Q4 2020 Valens Company Inc. Earnings Call

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Hello, and welcome to the balance companies' fourth quarter and the fiscal year 'twenty and 'twenty financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce your host Everett Knight Executive Vice President of corporate development and capital markets other balance company ever at please go ahead.

Thank you operator.

Morning, and welcome to the Valens company's fourth quarter and fiscal year, 'twenty and 'twenty financial results Conference call for the period ended November 32020, a replay of this call will be archived on the Investor Relations section of the Valens website at the Valens company Dot Com slash investors.

Before we begin please let me remind you that during the course of this conference call balance management may make statements, including with respect to management's expectations or estimates of future performance all such statements other than statements of historical fact constitute forward looking information or forward looking statements within the meaning of the applicable securities laws.

And are based on expectations estimates and projections as of the date hereof.

Specific forward looking statements include without limitation on disclosure regarding <unk> future results of operations economic conditions and anticipated courses of action.

These forward looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations for more information on the company's risks and uncertainties relating to forward looking statements. Please refer to our latest annual information form and our latest management discussion and analysis, otherwise known as M D and.

A each as filed with the Canadian Securities regulatory authorities at SEDAR Dot com or on the balance company's website at www Dot the balance company dotcom.

The risks described and the annual information form which may cause the actual financial results performance or achievements of the balance company and to mid be materially different from estimated future results performance or achievements expressed by the forward looking information or forward looking statements are hereby incorporated by reference here and.

Although these forward looking statements reflect management's current beliefs and a reasonable assumptions based on current available information available to management at the date hereof, we cannot be certain that the actual results of the consistent with the forward looking statements and the teacher, we caution you not to place undue reliance upon such forward looking results.

And for any reconciliation of non-GAAP measures measures discussed please consult our latest MD&A as filed on SEDAR.

Joining me on the call today are Mr. Tyler Robson, Chief Executive Officer, Mr. Chris buys and Chief Financial Officer, and Mr. Jeff Fallows President.

With that I would now like to hand, the call over to Tyler Tyler. Please go ahead.

Thank you Ed and welcome to everyone, who has joined our earnings call to discuss our results for the fourth quarter and fiscal year ended November 32020.

Later on today's call, Jeff will provide an update on our operational achievements Everett Knight will highlight industry trends and capital markets activities and crystallize on will give an overview of our financial results and the fiscal year, but first I'm going to talk about our accomplishments from the year fiscal.

Fiscal 2020 was a pivotal year for the balance of the company over the course of the year, we transformed from leading extraction come and company into one of the industry's most trusted third party manufacturers of cannabis consumer packaged goods.

And while the industry faced headwinds and uncertainty.

That impacted our 2020 financial result, the Valens company had the most productive operational year and our history.

And we are incredibly proud of everything we achieved during this transitional period for the business over a year of rebuilding and refocused our efforts on creating what we believe is the most innovative adaptable and cost effective cannabis product manufacturing platform and the market today. This platform sped up our ability to get finished products into the market and allowed us to advance and key growth versus.

Nichols.

Fiscal 2020, net revenue increased 44% to $83 $3 million and fiscal 2021 compared to.

Compared to $58 1 million and fiscal 2019.

With our growth capabilities to manufacture and ship out finished cannabis products, we increased product product sales revenue year over year by 237% to $54 7 million and fiscal 2020 product sales made up 65% of total revenue in fiscal 2020, and we expect that number to increase as we continue to launch new products.

And capture market share and the Canadian recreational market, Australia, and medicinal market and other new markets, we expect to enter in the near term.

And Q4 2020 product sales as a percentage of net revenue increased to 90% from 83% and Q3 2020.

Q4, 2020 was balance first full quarter provincial sales with a wider range of two point out products and categories, such as concentrates vapes and beverages and oils were happy to report that the provincial sales increased 292% from Q3 2020 from these sales we saw an increase and cannabis two <unk> and market share to.

And the four 9% and Alberta, British Columbia, and Ontario based on headset data and again, we expect provincial sales to continue to increase as we expand our portfolio of products and increase our partnership network as demonstrated in these highlights are key drivers for success on expanded as a manufacturer and we recognize the meaningful growth potential.

We have as one of the lowest cost kind of as platforms throughout 2021 balance will focus on growing unit volumes per SKU, increasing cannabis, two <unk> and $3 on product market share and driving revenues and new consumer verticals with our newly added manufacturing capacity at our K two facility and soon our GTA facility and life facility.

Subject to the transition transaction closing on or around March one 2021.

Additionally over the course of fiscal 2021, we expect to enter new markets and expand our distribution network, both provincially and Canada and outside of the country and market markets such as the U S as legal and regulatory framework continues to evolve.

While it's hard to ignore the challenges of the past year I am proud of some of the tough decisions and we have made and can confidently state that from an operational perspective, the balanced company is going from strength to strength, our strategic transformation from an extractor to our manufacturers undeniably been a success and as we as we now have one of the most formidable product.

<unk> and the country and we expect this to start being reflected in our financials. As previously stated it is our goal to eventually touch 20% of all manufactured products and the two point on market.

And objective, we have already almost achieved with certain products and markets and we look forward to rolling out various new three products over the course of 'twenty 'twenty, one and I'll turn the call over to Jeff Fallows President of the balance company to dive deeper into our operational achievements and this quarter and gave our high level objectives for 2021.

Thank you Tyler.

As mentioned earlier over the course of 2020 volume to establish itself as a leader and the Canadian cannabis product manufacturing market.

Began shipping both distillate and the first quarter and closed on the fiscal year ship shipping hundreds of thousands on finished products per month and the fourth quarter on transition was received well by our strong partnership network and demonstrated by our 10 White label and custom manufacturing agreements. In addition to our sustained relationships with many leading licensed producers in Canada.

We are proud to say that in fiscal 'twenty and 'twenty bonds launched some of the first two point on product formats available to the market, including cannabis infused beverages and hydrocarbon derived crumble and partnership with our brand House partners.

And through our vapor chemistry research and innovation volume most of its position as the largest third party manufacturer and Canada.

We're pleased by the continued positive consumer response, we are seeing from RV products, which have been created and partnership reverse cannabis Pinar and Chuck brands Burns and others.

Specifically in the fourth quarter, we manufactured 62 product skus, representing an 11% increase over our third quarter of 2020, the skus spanned four product categories with formats formats, such as vape carts oils, and new higher potency beverages and where.

Manufactured for a number of our customers.

Subsequent to the fourth quarter, where THC drops which are part of our growing portfolio product portfolio. We are planning with burst cannabis and CBD isolate formulation under the nuance portfolio portfolio created specifically for the medical cannabis flow shoppers channel.

Moving forward, we expect continued quarter over quarter SKU growth, especially as we introduce a host of new formats and the market and the coming quarters. This includes pre rolls libraries, and butter gummies and topic looked like bath bombs and relief robes more and more importantly, we are confident that our product quality and consistency consistency.

It is increasingly being recognized by both of our partners and provincial retailers as we continue to have success selling our products and with the current market.

We achieved a major milestone during the fourth quarter of 2020 with the launch of our K two facility and Columbia.

This additional 42000 square feet of manufacturing capacity and advanced product development space has significantly increased our capabilities solidifying our position as the largest third party manufacturer and distributor of cannabis products and Canada. We are already shipping product from our facility, including trouble beverages, THC drops babies and tinctures and commission and.

And your fracturing of Vapes tinctures beverages and Bath bombs.

Further this GMP compliant mask manufacturing facility will also support our international expansion efforts, which are expected to ramp up in 'twenty and 'twenty one.

Looking east construction is nearing completion at our 30000 square foot GTA facility, which will leverage sourced by Valens and technology and specifically focus on the formulation co packing and manufacturing of cannabis infused beverages.

Earlier this week, we announced and submission of our site evidence package to health, Canada, and we are still expecting the receipt of our of the micro processing license and the second quarter of 'twenty and 'twenty one.

With this facility coming on line, we'd expect to increase our cannabis infused beverage market share and Canada, which reached approximately five 2% and Alberta, British Columbia, and Ontario, and Q4, 'twenty and 'twenty. According to headset data despite volume, having only one customer and this category today and.

In fiscal 2020, we expanded internationally by entering the Australia market through a distribution agreement with candidly, we began to monetize this agreement with shipments up with shipments up tinctures and to the Australia market and the third quarter and we expect to continue to introduce various products designed for the Australia medicinal market and fiscal 2021.

And the fourth quarter, our subsidiary Volunteer Australia received its wholesale licenses required to sell and supply cannabis derived products and then the fourth quarter was awarded its important export licenses.

These two milestones from volatile Australia increased our distribution capabilities.

And for eventual on the ground operations and the country and we expect the opportunity Australia to offer a multimillion dollar revenue line. This year with the ability to drive tens of millions of dollars and three to five years.

Looking ahead to 2021, we have several goals that we are working hard towards.

Firstly on the global catalyst market continues to expand we were looking to enter the U S market and.

And other international markets subject to evolving and legal and regulatory frameworks.

Expect to enter new markets markets through strategic partnerships and acquisitions with existing market leaders, who we believe recognize the value and our platform which focuses on quality.

Instancy and innovation.

Two we are also looking to enter new verticals, such as health and wellness market with products, such as edibles and beverages.

<unk> and other innovative three final products.

Certainly it is our goal to continue to expand our domestic distribution network to all provincial markets in Canada in order to maximize market share gains across the country.

Finally, we expect to increase our international shipments by achieving EU GMP certification and our goal is to increase sell through and existing international markets, where we already shipped products, such as Australia and globally as we continue to make progress and target markets.

As Tom mentioned earlier, we have made tough with strategic decisions and the fourth quarter and does that bounce up from success in fiscal 'twenty and 'twenty. One. This included liquidating the majority of our cannabis oil inventories at market clearing prices to position the company as one of the lowest cost cannabis platforms and the market with over 1 million kilograms of dried cannabis on industry balance sheets and.

With outdoor growing and coming online the opportunity for valves was clear and we are now best positioned.

And to expand our relationships and.

And grow market share and all product categories.

2020 was the first year of extract based products sales in Canada, and we are encouraged by the growth you have seen year over year, despite a slower than expected start to a brick and mortar retail network and constraints due to the pandemic.

We're now beginning to see progress with over 500 stores with 425 of those and Ontario alone and then December extract based product sales accounted for 30% of sales and Alberta, Ontario, and British Columbia, According to and said data.

Although we are confident and the continued.

Growth of extract based products, we have decided to launch pre rolls and other dry cannabis derived products not only at the request from our partners, but also to increase our total addressable market recently, we announced an amendment to our existing standard processing license permitting that's all dried cannabis products, which we intend to.

To begin to put to use and Q2 2021.

With the capabilities to manufacture pre rolls and the ability to sell dried cannabis products and violence now offers a full suite of products for the Canadian recreational market.

On our last quarterly call, we talked about our enthusiasm for the edibles market and our commitment to expanding in this area.

I'm sure everyone on this call is aware.

We have recently announced an agreement to acquire life food technologies, which expands our capabilities and was fast growing product segments.

I'll now turn the call over to Everett to walk through the transaction and more detail and dug into our capital markets activity ever. Please go ahead.

Thank you, Jeff I'm very happy to be here today to talk about our progress and Tyler and Jeff May have made it clear we have made strides building out our platform manufacturing of Wap and skus significantly expanding our manufacturing capacity and launching on the international market. We are very proud of all the milestones.

We recently and expect 2021 to be a strong year for us as we reap the benefits of these achievements.

I'm going to talk more about our decision to acquire the leading Canadian animals manufacturer like food technologies, which is expected to close on or around March one.

While analyzing the edibles and market and the different capabilities of the industry manufacturers, we recognize that producing animals is an art not a science not all products are equal.

We are confident that the life platform is the perfect complement to our our our platform to create the best quality edibles products for our customers. The life team brings 25 plus years of experience with relationships with big box retailers spanning operations across North America.

They have invested approximately $10 million into the platform to create only the highest quality next generation edible products and success life has had acquiring customers paired with Valens current customer list offers tremendous synergies for the platform we.

We acquired life for Canadian $24 $9 million, plus approximately a Canadian $17 5 million and consideration, which is subject to achieving certain EBITDA milestones. If the lost EBITDA milestones and $10 million has hit it would imply a 4.2 times multiple.

On fiscal 2022 expected EBITDA.

This demonstrates the confidence and the competence of the life management team that a significant portion of their parent payout is contingent on achieving performance based milestones.

The acquisition is accretive and accelerates our entry into the edibles market one of the fastest growing segments and the cannabis two <unk> and three point on markets, our combined industry experience existing and deep supply chain relationships and unique IP formulations together create one of the leading consumer package.

And just good platforms, and Canada, Valens expects revenue synergies across the business as the full integration of the lifes platform and partner network will allow for cross selling to both new and existing and joint partners.

Life holds the capabilities to Bruce and exciting lineup of product formats, including real fruit gummies.

Caramel filled bars, peanut butter cups, hard candies and renewal of products and other customized baked goods and also in vegan no sugar low sugar and natural ingredient offerings as mentioned earlier by Scott.

Michael.

And with Edibles and with life, we are now able to provide lower sugar and no sugar formats with premium ingredients, such as cocoa cinema and coconut and just to name a few we believe this is a strong competitive advantage to valens as consumer trends continue to shift towards the health and wellness vertical with minimal caloric intake.

And in addition to quality and safety being top of mind.

Balance access to low cost active ingredients paired with life's industry recognized product I pre formulations of over 100 recipes strengthened its capabilities to produce higher margin new to market edible formats, and a segment with limited product variability and increased consumer demand.

With the added infrastructure and expertise from the life acquisition, we have significantly expanded our edibles footprint and why.

<unk> created while also increasing our ability to capture market share and the rapidly growing product category.

Similar to consumer trends and the U S cannabis market animal products are anticipated to represent over 10% of the sales in the maturing Canadian cannabis market and are currently the fourth largest product category and the Canadian recreational market.

Although the edibles market is growing and Canada, there is little product variability and increased consumer demand, we see an opportunity to produce differentiated product formats that you would typically only find and markets like the U S, which we will expect will work to capture market share as they gain traction.

<unk> is key to keep up with evolving consumer preferences and balance along with the integration of life has a strong competitive advantage to ensure that its products meet two core consumer needs and quality and consistency.

We are currently and the process of integrating life's platform and workforce and are looking forward to bringing their next generation product capabilities to our existing customer base. The life facility. In addition to Valens K, one and K two facilities will serve as 2.0 and three point on manufacturing and <unk>.

Sales hubs for life, and Valens combined roster of new and joint customers.

Life is currently shipping products for its existing <unk> customers and we expect to be ready to ship animal products for our partners in the next few weeks.

Also subsequent to quarter the quarter, we raised $39 7 million and a bought deal financing $32 million of which will be used to pursue strategic M&A and business expansion opportunities in Canada and international markets with the balance of net proceeds for working capital requirements and General Corp.

Purposes and.

And I'm sure you are aware its not just balance that had been securing additional capital. We've been very pleased to see plenty of other financing take place and the cannabis sector in the past and we've actually turned away business from licensed producers that could not meet our balance sheet requirement. Our policy designed to reduce the risk of default with.

And our customer base now with the wave of recent financing and our sector. We are finding more and more Lps are better capitalized and we are starting up negotiations again with a broader pool of potential customers.

Before I turn the call over to Chris buys and CFO I would like to reiterate our guidance for Q1 and 2021 revenue for the first quarter of 2021 is expected to be between 19 million to $23 million. We expect this to be driven by our newly launched and operational K two facility.

Which is expected to give balance and the ability to increase product and provincial sales entry into new innovative product verticals and significantly increased output volumes.

With that I'll now turn the call over to Chris buys and to run through the financial results for the fiscal year. Chris. Please go ahead.

Thank you Robert consolidated net revenue for fiscal 2020 increased 44, 2% to $83 8 million compared to $58 1 million and fiscal 2019.

The increase in fiscal 2020, net revenue was largely driven by the company and kind of an operation.

Revenue from this segment increased to $82 1 million compared to $57 8 million and the same period in fiscal 2019.

Cannabis operations' revenue associated with total extraction and co packing decreased $14 3 million or 34, 4% as the company continued to execute on our strategy of transitioning away from being strictly a toll processor to becoming a leading product development and manufacturing company.

The continued execution of the price development and manufacturing strategy was highlighted by growth and product sales by $38 4 million or 237% to $54 7 million with the scale up and white label and custom product formulation and manufacturing and to include pictures Big bet.

Averages crumble and sourcing bulk winterized and distillate oil for our partners candidates two point on products.

In addition for fiscal 2020, and the company generated $2 8 million and revenue from analytical testing through the company's lab versus 0.9 million and the same period, the previous year, including $1 $1 million and intercompany testing revenue as the volume of third party cash increase year over.

A year.

Consolidated net revenue and the fourth quarter of fiscal 2020 deep.

Decreased 47, 6% to $16 million compared to $30 6 million and the same period of fiscal 2019.

The decrease in revenues from the fourth quarter was driven by a reduction and cannabis operations revenue to $15 6 million compared to $33 5 million and the same periods in fiscal 2019.

Cannabis operations' revenue associated with total extraction and co pack and decreased $21 3 million or <unk> 95, 6% as the company continued to execute on its price development and manufacturing strategy as discussed previously.

And can you just continued execution of the product development and manufacturing strategy was highlighted and the increase in product sales by $6 2 million or so.

Sorry.

75, 9% with the scale up from White label, and custom product formulation and manufacturing to include tinctures Vape beverages Crumble and addition to sourcing bulk winterized and disciplined oil from partners kind of a two point on products.

The growth and product sales was tempered by continued price compression realized and the sale of bulk winterized and distillate oil.

Quarter over quarter, net revenue decreased $2 1 million or 11, 5% to $16 million compared to $18 1 million and the previous quarter ended August 31 and 2020.

The decrease in revenue for the fourth quarter was driven by a $2 $1 million decrease in revenue from cannabis operations, which generated revenue of $15 6 million compared to $17 7 million and the previous quarter.

Cannabis operations' revenue associated with oil extraction and co packing decreased $1 7 million or 62, 6% due to continued reduced shipments of biomass from extraction partners.

Company also realized a zero point $6 million or 4% decrease and product sales due to continued compression and pricing and bulk winterized and both difficult oil, which was partially offset by continued growth and provincial product sales of 292% over the prior quarter and the company continued to execute on its transition.

Away from our focus on co processing to product development and manufacturing.

Various reintroduced provincial COVID-19 restriction to Canada, storefronts and also negatively impacted revenue and the quarter and led to a delay and achieving purchase orders initially planned for the fourth quarter, resulting in these purchase orders being shifted into the first quarter of 2021.

In addition, the company generated <unk> $7 million and revenue from analytical testing through the company's lab compared to zero point $7 million and the previous quarter ended August 31, 2020, including zero point $3 million and intercompany testing revenue and the volume of third party test completed by the lab remained strong and consistent quarter.

Over quarter.

And the fourth quarter, we extracted 10311 kilograms of biomass and 28% increase over the prior quarter using input from our LP partners for toll processing as well as down on inventory from two point on products and.

In addition, the company utilized its bulk oil to manufacture 62 product skus and the quarter and increase of 11% over the prior quarter.

Gross margin for fiscal 2020 decreased to $25 7 million compared to 41 4 million and the same periods in fiscal 2019.

The decrease in gross margin was due to the company's shift and focus towards driving greater white label, and custom manufacturing product volumes and sales and.

In addition margins were impacted by compression and pricing and bulk winterized and both oil, which was which resulted in an inventory valuation allowance of $9 3 million.

The company also recorded and onerous contract provision of $1 8 million related to two purchase commitments and which the contracted volume exceeded current market rates.

And the fourth quarter of 2020, the company generated a negative gross margin of $6 million compared to positive gross margin of $22 6 million and the same period from 2019, and $7 3 million and the prior quarter ended August 31 2020.

Gross margins and the fourth quarter of 2020 were impacted by the same factors discussed previously related to the shift in business focus to product manufacturing and compression and inventory pricing, resulting in an inventory impairment on certain loss of bulk oil and biomass.

Operating expenses for the year ended November 32020 increased 42% to $46 3 million compared to the same period from 2019.

Operating expenses for the quarter were approximately $14 3 million compared to $10 7 million. During the prior quarter ended August 31, 2020, and was $12 1 million and the fourth quarter of 2019.

The increase in operating expenses was largely driven by higher depreciation and amortization expenses associated with additional equipment and put into service. The source like the source licensing agreement and higher salaries and wages as the company continued to build out a team to execute on its price development and manufacturing strategy.

Ended the fiscal year with positive adjusted EBITDA of $14 1 million or 16, 4% of revenue for fiscal 2020 compared to adjusted EBITDA of $27 5 million or <unk> 47, 3% from the same periods from fiscal 2019, we are very proud to have achieved positive adjusted EBITDA.

For the year, despite the challenging conditions that existed in many parts of the market and fiscal 2020, we were one of the few companies and the kind of a space that has been able to achieve this level of financial performance for our shareholders.

And the fourth quarter. It was determined that the zone term loan no longer provided the flexibility required to support the business or management strategic objectives Accordingly.

Accordingly on November 32020, the company made a voluntary prepayment of $9 5 million, reducing the secured term loan to $9 5 million.

And the credit facility was also amended to remove the accordion feature that previously allowed the company and to increase the aggregate commitments under the credit facility by up to $10 million.

To amend certain financial covenants, including the senior leverage ratio and fixed charge coverage ratio on the basis of EBITDA calculations for the financial covenants to be determined on an annual forward looking basis, starting in the first quarter of 2021 and.

The addition of a minimum liquidity covenant of $5 million until June 32021.

The addition of a fourth tier pricing, resulting and interest on the term loan of prime plus 2% to prime plus 275%, depending on certain financial covenants and.

<unk> received from the lender relating to the fourth quarter of 2020.

Financial covenants.

Rather than down compared deferred.

Financing costs of $57000 to secure the amendment. These costs are included and the value of the term loan and amortize over the remaining life of the loan.

On November 32020, the applicable interest rate on the term loan was 4%.

The company continues to closely monitor inventory levels and balance of those standing with our partners to ensure a strong financial balance sheet position.

And this November 32020, the company had $11 1 million and trade accounts receivable outstanding over 60 day and the expected loss rate for overdue balance is estimated to be 0.6 million based on subsequent collection and various discussions with associated customers and analysis of credit worthiness and and.

And the company has subsequently collected as trade accounts payable and extending the same partners or has recorded an impairment loss provision representing 75% of trade accounts receivable balance which supports the cash position of the company.

On January 29, 2021, the company closed a bought deal financing pursuant to which the company issued $19 4 million units valued at $39 $7 million, which was comprised of one common share of the company and one half share purchase warrants.

Each full share repurchase warrant is exercisable at a price of $2 55 per share for a period of 36 months from the date of closing.

The company had $20 3 million and cash as of November 32020, compared to $49 9 million as of November 32019.

Balance current cash balance of approximately $50 million includes gross proceeds of $39 7 million from.

From the bought deal financing that closed subsequent to year and with that I'll now turn the call over to the operator to open the lines for the question and answer session.

Thank you and we'll now conduct the question and answer session.

If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question. Hugh you May Press star two if he'd like to remove your question from the queue from participants using speaker equipment and may be necessary to pick up your handset.

I think star one we ask you limit yourself to two questions. Initially so that we have time to speak with as many of you as possible.

Once again that has stopped to ask a question one moment. Please while we pull for questions. Our first question is coming from David and could that go from <unk> capital markets. Your line is now live.

Hi, good morning, congratulations on the quarter on and thanks for taking my question.

First question is really related to your international International and specifically U S strategy I know we've talked about this from the past can you maybe just give us a little bit more detail about kind of what youre thinking and any opportunities that you see coming your way and near term. Thanks.

Okay.

Sure Thanks, David and maybe I'll just this one.

As we you know as we've said on previous calls and and.

On previous occasions, when we looked at the U S. There were several factors that we found challenging and were content to focus on other international markets in the meantime, but what happened with the change and the White house at the end of the year.

And 2020 in November.

Basically it started the clock ticking on our mind on the opportunity coming to the forefront and the U S.

And given that that clock ticking, we continue to review all of the opportunities that we had and our pipeline and the U S continue those conversations accelerated those conversations and in many instances.

In preparation for launch into the U S. Obviously, when we're looking at those opportunities. We will continue to be mindful of our listing requirements and the legal requirements around entering that market, but I can say that we are excited about the pipeline that we're seeing and about the opportunities for <unk> and the U S.

Okay. Thanks, that's very helpful.

I wanted to switch gears, a little bit here. So we just did some research published it last night.

And really on the edibles market in Canada, and what we've shown.

With health, Canada data actually is that there's quite a bit of buildup.

And Canada is that October from 2020, so im wondering with Valens. Our recent acquisition of life technologies. If you could maybe give a little bit of insight here because I know.

And with Edibles the buildup.

For health, Canada is that may be specific to certain product categories within edibles and beverages.

More specifically with life, which is what life is doing is more on the gummy category and are you concerned with these data.

Why don't you take this one.

Sure David Thank you for the question and debt.

Great data and chat about so if you look at the Edibles category right now when you see that inventory data. If you look at the majority of that that's made up by chocolates and beverages and that's really just the initial company not looking at what actually consumers want and one thing we've looked at it and being a data driven approach and when you look at the U S marketplace.

And the edibles category and gummies is over 70% on the market and what we're seeing and hearing from retailers today is they can't get their hands on enough gummies and I would say that category is actually one of the fastest categories not even only and the animal space, but comparatively to everyone. So this is a market that even in Alberta from a referenced.

<unk> went from three 7% of the market and November 242% in December and if you look at the U S market, it's around 10% and the market and I continue to see this as one of the biggest growth areas, but I think that was the mismanagement of what products versus what consumers want it and we're getting a lot of great feedback on gummies and as we mentioned.

And in the prepared comments.

Look forward to those seeing those in the market and in the near term.

Okay, great and if I can just squeeze one really quick one in here and just wanted to focus on the rare cannabinoids for a second I know for the balance team, which is something that you're actively looking into and as we see biosynthesis take off on the space. We see other Lps with partnerships for example, a grant of Graham with highest and Biologicals I'm wondering.

What is that balance see opportunity for rare cannabinoid and if so is this something that you'd think biosynthesis plays a role and or is it more coming from the plan.

Sure maybe I'll, let Tyler address this from Tyler.

Yes, so couple of things David I'd like to actually circle back first to your last question.

About the over saturation, and edibles, and and I want to tie into what's going on and the flowers space Theres a lot of inferior flower that is and selling it's the same thing with animals and theres a lot of inferior edibles and even if you look at the recalls that a lot of these companies have done and they're just inferior products that they didn't have a well thought out plan our strategy.

A lot of companies aren't listening to what the consumer wants and.

And I think thats, the biggest follow up and getting into rare cannabinoids that is 100%, where we're going and you'll see products come out and the latter half of the year, whether its CVA and CPG youll see some NPN numbers come out of us with different products, whether its sleep aid or different things like that but biosynthetic will play a role in time right now.

And the cost reduction is significantly higher than what we can isolate different cannabinoids for.

So in time, when they can get their feet under them a little bit more absolutely that will take place.

Did you rare cannabinoids, we don't need to wait for biosynthetic Youll see products this year from the balance team and.

And I think we're one of the only platforms out there that can do it sustainably and cost effective.

And again when you really look at on low cost platform I know, we say, we're one of the low cost we are the lowest cost purchaser of biomass. We're also the largest purchaser of biomass. So again, we're buying stuff that no one has access to or can get at it the same.

I would say price that we can so you will absolutely see rare cannabinoids leak out and our product portfolio and not only and domestic Canada and internationally as well.

Okay. Thanks, guys for that very informative congrats on the quarter and all of them.

Back in the queue.

Thank you and next question today is coming from Neal Gilmer from Haywood Securities. Your line is now live.

Hey, good morning, guys I appreciate the questions here first of all and maybe I'll start up and get in your prepared comments.

But on a holistic and products.

Expect to bring America through the acquisition of <unk>.

Right and just one.

And can you give us a sense as to sort of how that will play out over the course of 2021 are we talking about.

Whole bunch of and near term product launches or is that going to be sort of spread out over the course of this year.

So Neil and I would say, it's near term product launches and what we're focusing on first is is the gummies category.

But youre going to see quickly more and more innovative products come out right after that and we're going to keep that better and our GAAP and keep that confidential, but I think what what I'd say is I'd look forward to some of the those on new products or customized products that will be coming out over the next few quarters.

Okay.

And I appreciate that maybe the other ones from like a housekeeping item. Obviously I think you take your lumps on Lithia inventory write down on that you've announced and are recorded and this quarter. So is it fair for us to assume that go forward.

Not expecting at this point and time any further inventory write downs, you sort of cleaned house with Dod and then you've got the securing low cost biomass going forward so that we.

And we should expect sort of no more write downs, but also sort of scale up and your gross margin profile.

Chris one on you've addressed this one.

Absolutely and so yes, I would say as we kind of work through loss last quarter and as we gather and previous quarters continually monitoring what the market is doing so.

As we're kind of moving into Q1, I think we have seen kind of that stabilization in pricing in the market today, so on and the short term, we don't see any any more issues from an inventory.

Impairment standpoint, and we are definitely taking a very close look at all of our purchasing commitments to make sure that they are targeted.

As we look at the market to continue to evolve as we move forward wanting to make sure that we stay ahead of any any changes and pricing so.

I guess to directly answer your question no. We don't see any issues with additional impairments and and the short term, yes, Neil Tyler here, we won't have any but you can mark my words, right now and the rest of the sector it's coming.

No we took our lumps, but we got out in front of it we did it early and there is absolutely zero chance, you're going on and see more of those leak out over the next fiscal year. So again just to hammer that home. It was completely strategic we did it on purpose and you will see an effect on other people coming very very soon and so.

We stand behind the decision, we had and and it will not be irregular thing or as of right now and it's not even on our radar are ever doing that again.

Okay, great. Thanks, very much guys I appreciate it.

Thank you. Our next question today is coming from Andrew <unk> from Stifel. Your line is a lot.

Hi, Thank you for taking my questions.

I wanted to talk a little bit about your.

Your ongoing product launches.

And continuing on your existing comments and answers to existing questions here.

And so.

You know you guys already mentioned you have a five.

<unk> of the market and two point on products and those and those provinces.

But with the.

And with the new product launches coming.

Your GTA facility coming on line.

The acquisition of life closing.

You also talked about and overall goal of touching 20% of two point on products.

Could you give any kind of goalpost and.

Maybe timing if possible.

<unk> of what you're thinking about achieving and the edibles market and <unk>.

Maybe on the beverage market in particular since you have a dedicated facility for that.

Sure maybe I'll start with this one.

And your lot slips from pack there.

Say from from a goalpost perspective, yes, we think that 20% per product category is a reasonable target for us to strive for and.

And the short term I'd say, what we're focusing on is execution right. So we're focusing on driving.

Driving the volume from existing Skus, we're focused on driving volume from the new products that we launch and we think that that will naturally take that debt.

5% market share that we have today and will drive that up.

Over the course of the coming quarters, it's a little challenging to say based on on market starts et cetera, how quickly that's going to happen, but obviously as we continue to leverage our teaching facility and dry volume through there, we feel very capable of being able to service that kind of growth and that market opportunity.

And the coming quarters here.

From a life perspective.

And the product categories that we see there we're very excited about the market opportunity for those that product on.

And as a previous question around.

And the launch of products and when some of those new style products are coming online first and foremost there's lots and lots of low hanging fruit for us to achieve out of the gate in terms of getting quality and gummy products to market and we're going to be focused on accessing that market opportunity. So.

With that opportunity and the demand, we're seeing we could get to about 20% sooner rather than later under the life platform. Obviously, we want to make sure that we're continuing to leverage the skill set that we're getting and life and that means additional new product launches and new product formats et cetera, and that will.

And hit the market over 'twenty, and 'twenty, one that strategic times, but lots and lots of opportunity for us to grow that market share from existing companies.

And and Andrew maybe just to expand on that every year, that's four 9% market share that we advertise that's majority VIX right. That's what we focused on last year in that key one facility because we were constrained in Q2, now youre going to see us launch not only bath bombs, but innovative gummies and more cash.

And trade portfolio I definitely keep an eye on that from a market share standpoint, as well as you get into other markets like Quebec, and Manitoba here in the near term I think we can obviously increase that and and obviously, even beat that and in quarters to come.

And sorry, I also sort of addressed on the GTA facility, obviously coming on line later this year.

And we're very very encouraged.

By the response that we're getting from the summit 10 beverage, which the higher potency beverage that we launched that's what's really out there garnering the majority of the market share for us and the beverage category.

We have a number of ongoing conversations preparing for.

On boarding of the Pommies facility later this year.

Will not be a standing start on that facility and in terms of the partners that we're working with and their ability to launch additional products. So from that perspective as well we look forward to building on that current market share and beverages on television.

Comes on line.

Really appreciate the detailed answer guys.

And maybe just switching gears to <unk>.

To your geographic expansion.

Obviously, there is there is lots of opportunity in terms of white space for that.

You've already talked about Quebec and Manitoba.

You know wondering first off.

And it's kind of a two part question.

What kind of opportunities do you see and Quebec considering.

And the restrictions and limitations on two point on products there and.

Do you see any kind of.

Goal to reach.

And the rest of the country.

Tyler was going to take us from.

Yes happy to do so.

So multiple things to unwanted Allen as well so first of all and Quebec to point out products are only bandwidth. The SKU D. C. There is a way around and going through and medical platform, which we're currently.

And how do we do that and when do we do it but the big thing for <unk> and innovation. When you really look at the pipeline of products and they have no. One has done it well. So when you really look at even the edible platform. The only thing you have to keep in mind is that it can't be appealing to children and so when you bring and edible to market, whether it's protein balls call it like and Almond Joy Theres ways.

To get in there as long as it is not appealing and with the acquisition of light, we now have that ability and and we should have the first edible platform.

And in Quebec.

And the FTE D C. And then also coming over the and with all of our two point on product into medical patients and Quebec, and Theres multiple but what you'll see throughout 2021 is national distribution and so does the next key one for US is Quebec, followed by Manitoba after that and will it be the Maritimes, but what we're also going to do is double down on some of our key problems.

And right now because we have so many new product vertical verticals coming and the white space.

Youre going to see is also new lifting skews and different.

Different provinces as well so the best way to think about it as more products more distribution more revenue.

And in all of Canada, and not just kind of Quebec, Manitoba coming.

And Andrew maybe to expand on that too what's interesting about the Quebec market with some of the restrictions.

And you see on the outsized beverage market and I think that continues and it's a great opportunity to increase that beverage market, especially with the GTA facility coming online.

Later this year.

I think that that's a key focus for us, but I would continue to see growth there outsized compared to other provinces because of those restrictions I think that the beverage markets, particularly interesting.

Yeah.

Thanks again for the detailed answer definitely looking like a lot of excitement coming and this fiscal year, if I could just ask one more housekeeping question.

On the.

And then.

The 10 tons of biomass.

Process could you just remind us what exactly that includes.

Chris why don't you take this on.

So the the processing that we did this quarter was a mix of tolling that we did for a couple of our partners.

And as well as the extraction of certain strength of product that was specifically destined for.

And there are two point and our product portfolio.

Or for partners that we're looking for either bulk winterized or distillate oil that we were able to manufacture for them to get out to market.

Alright, great. Thanks for taking my questions guys and looking forward to seeing what's in store for fiscal 'twenty one.

Thank you. Our next question today is coming from John Chu from Desjardins Capital markets. Your line is not a lot.

Hi, Good morning, maybe just some details on the life acquisition, you've had about a month to kind of go right now and you had talked about some synergies timing for when they can be contributing from an EBITDA perspective.

Which I think both for fiscal 'twenty, one and so.

And anything in terms of accelerating some of those thoughts and <unk>.

Oh, it's more positive and then what's your thought originally and I think you've had more time to collect and see what's there.

Thanks, Sean maybe I'll start with this one.

So obviously when we were reviewing our life opportunity and working with the team there. It was actually a much more than a month and the work. We did there. We spent a lot of time reviewing a number of opportunities working with the team, making sure culture match et cetera.

So lots of time and look under the Hood there.

But as we're looking into 'twenty and 'twenty one.

You know as we get more and more integrated and art and.

And develop the plans for rolling forward, we do get more and more excited about the opportunities that we have in front of us.

Right out of the gate, leveraging our world class QA Qi.

Logistical infrastructure et cetera, and making sure that the products that are leaving that are leaving that effectively and efficiently. That's easy right off the bat opportunity for us, but then also in terms of integrating the customer platforms and and focusing on.

On driving volume through those relationships some of which were very strong with some of which they are very strong with some of them, where there's overlap. So in terms of timing on those synergies.

And for Us there.

There's a lot of low hanging fruit there.

And we're accessing right away, but it's a little too early for us and sort of get a little bit more granular on that but still think 'twenty and 'twenty. One is a reasonable opportunity for us and start to realize on those.

Yes.

Okay, Great and then I'm just curious since you've made that and now expect.

Acquisition.

I know you've talked about cross selling opportunities has any materialized since that announcement or are these discussions and whatnot I'm just curious.

And that's probably on a lot more calls or even finalized a couple of.

The agreements that work and early stages discussion, but now accelerated into something more detailed than that.

But the short answer to that is yes.

Yes, we're very happy with how the acquisition was received yes, we're very happy with how our existing portfolio of partners and relationships and come to us for opportunities. Yes. We are very excited about how we've been able to expand portfolios and with some of our existing customers to include edibles and put additional proposals and part of them and also ability to help the life.

Team in terms of bringing some of their ongoing conversations.

And so I've and towards them. So the short answer yes.

Okay.

Yes.

I'm sorry, just one quick thing one thing I would like to reiterate with that they're it's given us an opportunity to sit at the table with some of the people that we didn't have access to whether that a deal with one of our competitors as far as the instructors go. So yes, there are tons of synergies, but they go much past that.

Further than just yet on the line now we are cross selling based beverages concentrates and entire portfolio and we are truly becoming the one stop shop for cannabis derivatives and warm.

Manufacturing, so whether its analytical testing all the way down to final distribution rate to the provinces.

And the entire ecosystem as benefiting from the acquisition.

Okay Perfect and then last question would just be.

What's that recent license amendment to now be able to be involved on the pre rolls and flower.

Yes, I find that to be ever on the interesting point considering assets.

60% of the addressable market currently or maybe even a bit higher on that so how soon can we start to see.

Some of those product offerings and hitting the marketplace.

Total and take this one.

Yes happy to do so.

Got it and be careful what I say here, but obviously, it's a huge opportunity with pre rolls and flower being 61, eight percentage of the Canadian market alone and.

The one good thing that we have the ability to do is acquired biomass. We want so if you look at some of our industry peers.

And that cultivate.

Back to the Gen X. They are cultivating sofa harvest goes sideways on them and they have there's still use that material. So we can get a little bit more creative and them. So we can buy terpene profile weakened by flower genetics, we can buy anything we want so I would say it would make sense for us to get in and not only pre rolls, but whole flower with it being such a market opportunity right now.

And with some of our partners are asking for it again some of them are going asset light, which we've seen some of them are selling up grow assets and because we're the largest purchaser of biomass, we can get it cheaper than anyone else. So I would say short answer is if the customers want it and are the consumers want it and will deliver regardless of what it is at the end of the day, we're and manufacturer.

And we will deliver but there is a massive opportunity and not only for <unk> flower as well.

And John and Greg about what if you think about what pre rolls and flower do in terms of driving interest into our brand.

So those customers that would have had just on a day.

During the day of product portfolio.

And given them the option and I'll also on the shelves to drive through pre rolls indoor flower allows us to get much more synergy also in those product offering and brand awareness and market.

And that's why when it goes the other way if you have a great brand and now that same brand is now offering a pre roll on dry flower and can work the other way too right.

Exactly exactly so it's all of us and our customers are asking for when they're looking at their portfolios and what we're able to get.

Okay. Thank you very much very helpful.

Thank you we've reached end of our question and answer session and I'd like to turn the floor back over to management for any further and closing comments.

Okay first of all I just wanted to thank everybody for coming today obviously.

And then 'twenty was a challenging year for everybody and the space there.

And there was a headwind and not only for this space as a whole obviously our company we were strength with Covid. We're also been restraint with space and and now that we are operational and K, two and turning new products and new verticals for new revenue opportunities and we're extremely confident and where we're going again I think we predicted.

The future of our organization very clearly we bypassed cultivation, we went into extraction and our bypassing and traction getting into not only manufacturing, but end to end candidates solutions. So.

We're confident we're excited and ready to deliver and I think if we do exactly what we say we're going to do I think everyone's going to be extremely happy with the outcome and the one thing I am most comfortable with is delivering at the end of the day I would like to call myself on pure bred cannabis individual I think I know, Canada is better than most people in this space. So at the end of the day, we're going to deliver.

And the more time, we spend with the life team and a more synergies I E. The more ecosystem as we get into.

And I know theres and over saturation, and flower and I know theres and over saturation and inferior chocolate, but when we can bring innovative products tied to IP and technology that no. One else can do whether it's a spiky gummy wrapped and salt Lake If you look at our.

Habanero mango or if you look at our <unk>.

Nike Margarita gummy with actual jalapeno, and and wrapped in and call on that Orange. So the innovation is next to none and I've been in every edible manufacturer and very few are actually made for edible manufacturing. Even if you look at what I'd call one of the top brands in Canada, right now theyre, making in it and and grow room. So when you look at process flow. If you look at efficiencies if you look at IP.

Again, we're going to blow people out of the water with what we're bringing to the table.

And another thing I really want to hammer home and I know a lot of people costs of the lowest cost producer or one of the lowest cost. We are the lowest cost we can buy biomass cheaper than anyone else can buy it for because we are the biggest and we don't cultivate anything so we can get extremely concise on what we're buying when we're buying and we're not only buying cannabinoid content at this time, we're buying and Turkey.

And profile, we're buying genetics for buying streams were buying with purpose rather than just burning through our inventory.

And the last thing I really want to hit home right now it is the U S. It's not a matter of benefits and matter of when and were going in as an ally and not an enemy and and what we've done and Canada will bring into the U S and and obviously, there's a bigger market opportunity down there. So in short order you will see us maneuver.

And again, and we'll go as and ally not anatomy and then one other thing to know that some of our industry partners are well capitalized with the current round and financing Theres, a new pipeline of conversations that we've entered into not only bring and new customers, but also move on from some we're getting a little bit more strategic and in time and Youll see us move away from candidates partners to CPG relationships. So.

Now that people have money, we're willing to sit at the table and talk to them but.

And lots of changes are happening and balance and come 2022, we're going to be a very different company. So again, just want to reiterate we're extremely confident and comfortable with where we're going and at the end of the day, it's about delivery. So.

With that I'll ask the operator.

To close the call and I want to thank everybody again.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.

Yeah.