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spk05: Hello, and welcome to the Balance Company's fourth quarter and fiscal year 2020 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. It's now my pleasure to introduce your host, Everett Knight, Executive Vice President of Corporate Development and Capital Markets of the Valens company. Everett, please go ahead.
spk08: Thank you, operator. Good morning and welcome to the Valens company's fourth quarter and fiscal year 2020 financial results conference call for the period ended November 30 2020. A replay of this call will be archived on the investor relations section of the Valens website at the Valens company.com slash investors. Before we begin, Please let me remind you that during the course of this conference call, Valance 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, all disclosure regarding 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 that differ materially from expectations. For more information on the company's risks and uncertainties related to forward-looking statements, please refer to our latest annual information form. and our latest management discussion and analysis, otherwise known as MD&A, each as filed with the Canadian Securities Regulatory Authorities at CDAR.com or on the Valence Company's website at www.thevalencecompany.com. The risks described in the annual information form which may cause the actual financial results, performance, or achievements of the balance company to 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 herein. Although these forward-looking statements reflect management's current beliefs and reasonable assumptions based on current available information, available to management at the date hereof, we cannot be certain that the actual results are consistent with the forward-looking statements in the future. We caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures, measure discussed, please consult our latest MD&A as filed on CDOR. Joining me on the call today are Mr. Tyler Robson, Chief Executive Officer, Mr. Chris Bison, 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.
spk09: Thank you, Everett. And welcome to everyone who has joined our earnings call to discuss our results for the fourth quarter and fiscal year ended November 30th, 2020. Later on today's call, Jeff Fallows will provide an update on our operational achievements Everett Knight will highlight industry trends and capital markets activities, and Chris Bison will give an overview of our financial results in the fiscal year. But first, I'm going to talk about our accomplishments from the year. Fiscal 2020 was a pivotal year for The Balance Company. Over the course of the year, we transformed from a leading extraction 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 results. The Valence Company had the most productive operational year in our history. And we are incredibly proud of everything we achieved during this transitional period for the business. Over our year of rebuilding, we focused our efforts on creating what we believe is the most innovative, adaptable, and cost-effective cannabis product manufacturing platform in the market today. This platform sped up our ability to get finished products into the market and allowed us to advance in key growth verticals. Fiscal 2020 net revenue increased 44% to 83.3 million in fiscal 2021 compared to 58.1 million in fiscal 2019. With our growth capabilities to manufacture and ship out finished cannabis products, we increased product sales revenue year over year by 237% to 54.7 million in 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 in the Canadian recreational market, Australian medicinal market, and other new markets we expect to enter in the near term. In Q4 2020, product sales as a percentage of net revenue increased to 90% from 83% in Q3 2020. Q4 2020 was VALEN's first full quarter of provincial sales with a wider range of 2.0 products in categories such as concentrates, vapes, beverages, and oils. We're happy to report that the provincial sales increased 292% from Q3 2020. From these sales, we saw an increase in cannabis 2.0 market share to approximately 4.9% in 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, our key drivers for success have expanded as a manufacturer, and we recognize the meaningful growth potential we have as one of the lowest cost cannabis platforms. Throughout 2021, Balance will focus on growing unit volumes per SKU, increasing cannabis 2.0 and 3.0 products market share, and driving revenues in new consumer verticals with our newly added manufacturing capacity at our K2 facility, and soon our GTA facility and LIFE facility. subject to the transaction closing on or around March 1st, 2021. Additionally, over the course of fiscal 2021, we expect to enter new markets and expand our distribution network, both provincially in Canada and outside of the country in markets such as the U.S., as legal and regulatory frameworks continue to evolve. While it's hard to ignore the challenges of the past year, I am proud of some of the tough decisions we have made and can confidently say that from an operational perspective, the Valence company is going from strength to strength. Our strategic transformation from an extractor to a manufacturer has undeniably been a success, and as we now have one of the most formidable product platforms in the country, 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 in the 2.0 market. An objective we have already almost achieved with certain products and markets, and we look forward to rolling out various new 3.0 products over the course of 2021. I'll turn the call over to Jeff Valos, President of the Valens Company, to dive deeper into our operational achievements in this quarter and give our high-level objectives for 2021. Thank you, Tyler.
spk03: As mentioned earlier, over the course of 2020, Valens established itself as a leader in the Canadian cannabis product manufacturing market. We began shipping bulk distillate in the first quarter and closed out the fiscal year shipping hundreds of thousands of finished products per month in the fourth quarter. Our transition was received well by our strong partnership network, 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 2020, Balance launched some of the first 2.0 product formats available to the market, including cannabis-infused beverages and hydrocarbon-derived crumble in partnership with our brand house partners. And through our vapor chemistry research and innovation, Valence cemented its position as the largest third-party vape manufacturer in Canada. We are pleased by the continued positive consumer response we have seen from our vape products, which have been created in partnership with Verse Cannabis, High Noon, Trek Brands, Burnt, and others. Specifically, in the fourth quarter, we manufactured 62 product SKUs, representing an 11% increase over our third quarter of 2020. The SKUs span four product categories with formats such as vape carts, oils, and new higher-potency beverages, and were manufactured for a number of our customers. Launched subsequent to the fourth quarter were THC drops, which are part of a growing product portfolio we have planned with Burst Cannabis, and a CBD isolate formulation under the Nuance portfolio created specifically for the medical cannabis by Shoppers Channel. Moving forward, we expect continued quarter-over-quarter skew growth, especially as we introduce a host of new formats to the market in the coming quarters. This includes pre-rolls, live resin, batter, gummies, and topicals like bath bombs and relief rubs. More importantly, we are confident that our product quality and consistency is increasingly being recognized by both our partners and provincial retailers as we continue to have success selling our products into the current market. We achieved a major milestone during the fourth quarter of 2020 with the launch of our K2 facility in Kelowna. This additional 42,000 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 in Canada. We are already shipping cannabis products from the facility, including crumble, beverages, THC drops, vapes, and tinctures, and have commissioned the manufacturing of vapes, tinctures, beverages, and bath bombs. Further, this GMP-compliant mass manufacturing facility will also support our international expansion efforts, which are expected to ramp up in 2021. Looking east, construction is nearing completion at our 30,000-square-foot GTA facility, which will leverage Source 5 Island technology and specifically focus on the formulation, co-packing, and manufacturing of cannabis-infused beverages. Earlier this week, we announced the submission of our site evidence package to Health Canada and we are still expecting the receipt of the microprocessing license in the second quarter of 2021. With this facility coming online, we expect to increase our cannabis-infused beverage market share in Canada, which reached approximately 5.2% in Alberta, British Columbia, and Ontario in Q4 2020, according to headset data, despite Valens having only one customer in this category to date. In fiscal 2020, we expanded internationally by entering the Australian market through a distribution agreement with Candlelight. We began to monetize this agreement with shipments of tinctures into the Australian market in the third quarter, and we expect to continue to introduce various products designed for the Australian medicinal market in fiscal 2021. In the fourth quarter, our subsidiary Valens Australia received its wholesale licenses required to sell and supply cannabis-derived products, and in the fourth quarter was awarded its import and export licenses. These two milestones for Valens Australia increased our distribution capabilities for eventual on the ground operations in the country. And we expect the opportunity on Australia to offer a multimillion dollar revenue line this year, with the ability to drive 10s of millions of dollars in three to five years. Looking ahead to 2021, we have several goals that we are working hard towards. Firstly, as the global cannabis market continues to expand, we're looking to enter the US market and other international markets subject to evolving legal and regulatory frameworks. We expect to enter new markets through strategic partnerships and acquisitions with existing market leaders who we believe recognize the value in our platform which focuses on quality, consistency, and innovation. Two, we are also looking to enter new verticals such as the health and wellness market with products such as edibles, beverages, bath bombs, and other innovative 3.0 products. Thirdly, 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. Our goal is to increase sell-through in existing international markets where we already ship products, such as Australia, and globally as we continue to make progress in target markets. As Tyler mentioned earlier, we have made tough but strategic decisions in the fourth quarter to set balance up for success in fiscal 2021. 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 in the market. With over 1 million kilograms of dried cannabis on industry balance sheets and with outdoor growing coming online, the opportunity for balance was clear and we are now best positioned to expand our relationships and grow market share in all product categories. 2020 was the first year of extract-based product sales in Canada. and we are encouraged by the growth we 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 are now beginning to see progress over 1,500 stores with 425 of those in Ontario alone, and in December, extract-based product sales accounted for 30% of sales in Alberta, Ontario, and British Columbia, according to Headset data. Although we are confident in the continued growth growth of extract-based products, we have decided to launch pre-rolls and other dried cannabis-derived products, not only at the request of our partners, but also to increase our total addressable market. Recently, we announced an amendment to our existing standard processing license permitting the sale of dried cannabis products, which we intend to begin to put to use in Q2 2021. With the capabilities to manufacture pre-rolls and the ability to sell dried cannabis products, Valens 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 in this fast-growing product segment. I'll now turn the call over to Everett to walk through the transaction in more detail and dive into our capital markets activity. Everett, please go ahead.
spk08: Thank you, Jeff. I'm very happy to be here today to talk about our progress. As Tyler and Jeff may have made it clear, we have made strides building out our platform, manufacturing a lot of SKUs, significantly expanding our manufacturing capacity, and launching on the international market. We are very proud of all the milestones we've hit 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 edibles manufacturer, Life Food Technologies, which is expected to close on or around March 1st. While analyzing the edibles market and the different capabilities of the industry manufacturers, we recognize that producing edibles is an art, not a science. Not all products are equal. We are confident that the Life platform is the perfect complement to all 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. The success life has had acquiring customers, paired with Valen's current customer list offers tremendous synergies for the platform. We acquired life for Canadian $24.9 million plus approximately a Canadian $17.5 million in consideration, which is subject to achieving certain EBITDA milestones. If the last EBITDA milestones of $10 million is 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 payout is contingent on achieving performance-based milestones. The acquisition is accretive and accelerates our entry into the edibles markets. One of the fastest growing segments in the cannabis 2.0 and 3.0 markets. Our combined industry experience, existing and deep supply chain relationships and unique IP formulations together create one of the leading consumer packaged goods platforms in Canada. Valens expects revenue synergies across the business as the full integration of the Life's platform and partner network will allow for cross-selling to both new, existing, and joint partners. Life holds the capabilities to boost an exciting lineup of product formats, including real fruit gummies, caramel-filled bars, peanut butter cups, hard candies, granola products, and other customized baked goods, also in vegan, no-sugar, low-sugar, and natural ingredient offerings. As mentioned earlier by Jeff, we are now able to provide lower-sugar and no-sugar formats with premium ingredients such as cocoa, cinnamon, coconut, 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. Valens' access to low-cost active ingredients paired with Life's industry-recognized product IP formulations of over 100 recipes strengthened its capabilities to produce higher margin, new-to-market edible formats in 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 while also increasing our ability to capture market share in the rapidly growing product categories. Similar to consumer trends in the US cannabis market, edible products are anticipated to represent over 10% of the sales in the maturing Canadian cannabis market and are currently the fourth largest product category in the Canadian recreational market. Although the edibles market is growing in 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 in markets like the U.S., which we will expect will work to capture market share as they gain traction. Customization is key to keep up with evolving consumer preferences, and Valens, along with the integration of life, has a strong competitive advantage to ensure that its products meet two core consumer needs, quality and consistency. We are currently in 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 K1 and K2 facilities, will serve as 2.0 and 3.0 manufacturing and sales hubs for Life and Valens' combined roster of new and joint customers. Life is currently shipping products for its existing B2B customers, and we expect to be ready to ship edible products for our partners in the next few weeks. Also, subsequent to the quarter, we raised $39.7 million in 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 NEP proceeds for working capital requirements and general corporate purposes. As I'm sure you are aware, it's not just balance that have been securing additional capital. We've been very pleased to see plenty of other financings take place in the cannabis sector, In the past, we have actually turned away business from licensed producers that could not meet our balance sheet requirement, a policy designed to reduce the risk of default within our customer base. Now, with the wave of recent financing in the 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 Bison, CFO, I would like to reiterate our guidance for Q1 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 K2 facility, which is expected to give Valids the ability to increase product and provincial sales, entry into new innovative product verticals, and significantly increase output volume. With that, I'll now turn the call over to Chris Bison to run through the financial results for the fiscal year. Chris, please go ahead.
spk01: Thank you, Everett. Consolidated net revenue for fiscal 2020 increased 44.2% to $83.8 million compared to $58.1 million in fiscal 2019. The increase in fiscal 2020 net revenue was largely driven by the company's cannabis operations. Revenue from this segment increased to 82.1 million compared to 57.8 million in the same period in fiscal 2019. Cannabis operations revenue associated with toll extraction and co-packing decreased 14.3 million or 34.4% as the company continued to execute on its strategy of transitioning away from being strictly a toll processor to becoming a leading product development and manufacturing company. The continued execution of the product development and manufacturing strategy was highlighted by growth in product sales by 38.4 million, or 237%, to 54.7 million, with a scale-up of white label and custom product formulation and manufacturing to include tinctures, base, beverages, crumble, and sourcing bulk winterized and distillate oil for our partner's cannabis 2.0 products. In addition, for fiscal 2020, the company generated $2.8 million in revenue from analytical testing through the company's lab versus $0.9 million in the same period the previous year, including $1.1 million in intercompany testing revenue as the volume of third-party tests increased year over year. Consolidated net revenue in the fourth quarter of fiscal 2020 decreased 47.6% to $16 million compared to $30.6 million in the same period of fiscal 2019. The decrease in revenues in the fourth quarter was driven by a reduction in cannabis operations revenue to $15.6 million compared to $30.5 million in the same period in fiscal 2019. cannabis operations revenue associated with toll extraction and co-packing decreased 21.3 million or 95.6% as the company continued to execute on its product development and manufacturing strategy as discussed previously. The continued execution of the product development and manufacturing strategy was highlighted in the increase in product sales by 6.2 million or, sorry, 75.9% with a scale-up of white label and custom product formulation and manufacturing to include tinctures, vase, beverages, crumble, in addition to sourcing bulk winterized and distillate oil for our partner's cannabis 2.0 products. The growth in product sales was tempered by continued price compression realized in the sale of bulk winterized and distillate oil. Quarter-over-quarter net revenue decreased 2.1 million, or 1%. 11.5% to $16 million compared to $18.1 million in the previous quarter ended August 31, 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 in the previous quarter. Cannabis operations revenue associated with toll extraction and co-packing decreased 1.7 million or 62.6% due to continued reduced shipments of biomass from extraction partners. The company also realized a 0.6 million or 4% decrease in product sales due to continued compression in pricing in bulk winterized and distilled oils, which is partially offset by continued growth in provincial product sales of 292% over the prior quarter as the company continued to execute on its transition away from a focus on toll processing to product development and manufacturing. Various reintroduced provincial COVID-19 restrictions to cannabis storefronts also negatively impacted revenue in the quarter and led to a delay in 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 $0.7 million in revenue from analytical testing through the company's lab, compared to $0.7 million in the previous quarter ended August 31, 2020, including $0.3 million in intercompany testing revenue as the volume of third-party tests completed by the lab remained strong and consistent quarter over quarter. In the fourth quarter, we extracted 10,311 kilograms of biomass, a 28% increase over the prior quarter. using input from our LP partners for toll processing, as well as balance-owned inventory for 2.0 products. In addition, the company utilized its bulk oil to manufacture 62 products used in the quarter, an increase of 11% over the prior quarter. Gross margin for fiscal 2020 decreased to $25.7 million compared to $41.4 million in the same period in fiscal 2019. The decrease in gross margin was due to the company's shift in focus towards driving greater white label and custom manufacturing product volumes and sales. In addition, margins were impacted by compression in pricing in bulk winterized and distillate oil, which resulted in an inventory valuation allowance of $9.3 million. The company also recorded an owner's contract provision of $1.8 million related to two purchase commitments in which the contracted value exceeded current market rates. In the fourth quarter of 2020, the company generated a negative gross margin of $6 million compared to a positive gross margin of $22.6 million in the same period of 2019, and $7.3 million in the prior quarter ended August 31, 2020. Gross margins in 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 in inventory pricing, resulting in an inventory impairment on certain lots of bulk, oil, and biomass. Operating expenses for the year ended November 30th, 2020 increased 40.2% to 46.3 million compared to the same period in 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 in the fourth quarter of 2019. The increase in operating expenses was largely driven by higher depreciation and amortization expenses associated with additional equipment put into service, the source licensing agreement, and higher salaries and wages as the company continues to build out its team to execute on its product development and manufacturing strategy. We 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 47.3% in the same period in 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 in fiscal 2020. We are one of the few companies in the cannabis space that has been able to achieve this level of financial performance for our shareholders. In the fourth quarter, it was determined that the balance term loan no longer provided the flexibility required to support the business or management strategic objectives. Accordingly, on November 30, 2020, the company made a voluntary prepayment of $9.5 million, reducing the secured term loan to $9.5 million. The credit facility was also amended to remove the accordion feature that previously allowed the company to increase the aggregate commitment under the credit facility by up to $10 million. To amend certain financial... covenants, including the senior leverage ratio and fixed charge coverage ratio and 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. The addition of a minimum liquidity covenant of $5 million until June 30th, 2021. The addition of a fourth tier of pricing resulting in interest on the term loan of prime plus 2% to prime plus 2.75% depending on certain financial covenants. And a waiver was received from the lender relating to the fourth quarter of 2020 financial covenants. Values incurred deferred financing costs of $57,000 to secure the amendment. These costs are included in the value of the term loan and amortized for the remaining life of the loan. As of November 30, 2020, the applicable interest rate on the term loan was 4%. The company continues to closely monitor inventory levels and balances outstanding with our partners to ensure a strong financial balance sheet position. As of November 30, 2020, the company has $11.1 million in trade accounts receivable outstanding over 60 days, and the expected loss rate for overdue balances is estimated to be $0.6 million based on subsequent collections and various discussions with associated customers and analysis of credit worthiness. In addition, the company has subsequently collected, has trade accounts payable standing with 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 warrant. Each full share purchase 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 in cash as of November 30th, 2020, compared to $49.9 million as of November 30th, 2019. Ballant's current cash balance of approximately $50 million includes gross proceeds of $39.7 million from the bought deal financing that closed subsequent to year end. With that, I'll now turn the call over to the operator to open the line for the question and answer sessions.
spk05: Thank you. We'll now conduct a 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 in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset, pressing star one. We ask you to limit yourself to two questions initially so that we have time to speak with as many of you as possible. Once again, That is starting to ask a question. One moment, please, while we poll for questions. Our first question is coming from David Kudeko from ATB Capital Markets. Your line is now live.
spk04: Hi. Good morning. Congratulations on the quarter, all, and thanks for taking my question. My first question is really related to your international and specifically U.S. strategy. I know we've talked about this in the past. Can you maybe just give us a little bit more detail about what you're thinking and any opportunities you see coming your way in the near term?
spk03: Thanks. Sure. Thanks, David. And maybe I'll address this one. As we, you know, as we said on previous calls 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 in the White House at the end of the year in 2020 in November, basically, it started the clock ticking in our mind on the opportunity coming to the forefront in the U.S. And given that clock ticking, we continue to review all of the opportunities that we had in our pipeline in the U.S., continue those conversations, accelerated those conversations in many instances. in preparation for launch into the US. 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 balance in the US.
spk04: Okay, thanks. That's very helpful. I want to switch gears a little bit here. So we just did some research, published it last night, 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 in Canada as of October from 2020. So, I'm wondering with Valen's recent acquisition of Life Food Technologies, if you can maybe give a little bit of insight here, because I know, you know, with edibles, the buildup as per Health Canada, is that maybe specific to certain product categories within edibles, is it beverages, or more specifically with life, which is what life is doing is more in the gummy category, and are you concerned with these data? Thanks. Everett, why don't you take this one?
spk08: Sure, David, thank you for the question, and great data to chat about. So if you look at the edibles category right now, when you see that inventory data, if you look at majority of that, that's made up by chocolates and beverages. And that's really just of the initial companies not looking at what actually consumers want. One thing we've looked at is being a data-driven approach. And when you look at the U.S. marketplace in the edibles category, gummies is over 70% of 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 in the edible space, but comparatively to everyone. So this is a market that even in Alberta, from a reference point, went from 3.7% of the market in November to 4.2% in December. And if you look at the U.S. market, it's around 10% of the market. And I continue to see this as one of the biggest growth areas. But I think that was a mismanagement of what products versus what consumers wanted. We're getting a lot of great feedback on gummies. And as we mentioned in the prepared comments, look forward to those, seeing those in the market in the near term. Okay, great.
spk04: And if I can just squeeze one really quick one in here. I just want to focus on rare cannabinoids for a sec. I know for the Valens team, this is something that you're actively looking into. And as we see biosynthesis take off in the space, you know, we see other LPs with partnerships, for example, Organigram with Hyacinth Biologicals. I'm wondering, does Valens see opportunity for rare cannabinoids? And if so, is it something that you think biosynthesis plays a role in, or is it more coming from the plant? Thanks.
spk03: Sure, maybe I'll let Tyler address this one. Tyler?
spk09: Yeah, so a couple things, David. I'd like to actually circle back first to your last question about the oversaturation in edibles. And I want to tie it to what's going on in the flour space. There's a lot of inferior flour that isn't selling. It's the same thing with edibles. There's a lot of inferior edibles. And even if you look at the recalls that a lot of these companies have done, there's just inferior products that they didn't have a well-thought-out plan or strategy. A lot of companies aren't listening to what the consumer wants. And I think that's the biggest fault. But getting into rare cannabinoids, that is 100% where we're going. And you'll see products come out in the latter half of the year, whether it's CBN, CBG, you'll see some NPN numbers come out of us with different products, whether it's sweep aid or different things like that. But biosynthetics will... play a role in time. Right now, 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'll take place. But we do rare cannabinoids. We don't need to wait for biosynthetic. You'll see products this year from the Valens team. And I think we're one of the only platforms out there that can do it sustainably and cost effective. Again, when you really look at our 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 it at the same, I would say, price that we can. So you will absolutely see rare cannabinoids leak out in our product portfolio, not only in domestic Canada, but internationally as well.
spk04: Okay. Thanks, guys, for that. Very informative. Congrats on the quarter, and I'll hop back to the queue.
spk05: Thank you. Our next question today is coming from Neil Gilmer from Haywood Security. Your line is now live.
spk07: Good morning, guys. Appreciate the questions here. First, maybe I'll start off, Everett, your prepared comments. You've talked about a whole list of products that you expect to bring to market through the acquisition of Life. I'm just wondering, can you give us a sense as to sort of, you know, how that will play out over the course of 2021? Are we talking about, you know, a whole bunch of near term product launches? Or is that going to be sort of spread out over the course of this year?
spk08: So, Neil, I would say it's near-term product launches. What we're focusing on first is the gummies category. But you're going to see quickly more and more innovative products come out right after that. And we're going to keep that feather in our cap and keep that confidential. But I think what I'd say is I'd look forward to some of those new products or customized products that will be coming out over the next few quarters.
spk07: Okay, thanks. Appreciate that. Maybe the other one is sort of like a housekeeping item. Obviously, I think you took your lumps with the inventory write-down that you've announced and recorded in this quarter. So, is it, you know, fair for us to assume that, you know, go forward, you know, you're not expecting at this point in time any further inventory write-downs? You sort of cleaned house with that and then, you know, you've got the securing of, you know, low-cost biomass going forward so that... we should expect sort of no more write downs, but also sort of a scale up in your gross margin profile.
spk03: Chris, why don't you address this one?
spk01: Absolutely. So, yeah, I would say as we kind of worked through last quarter and as we have in 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, in the short term, we don't see any more issues from an inventory impairment standpoint. And we're definitely taking a very close look at all of our purchasing commitments to make sure that they're 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 changes in pricing. So I guess to directly answer your question, no, we don't see any issues with additional requirements in the short term.
spk09: Yeah, Neil Tyler here. We won't have any, but you can mark my words right now that the rest of the sector is coming. So I know we took our lumps, but we got out in front of it. We did it early. There's absolutely zero chance you're going to see more of those leak out over the next fiscal year or so. Again, just to hammer that home, it was completely strategic. We did it on purpose, and you will see it affect other people coming very, very soon. So we stand behind the decision we had, and it will not be a regular thing, or as of right now, it's not even on our radar of ever doing that again.
spk07: Okay, great. Thanks very much, guys. Appreciate it.
spk05: Thank you. Our next question today is coming from Andrew from Stiefel. Your line is now live.
spk02: Hi, thank you for taking my questions. I wanted to talk a little bit about your ongoing product launches and, you know, continuing on your existing comments and answers to existing questions here. So, you know, you guys already mentioned you have, you know, 5% of the market in 2.0 products in those provinces. But with the, you know, with the new product launches coming, your GTA facility coming online, the acquisition of Life Closing. You know, you also talked about, you know, an overall goal of touching 20% of 2.0 products. Well, could you give any kind of goalposts and maybe timing, if possible, of what you're thinking about achieving in the edibles market and maybe in the beverage market in particular since you have a dedicated facility for that?
spk03: Sure. Maybe I'll start with this one, Andrew. Lots to unpack there. I'd say from a goalpost perspective, yeah, we think that 20% per product category is a reasonable target for us to strive for. In the short term, I'd say what we're focusing on is execution, right? So we're focusing on 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 5% market share that we have today and will drive that up, you know, over the course of the coming quarters. It's a little challenging to say based on market stats, et cetera, how quickly that's going to happen. But obviously, as we continue to leverage our K2 facility and drive volumes through there, we feel very capable of being able to service that kind of growth and that market opportunity in the coming quarters here. From a life perspective, and the product category that we see there, we're very excited about the market opportunity for those back product. And put was a previous question around, you know, the launch of products and when some of those new style products are coming online. You know, 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 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 that 20% sooner rather than later out of the life platform. Obviously, we want to make sure that we're continuing to leverage the skillset that we're getting in life. And that means, you know, additional new product launches, new product formats, et cetera. And that will hit the market over 2021 at strategic times, but lots and lots of opportunity for us to grab that market share from the existing companies.
spk08: And Andrew, maybe just to expand on that ever here, that 4.9% market share that we advertise, that's majority-based, right? That's what we focused on last year in that K1 facility because we're constrained. In Q2, now you're going to see us launch not only bath bombs, but innovative gummies and more concentrated 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 obviously even beat that in quarters to come.
spk03: And sorry, I also sort of addressed on the GTA facility, obviously coming online. later this year. We're very, very encouraged by the response that we're getting from the Summit 10 beverage, which is the higher potency beverage that we launched. That's what's really out there garnering the majority of the market share for us in the beverage category. You know, we have a number of ongoing conversations preparing for the onboarding of the Palmy's facility later this year. It will not be a standing start in that facility in terms of the partners that we're working with and our ability to launch additional products. So from that perspective as well, we look forward to building on that current market share on beverages when funding comes online.
spk02: Really appreciate the detailed answer, guys. And maybe just switching gears to your geographic expansion. Obviously, there's lots of opportunity in terms of white space for that. You know, you've already talked about Quebec and Manitoba. You know, wondering, first off, kind of a two-part question, you know, what kind of opportunities do you see in Quebec considering, you know, the restrictions and limitations on 2.0 products there? And, you know, do you see any kind of goal to reach, you know, the rest of the country?
spk03: Tyler, why don't you take this one?
spk09: Yeah, happy to. So multiple things to unwind in that one as well. So first of all, in Quebec, 2.0 products are only banned with the SQDC. There is a way around them going through a medical platform, which we're currently exploring how do we do that and when do we do it. But the big thing for Quebec too is innovation. When you really look at the pipeline of products 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. So when you bring an edible to market, whether it's a protein ball, call it like an almond joy, there's ways to get in there as long as it's not appealing. And with the acquisition of Life, we now have that ability and we should have the first edible platform in Quebec, in the SQDC, and then also coming over the end with all of our 2.0 products into medical patients in Quebec. So there's multiple. But what you'll see throughout kind of 2021 is national distribution. So The next key one for us is Quebec, followed by Manitoba. After that, it'll be the Maritimes. But what we're also going to do is double down on some of our key provinces right now. Because we have so many new product verticals coming in the white space, what you're going to see is also new listings used in different provinces as well. So the best way to think about it is more products, more distribution, more revenue in all of Canada, not just kind of Quebec and Manitoba coming.
spk08: And, Andrew, maybe to expand on that too, what's interesting about the Quebec market with some of the restrictions, you see an 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 continue to see growth there outsized compared to other provinces because of those restrictions. I think the beverage market is particularly interesting.
spk02: Thanks again for the detailed answer. Definitely looking like a lot of excitement coming in this fiscal year. If I could just ask one more housekeeping question. You know, the 10 tons of biomass process, could you just remind us what exactly that includes?
spk03: Chris, why don't you take this one?
spk01: So the processing that we did this quarter was a mix of tolling that we did for a couple of our partners, as well as the extraction of certain strains of product that was specifically destined for either our 2.0 product portfolio or for partners that were looking for either bulk winterized or distillate oil that we were able to manufacture for them to get out to market.
spk02: All right, great. Thanks for taking my questions, guys. I'm looking forward to seeing what's in store for fiscal 21.
spk05: Thank you. Our next question today is coming from John Chu from Desjardins Capital Markets. Your line is now live.
spk06: Hi, good morning. Maybe just some details on the life acquisition. You've had about a month to look under the hood now, and you had talked about some synergies, timing for when they can be contributing from an EBITDA perspective. which I think both were fiscal 21. So anything in terms of accelerating some of those thoughts and anything else more positive than what you thought originally, now that you've had more time to look to see what's there?
spk03: Thanks, Sean. Maybe I'll start with this one. So obviously, when we were reviewing the life opportunity and working with the team there, it was actually much more than a month in the work we did there. You know, we spend a lot of time reviewing a number of opportunities, working with the life team, making sure culture match, et cetera. So, you know, lots of time to look under the hood there. But as we're looking into 2021, you know, as we get more and more integrated and develop 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 team, logistical infrastructure, et cetera, to making sure that the products that are leaving there are leaving there effectively and efficiently. That's easy right off the bat opportunity for us. But then also in terms of integrating the customer platforms and focusing on driving volumes through those relationships, some of which we're very strong with, some of which they're very strong with, some of which where there's overlap. So in terms of timing on those synergies, you know, for us, there's a lot of low-hanging fruit that we're accessing right away, but it's a little too early for us to sort of get a little bit more granular on that, but still think 2021 is a reasonable opportunity for us to start realizing those.
spk06: Okay, great. And then I'm just curious, since you've made that announcement, the acquisition, I know you talked about cross-selling opportunities. Has any materialized since that announcement or these discussions and whatnot? I'm just curious whether or not that's brought in a lot more calls or even finalized a couple of agreements that were in early stages discussion, but now accelerated into something more detailed than that.
spk03: 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 have come to us for opportunities Yes, we're very excited about how we've been able to expand portfolios with some of our existing customers to include edibles and put additional proposals in front of them, and also ability to help the life team in terms of bringing some of their ongoing conversations to life and toward then. So the short answer, yes.
spk09: Okay. Yeah, John, just one quick thing. One thing I would like to reiterate with that. It's given us an opportunity to sit at the table with some of the people that we didn't have access to, whether they had a deal with one of our competitors as far as the extractors go. So yes, there are tons of synergies, but they go much further than just the edible line. Now we're cross-selling vapes, beverages, concentrates, the entire portfolio, and we're truly becoming the one-stop shop for cannabis derivatives or manufacturing. So whether it's analytical testing all the way down to final distribution right to the provinces, the entire ecosystem is benefiting from the acquisition.
spk06: Okay, perfect. And then last question would just be, with that recent license amendment to now be able to be involved on the pre-rose and flower, I find that to be a really interesting point considering that's 60% of the addressable market currently, or maybe even a little bit higher than that. So how soon can we start to see some of those product offerings hitting the marketplace?
spk03: Tyler, why don't you take this one?
spk09: Yeah, happy to. So Got to be careful what I say here, but obviously it's a huge opportunity with pre-rolls and flower being 61.8% of the Canadian market alone. And the one good thing that we have the ability to do is acquire biomass we want. So if you look at some of our industry peers that cultivate, they're stuck to the genetics they're cultivating. So if a harvest goes sideways on them, they have to still use that material. So we can get a little bit more creative than them. So we can buy terpene profiles. We can buy flower genetics. We can buy anything we want. So I would say it would make sense for us to get into not only pre-rolls but whole flour with it being such a market opportunity right now and with some of our partners asking for it. Again, some of them are going asset-light, which we've seen. Some of them are selling off grow assets. And because we're the largest purchaser of biomass, we can get it cheaper than anyone else. So I would say shorter answer is if the customers want it or the consumers want it, we'll deliver regardless of what it is. At the end of the day, we're a manufacturer and we'll deliver. But there's a massive opportunity in not only pre-rolls, flour as well.
spk03: And, John, if you think about what pre-rolls and flour do in terms of driving interest into a brand, So those customers that would have had just a derivative product portfolio, you know, giving them the option to now also on the shelves to drive through pre-rolls and or flour allows us to get much more synergy also in those product offerings and brand awareness in the market.
spk06: And I suppose it goes the other way. If you have a great vape brand and now that same brand is now offering a pre-roll or dry flour, it can work the other way too, right? Exactly, exactly.
spk03: So it's all about what our customers are asking for when they're looking at their portfolios and what we're able to get.
spk06: Okay, thank you very much. Very helpful.
spk05: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
spk09: Perfect. First of all, I just want to thank everybody for coming today. Obviously, 2020 was a challenging year for everybody in the space. There was headwinds and not only for this space as a whole. Obviously, our company, we were restrained with COVID. We've also been restrained with space. And now that we're operational at K2 and turning new products and new verticals for new revenue opportunities, we're extremely confident in where we're going. Again, I think we predicted the future of our organization very clearly. We bypassed cultivation, we went into extraction, and now we're bypassing extraction, getting into not only manufacturing but end-to-end cannabis solutions. So we're confident, we're excited, and we're here 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'd like to call myself a purebred cannabis individual. I think I know cannabis 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, the more synergies I see, the more ecosystems we get into. And I know there's an oversaturation in flour, and I know there's an oversaturation in inferior chocolates. But when we can bring innovative products tied to IP and technology that no one else can do, whether it's a spicy gummy wrapped in salt, like if you look at a habanero mango, or if you look at a spicy margarita gummy with actual jalapeno in it wrapped in, call it that, orange salt. 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 call one of the top brands in Canada right now, they're making it in a grow room. So when you look at process flow, if you look at efficiencies, you look at IP, again, we're going to blow people out of the water with what we're bringing to the table. Another thing I really want to hammer home, I know a lot of people call us the lowest cost producer or one of the lowest costs. We are the lowest cost. We can buy biomass cheaper than anyone else can buy it for because we're 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 terpene profiles. We're buying genetics. We're buying strains. We're buying with purpose rather than just burning through our inventories. The last thing I really want to hit home right now is the U.S. It's not a matter of if, it's a matter of when. And we're going in as an ally, not an enemy. And what we've done in Canada, we'll bring into the U.S. And obviously, there's a bigger market opportunity down there. So in short order, you will see us maneuver. And again, we'll go as an ally, not an enemy. And then one other thing too, now that some of our industry partners are well capitalized with the current round of financing, there's a new pipeline of conversations that we've entered in to not only bring in new customers, but also move on from some. We're getting a little bit more strategic and in time, you'll see us move away from cannabis partners to CPG relationships. So now that people have money, we're willing to sit at the table and talk to them, but lots of changes are happening in balance and come 2022, we're gonna be a very different company. 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.
spk05: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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