers of economic activity had growth.

FDA leadership and guidance is required and required now.

That said, we continue to be proactive and exploring additional paths for that we can act on presently in the near term.

Actually we engage in market research and looking at product development.

Will allow us to move forward with the kind of regulatory environment.

And then finally enough grow this business during the first quarter, we saw elevated pricing due to the high demand as consumers Russian stocked up Lynn concerns over the pandemic to cope.

However, we were only able to take partial advantage as we had to honor our existing contracts with a major retailers at prices that were below the spot market.

In addition volumes from our Texas facility continued to be below normal production volumes importantly, with our newest growing partners coming online. We have now replace all of the capacity that was displaced by cannabis in Canada and then some.

The organization of weapons stress and experienced underlying our produce business remains a tremendous foundation through which to transform into new high value high growth opportunities such as CBD.

And what have we would have operations among the very largest and best located in the United States. There was no one to now paying and better position for a fairly legalized cannabis market something we're more optimistic about given the expected needs the stimulus and tax revenue going forward in this election year.

We have more than $300 million use thousand replacement value in our us greenhouse assets, none of our publicly traded Canadian peers can say that.

I'd like to turn the call over to Steve now to walk through the financial results, Steve. Thanks, Mike for those new to the village farm story, our cannabis joint venture Feresten farms cannot be thought consolidated for accounting purposes, and even though we own the majority of it as the pure some farms board is jointly controlled.

That said, we continue to provide full results for pure Sun farms.

To the invest in public so you can do comparisons with the other public Canadian license producers.

The first wind farms March 31st balance sheet. In Q1 income statement is contained in footnote number seven in our financial statements isn't U.S. dollar thrives in Canadian dollars as Billy farms is required to report statutory results in us dollars.

And then attempt to help the readers we included a financial summary in our press release in both Canadian dollars in Us dollar. Unfortunately.

We did not translate to figures correctly, while the Pearson farms net sales figure.

For Q1 is correct in us dollar to 13.1 million the breakout between retail and wholesale was not.

The retail or or branded sales figure should be in us dollar 6.2 million and the wholesale in U.S. dollar should be 6.9 million the Canadian figures as shown in the press release are correct.

As stated in our April earnings call Pearson farms experienced significant quarter on quarter growth in terms of sales in volume to the provincial government.

With provisional sales of 8.5 million.

In the quarter again, Q4, 19 sales of approximately 3.9 million or up for 118% increase.

And that was primarily driven by.

The increase in volume of 179% going from 1100, roughly 1100 grams in Q4 19 to over 3000 kilograms in the first quarter of 2020.

This revenue represents sell in.

In Q1 2020 versus sell ending Q4 219.

As Mike said Q1 of 220 benefit from the initial sell into Alberta, and the sell in other large format to on Terrio, Canada store when were stating our market share figures that Mike provided those represent sell through those figures are provided by the LCF.

Our retail channel.

And provided.

And Pete Pos point of sale data to the Pearson farms brand team.

The sell through or Pos data has been very strong for the large format product, particularly in April as it fits to ourselves you.

You will note that this does come at a lower price per Gram obviously.

With a lower gross margin to Pearson farms than the retail sales.

Of our pouch skews.

The Q1 2020 wholesale business, which was nonexistent in Q4 of 19 as Mike said was lumpy was primarily driven by transactions with two Canadian extraction LP.

We're seeking drive cannabis.

Flower in exchange for various forms of distillate.

Sure. So far has entered into these transactions due to both the availability of high grade extraction.

Flower and trend.

As well as the delay in its extraction license from health Canada.

So in order for pure Sun farms to enter the can have a 2.0 market and this in the summer of 2020, it wasn't native distillate.

And as Mike mentioned, we'll be launching its canvas 2.0 skews this summer.

As reported.

Last may.

So may of 2019 Pearson farmed was anticipated experienced very strong improvement year on year in our cost per gram.

As the Delta three facility, while it was fully licensed in the Q1 of 2019 was not fully operational as it wasn't fully planted.

Now the market concede the.

Benefit of economies of scale, all with a full winter of full scale production as well as an additional year of experience, we brought down our cost per gram by 36% on a year on year basis from $1.38 a year ago to 88 cents. This quarter for a 50 cents per Gram defense.

I also want to quickly review the Q1 financial impact of the Mark settlement agreement between curious on farms fed funds in Emerald, both builds farms and Pearson farms recognized income in Q1 as result of the transactions contained in the settlement.

Sure symphonic recognized US dollar 4.3 million of income in exchange the cancellation of the.

Outstanding.

Liabilities that remained under the 2019 supply agreements.

As well as the future supply agreement that enrolled one can get data for 2020 2021 in 2022.

The amount.

4.39 in US dollars represents the remaining shareholder loan that was outstanding between Hamilton Pearson farms at 5.9 million Canadian So one can look at this figure essentially as either debt burden given this income or can look at it as essentially.

Product revenues.

But could not be recognized as product revenues since no product with delivered so in any event. It represent from accounting perspective income recognition of 4.3 million.

In us dollars and is a onetime benefit so as not been included in the EBITDA of either pure Sun pharma services farms as presented in our financials. Additionally, as part of the settlement.

And we'll transferred 2.5%.

Equity stake appears on farms to village farms.

Which resulted in gross loans, recognizing other income of 4.7 million or 6.25 million Canadian.

As the value of the Pearson.

Sure some farms stock receive to.

Avoid any guess work on the various backlog.

Do the math that that's an agreed value between the parties, if you're confines of $250 million.

Our previous business by cannabis is an essential business and as Mike said, it's not experienced any production issues related to see 19 for which we're very fortunate.

That said retail demand has been volatile we saw very strong pricing as Mike mentioned in March.

On doing what I call the holding period in early April all we saw falloff in demand.

No no even the retail can really explain that.

Because people were buying other things other than other than fresh produce offline recently, we've seen very strong pricing.

And in early May.

Compared to historical levels for early May and Fortunately for US we dropped one of our large retail contract effective March 30, Onest. So we are benefiting from that improved pricing in our in our own results in Q2.

Just one thing to note ill not much happened with our us tech business in the in Q1.

We are having continued interest with respect to our existing biomass I do want to note. We do have a we did receive in March our license to grow hand in Texas.

But at this stage we're not.

Embarking on that until these regulatory hurdles are out of out of our way and with that I'll turn it over to Mike.

Okay. Thank you Steve.

So in conclusion here, we are a little over a year and a half into to legalize market for recreation counted recreational cannabis in Canada.

Just a market that has been slower to develop than expected and smaller comedy than originally expected, but we're just as much long term potential the industry is now clearly segmenting into leaders survivors and everyone else.

Hey, one we can seeds of Unbilled pure us on farms and not just be a leader in the Kim cannabis industry, but to be the leader, we focus first on getting to cultivation underpinnings right, providing the lowest cost of cultivation in the industry.

We then it's done what we believe is the best management team in the business and then that team launched would immediately became has consistently been the top selling dried cannabis brand and Canada's largest market.

So I'm going to come back to something you've heard me say before it's it's Ferrari is famous mode.

Mono that we all have the competition and yes, it's a bold statement, but one that I'm proud to simply make about your son farms not when arrogance, but with confidence it's the confidence I had since day, one about 30 years ago in our laws scale low cost cultivation knowledge experience and DNA operational know how.

Best in class facilities in operation and it's a confidence I have today based on consistently beating the top selling dried count on the spread and that in Ontario, having the lowest cost of greenhouse cultivation in the country and quarter after quarter generating profitability.

No one knows exactly what the next six to 12 months looks like the unprecedented withdrawals our financial guidance by public companies, even the largest and most mature as evidenced that Thats said I'm comfortable with where our businesses are today and I remain very confident what lies ahead.

While the Canadian cannabis industry will likely see some choppiness in the near term to the effects of the pandemic Pearson farms has a number of catalyst that directly leverage its leading brand performance.

The Buildout of retail store network in Ontario, further expansion across Crown, Canada, and the introduction of new products, including counted as 2.0 that make for a very exciting 2020 and beyond.

So thank you for listening and we'd be happy to take some questions. If anyone has.

Operator.

At this time, if anybody would like to ask a question. Please press star one on your telephone keypad and.

Please turn one on your telephone keypad. Your first question comes from Aaron Gray from Alliance Global Partners. Your line is on plan.

Hi, guys. Thanks to the questions and congrats on the quarter and the strong about market share momentum heading in April.

You're welcome.

Just.

First one from me just in terms of the commentary on the price per Gram for don't use just as we look to have these large format and become a higher portion of the mix going forward.

Should we think about that.

Randy I'm kind of ranging and how much is that kind of come down as we look to modeling out going forward. Thank you.

No I think probably not going to answer that directly but.

I think in general Best Philosophy is.

As Ive clearly said is we have to be competitive, but the legacy business and.

Pricing, we're just come down as we see that penetration in to the point, where we believe the penetration rate will increase and we're going to remain with that strategy. As we launch. These other products. This summer and I think it to be much clearer, maybe a one reported third quarter, how that's going to look.

So.

Alright, great. Thanks for that and then the second question is just on 2.0 and plans for launch. This summer I can certainly appreciate for competitive reasons why don't want to disclose too much could you maybe instead just talk about what you're seeing right now in the marketplace and maybe the opportunities you see clean.

Oil debates ratable.

Appears on farms, specifically, given how well you execute on the second mover advantage in Canada small panel. So any commentary on your view of the competitive landscape n-tuple products would be helpful. Thanks.

Well I think the you know the management team appearance on farm sat back and watched as they've done before what was working from others and what was not working so.

That's proven to be a positive for them and in terms of not just the performance of the product, but when the pricing needs to be and I think.

I'd say launch their first product and I'm not going to say what it is I think you'll see the same aggressive pricing strategy.

That they launched when they started retail sales in fourth quarter. So again that that will show clear when we report the second quarter. Thank you.

Great Thanks, and best of luck.

Thank you.

Next question comes from Andrew personnel from Stifel. Your line is open.

Hey, Thanks, and congrats on a on a good quarter.

So I would like to talk a little bit about.

Supply chain dynamics.

The beginning of this year, we were and the launch of 2.0 products. We were hearing that overall progress or distributors were.

Changing their ordering dynamics and ordering more frequently but less volume in order to be closer to.

Hi, I'm type of ordering dynamic.

Just wondering now with co bid.

Have you seen any changes in that in that sense.

Perhaps the volumes, increasing or or higher frequency and.

In ordering.

No I think you know there's so many moving parts, it's really hard to get a handle on it but I would probably say that.

Like many other consumer products.

There was a higher purchase towards the.

And as the first quarter, but I think thats going to there now.

My view is that it's going to probably contract somewhat in the second quarter, and then probably get back on on track.

And the third and fourth quarter.

Thank you notes if you look at Ontario.

Sales aren't quite even back to the level. They were in January so I think it's still we still need to get through the second quarter because.

I just kind of give the.

Vince you'll governments time to move through the inventory assessment they have before they start replenishing.

Okay, Thanks, and maybe if I can dive a little deeper.

Towards your carbon in Ontario.

Are you able to maybe give a little bit more color and and how click and collect and delivery is doing.

I know you said that they're not back towards level in January but could you give a little bit of color in terms of.

Types of magnitude or.

Actually.

Are they suffering from lack of inventory or is it just not being able to fulfill demand is as a as quickly as before.

Yes, Andrew this is Steve where we were a bit removed from from those level of details actually from a from a from a.

Delivery perspective, I was quite excited about it I wanted the advantage the legacy business has.

The dealers no longer a rep delivers it to the out so which is what was happening so actually the development of them closing freaking. That's all I've closing stores, and then changing their mind and having store pickup and home delivery hopefully home delivery continues.

One things go back whatever the new normal it. So we don't have specific for that but I think is also benefited a large format as well if people want to make less trips to the six to go out so.

Hopefully it turns out to be a long term benefit for the legal industry.

Great. Thanks for taking my questions again.

Certain.

Your next question comes from Doug Cooper from Beacon Securities. Your line is open.

Good morning, guys and congratulations on great quarter Im just want to follow up your comments of 20% market share the you'll see us in April.

Talk a little bit about the breadth of you distribution beyond the you'll see us in Ontario.

Okay, Doug feedback, we don't Unfortunately other provincial government don't provide that appears on farm so I.

Pure conjecture I know other people say Theyre X percent of the total market but.

We've asked Pearson Herms, what what the market shares in these other provincial.

Sales and they said they don't have information so I.

Cameras.

We're not going report, what we can't support right what about just how many doors or you are any actual retail stores. He is your product available and Ontario of the actual retail stores well preserved.

I don't know I haven't asked appears on farms team I am I know that I can get back to maybe but I don't know okay.

Do you.

Just in terms of the large.

Format.

Just remind us what the THC level isn't that is it sort of 18 to 22 presented at the sort of range.

Yes, I think.

We don't want to issue looking very somewhat but I mean that 28 accident and the candidates.

The sweet spot there is probably in.

15, 16 range and.

We're always striving to get that balance better and improve on that but.

For the most important thats to current range thats in and being well accepted there.

Okay.

Talking about there's some other kind of value packs and being offered in the marketplace.

What is the with the price advantage or the or the the do you have over those other value packs.

In terms of well I guess in terms of where the retail was pricing them and I guess, just where yeah.

Well I think what we've heard from materials, that's the lowest price we have the lowest price they are selling at the lowest price. They have they've come off 25% as I said in and out product is being sold is lowest price, but I think the key differential to anyone else's were profitable doing it right.

Right.

It is at retail into surmise Rep is at 99 Bucks.

Before he just yet.

Yes, okay.

Thank you guys mentioned.

I missed that on the call the strategy for opening up the too.

Given this environment.

Yeah, we're going to wait and see what transpired here I mean look we don't know.

Yes, so many moving parts, I mean, where where the pandemic.

Changes or what happens in the fall. So we wanted to be very cautious because.

So there is.

You know a resurgence of the bricks and mortar stores, we don't want to have an overcapacity is a prudent thing to do.

And there were actually we'll monitor even delta three.

We're very focused on having how.

Capacity meet out demand and we can easily.

But that back in the remembering Delta three a 16 grower so.

We wanted to cut that back to 14, a 13 weeks ahead, and then that add to delve too is ready to go. So we can move that going following towards year end at the beginning in the years, we see where the markets, though so the good news is long term, we can double out capacity with the same.

Cost structure.

Which I think is now starting to improve how it differentiates us from the competitors.

And get to a double capacity going forward and that the same times, if we have to curtail with 16 grow dissolve in three we can adjust that pretty quickly as you know it's a late we cycle for us inside the flowable. So.

But we just had a monitor it because it's really hard to see what.

The demand is going to be in the current situation.

Your next question will come from raw sour gas or from Raymond James Your line is open.

Good morning, making Steve Thanks for taking my questions and let me reiterate congrats on a strong quarter and also really.

Six straight quarters of positive EBITDA that that's really unprecedented for industry. So huge congratulations to you in that even the team.

So a lot of questions on the retail and of course that.

Really important I wanted to sort of focus on your product split.

We saw that's that's been a real reemergence of wholesale almost.

50, 50 split between.

Okay.

You said in your wholesale so where do you see.

Going to seeing that being durable do you see that.

[noise] being essentially a larger proportion of your revenue, particularly as the market continues to sort of these low.

And then sort of as a follow up to that crude you see as the.

Primary buyers are the extractor or the other Lps because that really kind of speaks to the competitor advantage that you guys are our building.

Yes, I think.

You know.

Our strategy is to be fully vertically integrated company. So that ultimately means that we want to control.

Oh production and.

And everything we do it into Canada, just to point out ourselves so.

I think at retail at the end of the day were shooting to be very high percentage retail to 60, 70% level, let's say so to the extent that wholesale is there any always going to have to have another outlet.

Because of quality consistency, that's just the way it is still fall product right, but I don't know what the future is going to hold on.

So I mean.

I think it'd probably be working more with extractors for the foreseeable future I believe it or not there are other lpds that are.

Asking us for product and I'm, a little be welded bias, but.

David has to deal with cost structure, but I think as this contraction takes place in the industry at some point, that's going to really changed with the dynamics between wholesale and retail for us are.

Everybody filling a game right now even with tremendous losses on a quarterly basis that we're seeing.

Because I think as long as they're able to get financing.

Yes, just this like 50 plus suppliers in the industry is just way too many and I think thats going to have.

A very impact on the wholesale dynamics so.

I would think right answer your question more or less retail were shooting at retail, it's a larger percentage or overall revenues.

Great. That's that's very helpful and then sort of moving forward not to kind of 2.0. So.

As you said Mike.

Second mover are you able to use your cost advantage to drive.

Grabbing market share in the whole flower segments and we're also seeing is likely in sales segment over time and and again like you said you were able to actually do that profitably.

When it comes to kind of its 2.0, the cost of goods, Oh, wow or less of a key component, whereas formulation and the collection property tends to be a driver as cost of goods. So.

How do you how are you managing your strategy in Canada is 2.0.

When youre cost advantage cultivation is not as.

Drawn as it is in Kent is 1.0.

Yeah, well I think you know, yes, you will agree it's an ingredient, but what we've done they just like we've done a passive Pearson farms has selman I think they've been built in about it as they've watched everybody else position.

I'll pick a product I don't know chocolate vaibs, whatever you have a position to pricing and then they have come back in and analyze where they can be overall, so I think more importantly at the end of the day I know they can be much more aggressive then that's why they wait to see where the market is in the pricing structure and then data.

You Asian, and I've seen that has shown that they can be very aggressive over the competition.

So even though it may be an ingredient, it's still a that but still adds up to having an advantage and keep in mind you know that's been margins that.

The margin of 70 or 80% I've, just not realistic I mean at the end of the day, it's a CPG product and as it matures out I think it's going to have typical average CPG margins in that 30, 40% range and.

Yes, I think we're going to compete very well there. So again I think it's a great question that can be better attitude on the third quarter.

The conference call.

Right right terrific Kerry thanks, Thanks, again and congratulations again.

Thanks.

Your next question will come from Scott Fortune from Roth Capital Partners. Your line is open.

Good morning. Thank you congrats on a quarter below the question has been answered but.

But I don't know if you break it down persons come in from Ontario, and the different provinces, but can you provide just a little bit color from Alberta, MPC as far as the ramp or Reorders are gone there compared to what you experience in Ontario at all just kind of the throughput and.

And Reorders.

Philosophy from that standpoint.

Yeah, I mean, we re or is it coming in and Thats something actually Scott that when looking at is.

What's unique about at least from my experience unlike dealing with the large retailers here in Canada, you less where we're rolling out how for cash and what we're going to be doing a year ahead of time, it's really not that way currently in account in the sector in Canada. So it's hard to get.

More of a handle on these projections going forward, but.

We are sitting in a good position in British Columbia, and we just started with Alberta recently, so I think it's too early to say that was something that finally, we've got going actually in the first quarter. So probably just feel better answering that question when we get some traction towards.

According to the second quarter.

Okay, and then I know you guys are continuing to explore the other provinces Congrats Scott.

Scott, but Kodak human antibody to other large crowds.

Okay.

Well obviously.

The Apple of their eyes, Quebec, but.

Yes, hopefully that will happen sometime.

Soon but I don't know, we're not Mike and are not involved in the day to day, but I know there's ongoing discussions there.

Asks about the U. Conn too.

Yes.

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Okay.

Okay. That's it for me thanks.

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Thanks Scott.

And our final question for today will come from Eric Lori from Craig Hallum Capital. Your line is open.

All right. Thanks for taking my question guys.

Since may have been a follow up on the previous question.

I'm just wondering if you guys have noticed any change in regulators appetite.

Either sign additional.

Supply agreements or to license additional retail stores and might have called it just any any kind of impact that coded may have on.

On regulators sign supply agreements are opening retail stores from your guys point of view.

No not tied to Greg you mentioned that were aware of just it's just kind of compressed and slow things down so.

But we havent seen anything unusual just.

Just a just a slowdown because the essential business issues in general so.

We have and just thinking to U.S., we haven't but.

But I will I will say you know with the U.S. I know that's not for your question, but where we're starting to see some political.

Flavor towards looking at Decriminalisation, Canada, citing due to their pandemics, probably not the way we want them to get there but.

Again.

That's a big possibility for village farms in a future should that happen next year. So.

And so that's a regulatory issue that we're looking very clearly in the U.S. and would be beneficial to us going forward.

Okay that makes sense.

And then last one for me great to see the kind of impact that youre.

No cost both products has had in the market right now.

Great demand, obviously seeing increased market share you guys mentioned that you have.

New bulk products coming out this it's either blind as was on some 14 Grand products anything you can share on sort of when you expect that maybe hit your guys retail sales.

Okay. Its launch I mean, it launched I have we haven't seen Pos data, but I think the initial shipments of ship in.

Which ever provincial governments are taking it.

So.

We'll have more to report on that but hopefully that does garnet garner Pearson farms additional market share in the market both skews therein.

All right great that's helpful.

Thanks, again, and congrats guys. Thanks.

Thanks.

Thank you Michelle.

You're very welcome and thank you everyone that concludes the causes. Thank you for participating today, it's a much appreciated and we're share, but I'd say things.

Thank you everyone. This will conclude today's conference call you may now disconnect.

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