Earnings Transcript for FLWPF - Q4 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Flowr Fourth Quarter 2019 Earnings Conference Call. At this time all participants are on a listen only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today Thierry Elmaleh. You may begin.

Thierry Elmaleh: Thank you operator. Participating on today's call are The Flowr Corporation’s CEO, Vinay Tolia; Founder and manager partner, Tom Flow; President, Lance Emanuel and our new CFO, Irina Hossu. Please note that throughout the call, we will refer to Flowr and the Company interchangeably with the Flowr Corporation. Before management discusses results, I would like to remind participants that all amounts discussed on this call are denominated in Canadian dollars. Please also note that the statements made during this call may include forward-looking information and future oriented financial information regarding Flowr, its business and disclosure regarding possible events, conditions, or results that are based on information currently available to management, which indicate management's expectations of future growth, results of operations, business performance, and business prospects and opportunities. Such statements are made as of the date hereof and Flowr assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties that are not guarantees of future performance or results as a number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given the risks and uncertainties one should not place undue reliance on these statements and information. Please refer to the risk factors, forward-looking information and future oriented financial information sections of our public filings, including without limitation, our 2019 year-end AIS, our Q4, 2019 MD&A and our Q4 2019 earnings press release for additional information, which are now filed on SEDAR. In addition, this discussion may include certain financial performance measures that are not defined by IFRS and are used by management to assess the financial and operational performance of the Company. These non-IFRS measures include but are not limited to adjusted EBITDA. As there are no standardized methods of calculating non-IFRS measures, the Company's approach may differ from those used by others in the industry and may not be comparable as a result. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered independently or in substitution for measures prepared in accordance with IFRS. We refer you to our MD&A which includes reconciliations to the non-IFRS measures. It is now my pleasure to turn the floor over to Vinay Tolia, Flowr’s CEO.

Vinay Tolia: Thanks Thierry. Earlier today we released our fourth quarter and fiscal year-end resulting. I'll begin by highlighting our strategic and operational progress before Irina reviews our financial results. We are very pleased to have close $20 million private placement earlier this week, led by myself and our chairman Steve Klein to the tune of over $10 million. We believe this capital will enable us to become cash flow positive in the second half of 2020. And that is at the level of financial investment further signifies our level of conviction in the business and strategic direction of the company. Also, management and insiders that own nearly 60% of Flowr’s stock have agreed to a voluntary one year lockup. The group including myself have never sold a single share. You can see we clearly believe in the Company's strategy. First to address the global COVID pandemic. In early March, we made the requisite changes to our operating procedures in our production facilities around the world to ensure the safety of all of our staff. While COVID has clearly affected our business various government bodies and deemed candidates an essential service and we are continue to ship orders to our partners. In March, we made the difficult decision of restructuring 25% of our global workforce in an effort to preserve capital and narrow our focus to executing and the Canadian premium dried flower market over the next six months, which we believe enable our company to become cash flow positive. Admittedly our fourth quarter revenue were short of our internal expectations as we continue to work through our legacy product assortment of low to mid-THC strain and waiting for Health Canada approval for the remaining 50% of the [Indiscernible] facility. Which we finally received in late February. We had no issues selling our BC paper products, and we sold everything that was packaged. In Q4, we produce 675 kilos of indoor dry flour 51% increase against the previous quarter and our highest production to-date. As I have mentioned in the past, to make a major shift in genetic takes time. But now that all 20 grow rooms are populated with high THC strength we should begin to effect change in production and sales, beginning as soon as next month. It is worth noting that our purpose built indoor facility is in our view, the best place to grow consistent high THC and premium cannabis. In fact, in our latest harvests we saw one of the highest yields that we have seen since we began growing in the facility. Furthermore, our automated packaging line is in the newly licensed area. We recently commissioned it and expect to see an improvement in efficiency going forward. Taking over two years, but our flagship facility is finally fully licensed and operational. Given the increasing demand trends and sell through rates, we have seen it with BC Pink Kush we have never had this level of conviction and visibility into our commercial efforts in the Canadian recreational market. The time is now for us to prove our core value proposition that growing premium quality candidates at scale is difficult to do and that we are one of the few companies in a position to do so. It is also worth noting that we haven't irradiated any BC Pink Kush in our facility in over 16 months. And our cannabinoid content range continues to tighten with products in the market that are consistently between 22% to 25% THC. In the fourth quarter, we also had our first harvest of flour pores. We harvested a little under 1300 kilos of dried flower, and 13,000 kilos of frozen material which is the equivalent dry weight of 1900 kilos from our outdoor greenhouse. This material may be subject to release be used for extraction purposes. But we have decided to pause further investments in our Rest 2.0 strategy until we become cash flow positive. All-in-all we believe our Canadian operations are well positioned to enable us to become cash flow positive at the corporate level in the second half of this year. In Europe, we are extremely excited about our competitive positioning. And we recently received our EUGMP certification at our Sintra facility just outside of Lisbon, which puts us on a shortlist of companies in Europe with this certification. The GMP certification in Australia and Europe we believe we are ideally positioned to be a partner of choice throughout the world. Construction of the Sintra facility is mostly complete three of the six grow rooms are in operational and recent harvest have been promising. We intend to plant over a million square feet on our outdoor cultivation site in Holigen's Sintra in the coming weeks, which will likely be the largest cultivation in Europe. We recently received an export permit from Health Canada to ship 10,000 pounds to Portugal to help support the operation. Now, I'll turn it over to Irina to run through some financial highlights.

Irina Hossu: Thank you, Vinay, and good evening, everyone. I'm very excited to have recently joined Flowr and share an incredible amount of conviction and optimism our company's strategic direction. I intend to bring a high focus on financial discipline, and now we are [indiscernible] to help us achieve our ambitious global growth plans and near-term commitment on becoming cash flow positive in the second half of 2020. Our go forward financial management strategies will be based on a three pronged approach. Appropriate investment in sales and marketing to support our expected growth. ROI and data driven decision making, focusing on high return investments, all while ensuring G&A growth at a slower pace than revenue. We believe that these approaches will allow us to achieve our strategic plan, while recognizing the need for tight cash management during these uncertain times. We are focused on our internal controls environment, and we will also be evaluating potential improvements to our systems in the near-term. Now, let's review Q4 results, we sold 216 kilos products in the quarter at an average price of $6.10 per gram. Price per gram in Q4 was impacted by bulk sales of 35,000 grams at $3.50 per gram. On a normalized basis, Q4 price per gram was $6.61. On a full-year basis, we sold approximately 993 kilos at an average price of $7.12 per gram. Gross revenue was 1.6 million for the quarter and 8.2 million for the full-year. Q4 net revenue was negatively affected by approximately 1.4 million in one-time events specifically returned to Legacy Springs sold in 2018. Given our adjust strategic priority of producing high THC and demand revenue strength, the company does not expect further material returns. As a result of these one-time adjustments, net revenue in Q4 was $51,000 and 5.2 million on a full-year basis. The total cost of sales were 2.7 million for the quarter which included approximately 1.2 million in income statement line item reclassification and one-time events. On a full-year basis, total cost of sales were 7.6 million, the normalized cash per gram sold for the quarter which excludes depreciation amortization, and one-time adjustments was $4.52 compared to $5 in Q3. We expect further operational efficiencies due to our new packaging line to approve our cost per gram significantly beginning in late Q2 of this year. Further cost for gram efficiency are expected that fix costs will be diluted against the larger production volume. In Q4, the company took an inventory impairment of 5.3 million, which included impairing inventory pertaining to Legacy Springs, and also in carrying inventory from Flowr sourced. The company is awaiting a regulatory review of its inventory and as Vinay mentioned, we have made a strategic shift from [indiscernible] in the short-term. Selling, general and administrative expenses consisted primarily of salaries and professional fees were approximately $6.9 million for the quarter compared to 6.1 million in Q3 of 2019, and were in-line with management expectations. The higher SG&A is due to the expansion across all functional areas to support the increasing production proper in Canada and the build out of our global business with acquisition of Holigen. As Vinay mentioned, in March of this year, the organization undertook a global restructure of approximately 25% of its workforce which we expect to generate approximately $6 million in annualized savings. Adjusted EBITDA on the fourth quarter, which excludes non-cash expenditures was a loss of $8.3 million, as compared to a reported loss of $5.6 million for the third quarter of 2019. This increase in loss is primarily due to accounting for one full quarter ramp up the Holigen operations as the acquisition closed on August 20th. On a full-year basis, adjusted EBITDA was a loss of $22.2 million. The company believes that we will achieve breakeven in the second half of 2020 driven by increased demand driven sales, scale and operational efficiencies and the SG&A measures previously discussed. Achieving positive EBITDA will be our first step towards achieving our targeted adjusted EBITDA, margin of 25% to 30%.Throughout Q4, the company continues to manage the construction and operations at K-1 concurrently. The K-1 facility will substantially complete in Q1 2020 and 20 rooms are now operational. We do not expect further material CapEx investment in our Canadian operations. Holigen is expected to begin generating revenues in late Q4 of this year and we expect some capital investment this year to support revenue driving activities. Flowr ended the quarter with a net working capital balance of approximately $7.8 million, including a non-restricted cash balance of approximately $10.5 million. To bolster on our balance sheet position, we recently closed on a $20 million non-broker private placement of convertible bond units led by management and insiders. As we noted earlier, we feel this capital will enable it to be cash flow positive in the second half of 2020. As Vinay mentioned, Q1 revenue will be suppressed due to the final harvest with low to mid THC strengths. However, we sold through all available piece of BC Pink Kush. With the [indiscernible] facility fully operational and the shift and strength complete, we believe Q2 will be inflection points for our business. I'll now turn the call back to Vinay for closing remarks.

Vinay Tolia: Thanks Irina. In the past few years, we are proud to be have been granted two site licenses from Health Canada constructed a purpose built indoor facility, constructed and applied for the final licenses of our R&D facility. As GMP certified facilities Australia and Europe and perhaps the largest licensed cultivating footprint in Europe. To go from zero to over seven million square feet of licensed cultivation space is something we take great pride in. Our strategies have right size facilities for the markets we are targeting to ensure that we can cultivate products that meet our customers demand. This aboard pursuing scale for the sake of scale and allows us to prove out the business in a capital efficient way. We are now happy to answer any questions you may have. Operator, please open line for Q&A.

Operator: Certainly. [Operator Instructions] Your first question comes from the line of Vivien Azer with Cowen. Please go ahead. Your line is open.

Vivien Azer: Hi, good afternoon. I hope everyone is safe and healthy. Thanks for the question. And I just like to start off and I apologize. As you know, I don't cover you but like I'm having a really hard time reconciling the fact that you generated gross revenue of $1.6 million in the fourth quarter, selling all of your BC Pink Kush. And then the guide for 1Q. But maybe this is like as easy as like some of the things that we see in here is it just kind of just the timing of cultivation, but the disconnecting is being kind of wide.

Vinay Tolia: Hey Vivien thanks for jumping in. It is purely a function of timing. So, it is a purely a function of how much Pink Kush we had available to sell. So, essentially every single gram of Pink Kush that we have had to sell, we have been able to sell and as I mentioned to make a wholesale shift in our genetic library, it is taken nine months. So, really, as of January, February as we think we have been planting is been Pink Kush to the other high THC strains. But before that, we just been constrained by the amount of Pink Kush we had available for sale.

Vivien Azer: That makes sense. And like yes, absolutely like lean into Pink Kush, I mean it is not only - not seeing like genetic [indiscernible] enhancer genetics like that is a worthwhile investment in the revenue [indiscernible] seems totally resemble. But like keeping in mind you know generating like roughly 650% fixed cost of ASP, which is awesome. But how do I reconcile the delta between your gross revenue and your net revenue then because it is very wide?

Irina Hossu: Sure. So, particularly in Q4, there was quite a material impact between gross to net and really what happened was, there were all strings that were sold in to customers when we really first went live with our products dating back to 2018. So, we had some fairly significant return provisions that we took in Q4, but the expectation that there would be some return coming back from the provinces. We have certainly spoken to our provincial partners and we do that, we do not anticipate any further return. So, it really was a one-time event occurred in Q4.

Vivien Azer: That is super helpful and congress on the new CFO role, this is the license to see more diversity in the industry, so congrats on that. Last one for me please. Vinay, can you just help us understand how that COVID-19 maybe impacting your medical operations in Europe. The Europeans have obviously been more aggressive. I would argue more diligent than we have been in the U.S. and Canada. We hear a lot about theme we hear a lot about Germany on things obviously, adjacent to your cultivation Germany is your end market. So, what are you seeing in terms of COVID-19 and tap into the European market?

Vinay Tolia: Sure. We have really seen no impact in demand, there is still even still a shortage of GMP certified products. So, we haven't seen much of an impact in demand there. The biggest impact I would say is simply the whole process of GMP certification because of COVID and because of the fact that people don't want regulators or auditors flying around to different places to do audits, that whole backlog has just gotten longer. So, you need that GMP certification in order to release final product into the European market. If you anyone's in line for that, and they thought it was going to be six months now, all of a sudden, it is going to be a year 18-months. So, that kind of that kind of first mover advantage in Europe is a real thing, but we haven't seen any need any real change in demand in Europe. But I would probably put that more to the fact that it is a supply constrained market right now.

Vivien Azer: Super helpful. I have got more, but I will get back in the queue. Thanks.

Irina Hossu: Thank you.

Vinay Tolia: Thank you.

Operator: Your next question comes from the line of Bill Kirk with MKM Partners. Please go ahead. Your line is open.

William Kirk: Thank you. Good afternoon, everyone. So it looks like even if you adjust our inventory impairment, gross margin was negative in 4Q. Can you maybe confirm if that was the case and help us understand why that was and why are you expected to go positive?

Irina Hossu: Sure. So there were a couple of things that happened in Q4. So there was inventory impairments that we still go through. Also, as I mentioned, some financial statement reclassifications. So there were a number of items that we previously would have included SG&A expenses that were moved out to cost to sales items. So when we exclude - when we started normalizing gold we would have not have seen a normalized - a negative gross margin for the quarter.

William Kirk: Okay, and do those expenses remain up in the cogs line or --

Irina Hossu: They do.

William Kirk: Okay. Is there some leverage you get on that type of expense item that, as I'm thinking about how gross profit margin should go positive. You get leverage over those newly moved SG&A items into that were moved in the cogs.

Irina Hossu: So let me just clarify if I may. The items that were removed in Q4 was really a year-to-date catch up. So Q4 would have been abnormally high and the first three quarters would have been added on. So there is some leverage, but really what we moved was salaries for employees who were specific to cultivation that were improperly classified throughout [Indiscernible].

Vinay Tolia: Irin you want to talk about potential target margins in the future, maybe that'll help guide those.

Irina Hossu: Sure. So from a margin perspective, we are targeting between 45% to 50%. We do anticipate to have some fairly significant improvements in our cost base beginning at the end of this quarter. By significant I mean, anywhere between $0.70 to $1 improvement by driving efficiency through the production line. And then further efficiencies are expected as we move into Q3, we do expect a fairly material uptake in our harvests. And the fixed costs that we have are obviously going to be spread across higher yield and higher harvest which will inherently reduce our production costs.

William Kirk: Okay, I think I get that. Switching to the top line inflection that you are talking about for 2Q. How do we think about the magnitude? Is it essentially going from call it five rooms of Pink Kush to 20 rooms of Pink Kush is that how we should think about the size of inflection?

Vinay Tolia: Yes. I mean the actual magnitude of rooms of Pink Kush are between Pink Kush and new high THC strain, the Tahoe OG, Louis XIII. we are talking about 95% of our production is being high THC. The only question mark for Q2 is really COVID. I mean, we have seen some uncertainty around Ontario, that is been our biggest market and that is been kind of by far our biggest market for Pink Kush. There is a little uncertainty there. Although we have seen a pick up an online sales. Overall sales are down significantly from the retailers. And although the, you've been reading a lot about the pickup in online sales and net-net overall Ontario sales are down like I said they're down pretty significantly. So the best way to think about it, I wish I could give more clear guidance I could have about, a month ago. But, a month ago we basically were selling out every single thing that we are sending to Ontario that may or may not happen now given the environment of COVID.

William Kirk: Okay, but from production standpoint, and it was roughly and I'm just kind of guessing but five, five rooms of high THC Pink Kush, and now to be 20 rooms of high THC between the three genetic?

Vinay Tolia: Correct. It will be roughly five and then it will be 20. But remember that we got licensed for the remaining 10 rooms at the end of February and we have been propagating those the bounds of 10 rooms since then. So, it is not just going to go from five to 20 in one shot is really the kind of Q3 where you'll see the full production come on from all 20 rooms.

William Kirk: Got it. Thanks Vinay. I will hop back in the line.

Vinay Tolia: Thanks Bill.

Operator: Your next question comes from the line of [Nicholas Phase with Bryan Garnier] (Ph). Please go ahead, your line is open.

Unidentified Analyst: Thank you. To continue on the same line of cushioning on the inflection point and just stepping in for a sec on computing. And if you take a step back then what is your unrealized capacity now it is the lower capacity.

Vinay Tolia: It is all a function of yield, I would say right this second, I would say somewhere in the neighborhood of probably 6,000 kilos per annum. But again, as I mentioned, we had a harvest just this week that came down at a much higher yield. If we can average those yields that will go up to significantly. I would say about 7000 kilos right now is a fair run rate and we are hoping to increase that as yields increase as well.

Unidentified Analyst: So, same as it goes in the couple of months down to 8000. So, when you say up [indiscernible] these cash flow positive in the second half, you are probably looking at selling about 4000 kilograms and that would get you are just over that receiving from it. That is correct and then in Q2 I need to see somewhere in between, what you do in Q1 and in Q2?

Vinay Tolia: I think Q2 the real question mark is going to be what the overall demand because I know I mentioned OCS and me and Ontario and our overall sales. In fact, if you look at the numbers of market share in Ontario has actually going up, but the overall sales in [indiscernible] has gone down so much. We obviously had suffered because of that. So, Q2 is really going to be about uncertainty around the COVID, and then was your question 4000 kilos in the second half of this year or 4000 kilos for the entire year?

Unidentified Analyst: No, the second part of the year.

Vinay Tolia: Second half of this year, that is probably a bit aggressive just given the ramp up in yields. I think that is probably a bit aggressive.

Unidentified Analyst: [indiscernible] And how we need to look at Q1, how we need to understand that $1 million gross figure first of all, I understanding that there is no negative returns anymore on the impact. We do see that actually planted the seeds as you said, only 140, 150 kilograms of produce in the first quarter. And why is it lower than the 250 that you sold in Q4 [indiscernible] decline?

Vinay Tolia: It is really, it’s really just a matter of how much Pink Kush we had available and remember the product that we are selling in Q1 were products that were planted in Q3 of the prior year. So it is really just all about the harvest cycles and how much Pink Kush we have available.

Unidentified Analyst: Right. Now that make sense. And then just modeling a loss on Europe and selling it as you will have, your first sale in the fourth quarter in Europe, now I believe that you already have some production is Sintra going on, and so why is that not being sold at this stage?

Vinay Tolia: With that, that is a very conservative number. I think we will see sales before that. That is a conservative number. And then as I mentioned, we will be planting Aljustrel this month. And I think it will certainly be the largest scale, the largest cultivation in all of Europe, for sure is the largest outdoor cultivation .

Unidentified Analyst: Yes. The one million square feet that you mentioned, how much is actually that going to yield?

Vinay Tolia: Sorry. Can you repeat that. Of the one million square feet how much is what?

Unidentified Analyst: How much you yield will that be?

Vinay Tolia: That is a tricky one, but if you can see, a very conservative yield number, I mean you can assume 10 grams a square foot, which is very conservative yield number and you are talking in excess of you know you are talking about 10,000 kilos.

Unidentified Analyst: Alright. Are you are going to sell those 10,000 kilograms then?

Vinay Tolia: Currently there has been a lot of demand in Europe for GMP certified product, there is also demand for feedstock into treat medical ills, but right now in Europe there is almost insatiable demand for products.

Unidentified Analyst: Well thank you for the answers, I will go back in the queue now. Thank you.

Vinay Tolia: Thanks.

Operator: Your next question comes from the line of David Kideckel with AltaCorp Capital. Please go ahead. Your line is open.

David Kideckel: Hi, good evening and Congrats. Congratulation everybody on this quarter. Just a couple of questions from me. I want to go back to COVID-19 and medical cannabis in particular out in Europe. So Vinay I heard you mentioned, there is no issue with demand at all for product in Europe for medical cannabis, but given that there is still only a few, maybe a couple of select countries, Germany in particular, maybe the UK some other places that even allow medical cannabis, beyond the GMP certification delay for other companies not you, do you think in general for some of the EU member countries that it might put them back in and maybe including medical cannabis as a whole?

Vinay Tolia: It is a really tough question. I guess what I was trying to get across when I said that we haven't seen a drop off in demand, is if you look at overall sales in Ontario and things like that, and you see some of those steep declines. We haven't seen that decline in the customers who want product now in Germany. That is I guess that is what I meant. The question is, how will medical cannabis, will this delayed or potentially speed up medical cannabis adoption in Europe? That is a really tough question. I'm not sure. I guess all I can comment on that is oftentimes the regulatory bodies that are in charge of this stuff are the same body dealing with COVID-19. So I mean there is a change certificate put on the backburner further cannabis legislation. But it is really hard to say we don't have much insight into that.

David Kideckel: No that is a great answer. And it is similar to a lot of I think we are all hearing from U.S. as well, to speed things up as a kind of tax generating opportunity for government services, expedited or not expedited. Okay, so I want to move back as well to the margin profile. I think you said between 45% and 50%. And I guess my question is, is there going to be a blended mix here when we are taking into account medical cannabis in Europe versus your premium Flowr here in Canada? And one other thing is to break that up further, would that margin profile further the kind of subdivided if you are assuming whether it is premium Flowr on the Europe or?

Vinay Tolia: It is a great question. Yes so what I think what I really was speaking to was our indoor - the margin profile for indoor flower in Kelowna. In Europe right now, I mean you are talking about the outdoor flower, which is incredibly low cost. We are talking south of $0.35 a gram. And right now the prices in Europe are high. So I mean we will see what that margin profile looks like once we actually make some sales. But I think what Irina was talking about the margin profile for Kelowna in particular. But I think it is fair to say that the blended margin would be our target margin would be somewhere around there on the expected kind of steady state would be somewhere around there on the European side as well overtime.

David Kideckel: Okay, very helpful. Thank you. My last question now is I mean, for some of the retailers that we cover, as well as a firm. Big message we hear from them is the illicit market is actually their biggest competition, not even other competitive retailers. So I guess the question to you guys, is your BC Pink Kush, because this is a premium product not on a lower end product that is meant to compete with illicit market products. Does BC Pink Kush do you find at all that the illicit market is a competitor? Or and if not I mean, who are we you really competing with, is it just other our legitimate grants.

Vinay Tolia: Hey look we have said from the start that we view our biggest competition as the illicit market. Because those folks who are used to that level of quality. We want those folks to step into the store and view BC Pink Kush2 as a reasonable alternative. It is what I mentioned during the remarks that we hadn't radiated BC Pink Kush since January 2019. So, that is one of the things that allows that product to really have the smell, taste and feel of the solicit market products. And so I would absolutely view that as our biggest competition. There are some other folks who are - craft those who are putting out good products as well. So I don't want to say no one else that has really good products that there are. But that being said, we view that, our goal is to get that solicit markets user to have any similar experience or better experience with our product, and we are very excited frankly about the new genetics as well the Tahoe OG and Louis XIII. We think those are going to be, just as good if not better than the Pink Kush.

David Kideckel: Very good. Thanks for taking my questions everybody and gin congratulations in the quarter.

Vinay Tolia: Thanks David.

Operator: [Operator instructions] Your next question comes from the line of Scott Fortune with Roth Capital Partners. Please go ahead. Your line is open.

Scott Fortune: Just kind of along the lines of that. Can you reconcile the production and supply demand dynamics going on in Canada. Specifically, your focus premium high THC side of things. Obviously, we are seeing a lot of taco peace centering cultivation and we are seeing pricing from that standpoint, are you seeing competition in the high end you mentioned in the back market obviously and then what are the new market opportunities for you to continue to sell just step us through kind of over the next quarters how you see the supply demand dynamics. As all these LPs are going down the value chain and the pricing side of things, they keep your $6 and $10 price per gram, per se?

Vinay Tolia: Yes. So, we have actually seen a bifurcation in the market. So, we have seen massive price compression on the kind of lower THC and lower quality products. Frankly, that is one of the reasons we agitate right down and some of our lower THC strains, they're not they're not as desirable. So, we are seeing that there but on the on the high on the premium side, haven't really seen a whole lot of price progression. Again, if you, we believe that there is real value in the premium the premium side of the market. If you think about this on a cost per serving, if you are really talking about a couple bucks, you are not talking about a, $1,000 bottle line versus a $20 bottle of wine. So, the folks who are the real [indiscernible] that are willing to pay up for that they remain willing to pay up for that premium product. So, while there has been, more entrants into that premium segment over the last few months. We still think that it is massively underserved, and you can do the math, just looking at the facilities around the country, how many of them even have the capability if we know whether or not they have the skills to do so how many of them are built and set up the right way to even have the case even have a chance to grow in that premium is that high THC product, not a lot.

Scott Fortune: So, you are not seeing much of a competitive response as more people move down the value chain, and others might be able to give to it, cultivation where they can actually cultivate high end but you are not seeing success coming from that side from other cultivators or competitors getting into the premium side as quickly.

Vinay Tolia: Not a lot of you know thing that that is worth noting too is we have spent a minimum sales and marketing dollars. So, as this year progresses, and we start to increase your spending to increase awareness and demand, one can only assume that that what we will see further demand to the right we this is this is all really happening organically.

Scott Fortune: There is a lot that question, do you have opportunities to expand into provinces or move up like marketing and dollar amounts in different provinces? Can you call those down?

Irina Hossu: Absolutely. So, if we think back to what some of our three prong approach to financials, we are very much planning on making appropriate investments in sales and marketing. What we have found at least for the first quarter of this year is that we have been supply constrained versus demand constrained but as we increase our demand over the coming quarters. We do anticipate to make fairly significant investments where required, if you read through our MD&A we have recently signed with rolls in Quebec. We are awaiting approval through Quebec markets to sell on that channel, but we are evaluating different options that we might have.

Scott Fortune: Okay. I appreciate the color, I will jump back in.

Vinay Tolia: Thanks Scott.

Operator: Your next question comes from the line of [Nicholas Phase with Bryan Garnier] (Ph). Please go ahead, your line is open.

Unidentified Analyst: I have a follow-up question Vinay on the inventory. So I suppose if inventories all the full week products of those little THC products that you cannot sell. So what is the plan with then? And I think if you are still around the you are right, there is quite a lot of the flower forest harvests. Have you still in the freezer waiting for you to start up the 2.0 production at the end of the year, so is it in between your season and you look slowly anything further at flower forest or how do I need to see that dynamic around your outdoor growing?

Vinay Tolia: So I will enter the last part. So we are evaluating what to do with flower forest this year, potentially, right now we are able to plant a crop environment if you wanted to, we are evaluating that depending on what our strategy and timing will be the our [indiscernible]. And then on your question on the inventories. So we have taken, we have written down substantially all the inventory that the lower THC product inventory that we have, we are looking for some avenues to send it to extraction or send it to some other LPs so we are hoping to work through that in the coming months. But like I said we have taken the appropriate write downs for that so I don't think it will - it should affect future financial statements much. And in absolute numbers Nick, it is not a - we are talking about hundreds of kilos of product here. We are not talking about thousands and thousands of kilos. So in absolute numbers not - it is not absolutely nothing.

Unidentified Analyst: It is just a difference as opposed what you are had Q4 of season of 60 kilograms in the [indiscernible] in the sales of 216. So about 400 kilograms.

Irina Hossu: So again to Vinay’s, earlier point we did take the appropriate convert provision in the fourth quarter. If you read through the MD&A to the financial statements, you will see that is my overall inventory valuation perspective, we actually don't have quite a bit of inventory sitting in our financial statements. And I would say roughly right 50% of the inventory we have on hand is about cannabis, the other 50%. Again, rough numbers for trim.

Vinay Tolia: What you getting it, right now currently, as of this date, every single room is high THC and it is --

Unidentified Analyst: Yes. Oh that is in the month we have another question, I had for you, you were saying that in the beginning of next month, you will see a step change in sell through of high THC products. You do in the next month like going to extent May 1.

Vinay Tolia: Correct. May is going to be - we are anticipating some harvest from the new rooms which will come down in May. So we won't be surprised in May.

Unidentified Analyst: Okay, very close to at a lower level but then the starting May you really to see some step changes there.

Vinay Tolia: Correct. We will have enough high THC to meet demand for the first time in a while.

Unidentified Analyst: Okay. Thank you for that.

Operator: And your next question comes from the line of [Eric Tice with investor] (Ph). Please go ahead, your line is open.

Unidentified Analyst: I just want to follow up. You took back well over a million dollars worth of wholesale dollars with the cannabis package and ready to go out the door. What is your plan with it? You are doing $300,000 or $400,000 a month now. That is significant money. I mean, that is a whole quarter worth of products.

Vinay Tolia: Yes. In remember as Irina said, one of it, but $400,000 $450,000 of it was bulk. So it wasn't package. And that was from December 2018. So we are looking to find some channels to move that product likely to turn it into distillate for abstract or potentially shipping them off overseas.

Unidentified Analyst: Fantastic, thank you.

Vinay Tolia: Thank you.

Operator: There are no further questions at this time. I will turn the call back over to the presenters for any closing remarks.

Vinay Tolia: Thank you everyone for the time. it is been a tough time in the market right now. As you guys know it has been challenging in the cannabis industry before COVID. But for the first time we had enough demand driven strains to meet supply - or enough supply to meet demand. And we are looking forward to the next couple quarters and really proving our value proposition. Thank you so much for the time.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.