Cronos Group (TSX:CRON) Q4 2020 Earnings Call

0:00 Good morning. My name is Ursula, and I will be your conference operator today. I would like to welcome everyone to the Kronos Group's 2020 Fourth Quarter and Full Year Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laidlaw, Ambassador Relations. Please go ahead. Thank you, Ursula, and thank you for joining us today to review Kronos Group's 2020 Fourth Quarter and Full Year Financial and Business Performance. Today, I am joined by our President and CEO, Kurt Schmidt. our CFO, Jerry Barbato, our Executive Chairman, Mike Gorenstein, and our EVP of Legal and Regulatory Affairs, Su Ming Shun. Kronos Group issued a news release announcing these financial results this morning, which are filed on our EDGAR and CDAR profiles. This information, as well as the prepared remarks, will also be posted on our website under Investor Relations. Before I turn the call over to Kurt, I would like to remind you that our discussion during this conference call will include forward-looking statements that are based on assumptions that are subject to risks, Subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of the factors described in the cautionary statement and risk factors included in the company's earnings release and regulatory filings, including the company's most recent annual report on Form 10-10 filed today, by which any forward-looking statements made during this call are qualified in their entirety.

1:20 In addition, during this call, certain financial measures may be discussed that are not recognized under the U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting, and evaluating business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release, Furnished to the SEC, which is available in the press room section of our website, thechronosgroup.com. These non-GAAP measures may not be comparable to measures used by other issuers. I'd also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or minor technical issues during this call. We thank you in advance for your patience and understanding.

2:06 We will now make prepared remarks, and then we'll move to a question and answer session. With that, I'll pass it over to Kronos Group's President and CEO, Kurt Schmidt. Thank you, Shay. As we turn the page to 2021 and reflect on 2020, the accomplishments the Kronos team achieved, especially given the complex operating environment, were impressive. I'm incredibly excited to see what we can accomplish in 2021 and beyond. I want to take this moment to recognize and thank our global team for persevering through the challenges the world faced in 2020 and continue to face in 2021. I'm going to start this morning's call by reflecting on a few highlights from 2020 and to discuss our strategy to win in 2021.

2:52 Since joining Kronos six months ago, I've made it my focus to help accelerate growth and plan for our future strategy. With the help of Mike and our passionate senior leadership team, we've honed in on the areas we want to concentrate on as an organization. In 2021, we plan to focus on four main pillars. to drive business results and growth across the organization. The first pillar is to ensure we're continuing to build a winning team. I plan on supporting our employee base by fostering collaborative, performance-focused culture that strives to win. We know that this burgeoning industry requires talented and driven employees, and I plan to continue to instill a spirit of winning and collaboration to enable our teams to execute as we grow in existing markets and for new markets support our brands and continue our R&D work in 2021.

3:47 The second pillar is having a keen focus on building disruptive technology and innovation, which has always been a core strategy priority for Kronos. We continue to believe that investing in innovation and breakthrough research will unlock the potential of cannabis and provide us with a long term competitive advantage. The third pillar, as I mentioned on our previous call, is to build great cannabis brands. I'm a marketer at my core, and in 2021, we plan to continue to innovate with our brands with the goal of meeting the needs and exceeding the expectations of our consumers. I'm incredibly proud of how we are developing our brands across our markets. We'll be focused on robust marketing strategies and new retail partnerships to reach more consumers in 2021.

4:34 The fourth pillar is to strengthen our ability to compete. which is supported by the first three pillars. We will focus on building competitive advantage through R&D capabilities, strategically placed global infrastructure, and engaging in the legislative process in the markets that matter to us. This includes sharpening our strategic focus in Canada, Israel, and the U.S. to ensure we're driving long-term value and preparing the company for new opportunities as they arise in 2021 and beyond. It was a busy year. But we're excited to continue delivering our strategy and drive long-term value for shareholders. And 2021 is also shaping up to be an important time for U.S. cannabis legislation. I want to share a few thoughts on legalization efforts and how Kronos is taking part to ensure that we have a seat at the table.

5:26 Legalization in various forms continues to spread across U.S., with the vast majority of Americans now living in states where cannabis has been legalized in some form. whether medical or adult use or both. As many Americans express support for cannabis legalization in some form this past election, momentum continues to build at both the state and federal level. We believe cannabis should be legal at the federal level and that a comprehensive and reasonable federal regulatory framework should be put in place for the industry. We think the framework should create product and safety standards for the industry, and address critical societal considerations such as youth access prevention and social justice issues. As part of our focus and our participation in these efforts, it was announced a few weeks ago that Kronos is joining industry colleagues as a founding member of the U.S. Cannabis Council or USCC.

6:25 With representation from leading cannabis and social justice organizations in North America, the USCC will be the premier trade association for cannabis thought leadership, innovation, and social responsibility in the US. We look forward to partnering with our industry peers to advance cannabis legalization in the US. As previously discussed, Mike Gorenstein's priority in his role as executive chairman is looking at US opportunities and the best way for us to participate. He has commissioned a team internally to analyze the various opportunities in the market and different potential strategies for us there. We are confident that our balance sheet, existing CBD infrastructure and our strategic investor, we will be a best in class cannabis company in the US.

7:16 Jerry will focus on the fourth quarter results, but I wanted to take a moment to highlight the annual performance. In fiscal year 2020, on a consolidated basis, we increased revenue 97% year over year to 46.7 million. with strong performance across all regions. Our rest of world segment recorded net revenue in fiscal year 2020 of $37.2 million, representing an 83% increase year-over-year. And lastly, the United States segment, in its first full year of operations under the Kronos umbrella, recorded net revenue fiscal year 2020 of $9.5 million. After a modest third quarter, the U.S. team came back strong in the fourth quarter and executed.

8:02 Although our USCBD business continues to navigate turbulent times due to retail closures and other impacts due to the COVID-19 pandemic, we are confident the team will continue to successfully operate in this environment. A critical component to our USCBD business results with the successful launch of Happy Dance, our new skincare and personal care brand in partnership with Kristen Bell. Today we announce an exciting expansion for Happy Days by securing its first major U.S. retailer, Ulta Beauty, making the brand's first brick-and-mortar retail rollout. Happy Dance features an easy-to-use line of clean and cruelty-free hemp-derived CBD bath and body products. The full collection, expected to launch in the coming weeks on Ulta.com, follows shortly thereafter in store at over 550 Ulta locations across the U.S. We're incredibly excited to be partnering with Ulta and look forward to bringing the brand to a broad audience through Ulta's retail network. Broadening our distribution capability is an important next step in the evolution of this brand, which will be followed by additional product launches to expand variety for our consumers.

9:16 In June 4, Lord Jones, our prestige position U.S. CBD grant, launched a new whole plant formula CBD lip balm, which has been well received by consumers. Introducing entry-level products to the Lord Jones portfolio improves the accessibility of the brand and increases trial. The Lord Jones Acid Mantle Repair Cream was awarded the prestigious Refinery29 Beauty Award in Q4 2020. The self-care and beauty segment offers a respite from daily stressors, and we are fortunate to be able to continue to bring high-quality products to consumers in the U.S. during this time. We plan to continue to expand our innovative product portfolio in 2021. In Canada, we continue to broaden our distribution across the retail landscape.

10:05 We let consumer insights drive our decision-making while leveraging our robust R&D and innovation teams to bring products to market that consumers desire. Our innovation funnel is fast at the top, but it's our consumer insights that enable us to focus on what the consumers want today while keeping an eye on what they may want in the future. To that point, As segments of the industry have grown and consumer adoption increases, we are excited to tackle these additional opportunities with innovative products in 2021. Our spinach brand continues to perform well. In this past quarter, spinach's dancehall strength was awarded Best Hybrid Dry Flower of the Year by Kind Magazine. This award is especially appreciated as bud tenders across our Canadian retail network nominated us. Although COVID-19 limits our ability to engage face-to-face, retail marketing opportunities will be an area of focus for our adult-use brands, and we are excited to meet more consumers in retail spaces in 2021 as our marketing strategies are expected to focus heavily on this channel.

11:12 Moving to the Israeli medical market, we are excited to see the market continue to expand, now with roughly 80,000 medical patients in the country. Kronos Israel began selling Peace Naturals branded oil along with the previous launched flower products to the medical patients. These successful launches have enabled Kronos Israel to quickly build their distribution network and brand awareness through a growing network of pharmacies. In February 2021, Kronos Israel signed a distribution agreement with the largest pharmacy chain in Israel, Superpharm, which has over 250 branches in Israel. As we grow our share, the size of the pie is also expanding, with the number of pharmacies in Israel wanting to carry medical cannabis products increasing, which presents a great growth opportunity for the industry.

12:04 The Peace Natural brand has already been recognized by the Israeli Marketing Association for its successful marketing strategy at launch in 2020 to generate exposure for the Peace Natural brand to patients. as well as for differentiating and highlighting the brand's high quality amongst its competitors. We're incredibly pleased to see the sales volume and resonance amongst patients in this region. A critical component to our R&D and innovation initiatives continues to be our biosynthesis work taking place at Kronos Fermentation in Winnipeg in partnership with Geco Bioworks. Following the successful fermentation of CBG in our Winnipeg R&D labs at research scale, and the second quarter of 2020, the team has continued to optimize for scale and downstream processing and preparation for commercialization.

12:56 Kronos is prioritizing rare cannabinoids such as CBG over common ones such as THC and CBD and plans to sequence commercial production and subsequent product launches based off this approach. Canada is an important platform for us to develop innovative products to be ready for other markets We look forward to leveraging our R&D, innovation, and consumer insights to drive the creation of differentiated products through consumer learnings as part of the commercialization plan. On the innovation side, we believe providing rare cannabinoids at a meaningful scale could elevate and differentiate the consumer experience.

13:41 We look forward to leveraging current insights and building future ones on consumer acceptance of these innovative products over time. In short, this past quarter is a summation of the hard work our teams have put into the past year plus. As we look to 2021, I'm incredibly excited about the teams we have supporting our brands and all the R&D, innovation, and exciting plans we have in store. With that, I'll turn the call over to our CFO, Jerry Barbato. Jerry? Thanks, Kurt, and good morning, everyone. Before discussing our financial performance, allow me to briefly touch on a change in the metrics we are reporting on. We are shifting away from reporting segment-level operating income results in favor of reporting adjusted EBITDA at the segment level.

14:32 We believe this is a more representative view of our business and aids in management's review of performance and capital allocations. We also hope it further helps the investment community evaluate our business performance. We review these results on an adjusted basis, which excludes certain non-cash items that may be highly variable, unusual, or infrequent and can distort underlying business trends and results. For more details regarding our calculation of adjusted EBITDA, please refer to our earnings press release, which is available on our website, thechronosgroup.com, on the investors page. Turning to our financial results, the company reported consolidated net revenue in the fourth quarter of 2020 of $17 million, a 133% increase from the prior year period. Revenue growth year-over-year was primarily driven by the growth in the adult-use Canadian cannabis market, sales in the Israeli medical market, and growth in our U.S. hemp-derived CBD business, partially offset by non-recurring wholesale revenue and the Canadian market in the fourth quarter of 2019 and strategic price reductions on various adult-use cannabis products in Canada in the fourth quarter of 2020.

15:49 Consolidated gross loss for the fourth quarter of 2020 was $14.9 million, a $5.2 million decrease in losses from the fourth quarter of 2019. The improvement versus prior year was primarily driven by lower inventory write-downs and increased gross profit contribution from the U.S. segment. This was offset by an increase in cost of sales primarily driven by third-party purchase flour and a decline in wholesale sales in the Canadian market. We may incur further inventory write-downs due to pricing pressures in the marketplace. Adjusted EBITDA loss for the fourth quarter of 2020 was $53.1 million, representing a $1.5 million increase in losses from the fourth quarter of 2019.

16:36 The increase in losses year-over-year was primarily driven by increased general and administrative expenses and an increase in R&D spending. Turning to our reporting segments, in the Rest of Worlds segment, we reported net revenue in the fourth quarter of 2020 of $13.5 million, a 193% increase from the prior year period. Revenue growth year-over-year was primarily driven by the continued growth in the adult-use Canadian cannabis market, and growth in the Israeli medical cannabis market, partially offset by non-recurring wholesale revenue in the Canadian market in the fourth quarter of 2019 and strategic price reductions on various adult use products in Canada in the fourth quarter of 2020.

17:23 Gross loss for the rest of the world segment for the fourth quarter of 2020 was $16.7 million, a $4.8 million decrease in losses from the fourth quarter of 2019. The improvement year-over-year was primarily driven by lower inventory write-downs, offset by an increase in cost of sales, primarily driven by third-party flower purchases and a decline in wholesale sales in the Canadian market. As we work to create an efficient global supply chain through 2021 and beyond for our rest-of-world segment, we anticipate that gross margins will continue to fluctuate as price and mix change from quarter to quarter. Adjusted EBITDA loss in the rest of the world segment for the fourth quarter of 2020 was $36.4 million, representing an $11 million decrease in losses from the fourth quarter of 2019.

18:15 The improvement was primarily driven by a decline in gross loss, reduced sales and marketing costs, and a decline in general and administrative expenses. Turning to the U.S. segment, we reported net revenue in the fourth quarter of 2020 of $3.5 million, a 30% increase from the prior year period. Revenue growth year-over-year was primarily driven by the growth in existing product lines, introduction of new hemp-derived CBD products, and strength in our direct-to-consumer business driven by holiday promotions. Gross profit for the U.S. segment for the fourth quarter of 2020 was $1.8 million, a $400,000 increase from the fourth quarter of 2019. Adjusted EBITDA loss in the U.S. segment for the fourth quarter of 2020 was $11.8 million, representing a $10.6 million increase in losses from the fourth quarter of 2019.

19:10 The increase in losses was primarily driven by increased sales and marketing costs in relation to brand development and increased general and administrative expenses. Overall, Kronos Group reported a decrease in net income versus the prior year period primarily due to the change in fair value of the financial derivative liability associated with Altria's investments. In the fourth quarter of 2020, the company recorded a non-cash loss of $53.5 million related to the change in fair value of these financial derivative liabilities. Kronos continues to expect there may be significant reported earnings volatility, primarily driven by the fair value quarterly adjustments related to the movement of Kronos Group's stock price.

20:02 Turning to the balance sheet, The company ended the quarter with approximately $1.3 billion in cash and short-term investments, which held relatively flat from the third quarter of 2020. Capital expenditures for the quarter were $11 million. This spending includes investments related to Kronos Fermentation, the Peace Naturals Campus, our Israeli facility, and our new ERP system. We remain committed to deploying capital in a disciplined manner and only in ways that align with our strategic priorities. I continue to be encouraged by the work our teams are doing globally. With that, I'll turn it over to Kurt for closing remarks before Q&A. Thank you, Jerry. What's clear is that our products are winning with consumers and our brands continue to resonate in the markets we operate.

20:50 This past year has offered opportunities to grow despite the unprecedented effects of the pandemic and we're incredibly motivated to continue that growth in 2021. With a focus on continuing to build successful teams, Perfecting Regional Strategies, supporting our breakthrough technologies and R&D projects, and building leading brands. I know we can continue to win as an organization and lead the global cannabis industry into its next phase of growth. With our strong balance sheet, a best-in-class strategic partner, and a team that is built to win, I'm excited about the opportunity to lead Kronos in the next chapter. With that, let's now open it up for the line of questions. If you would like to ask a question, please press star, then the number one on your telephone.

21:38 You will be allowed one question and one follow-up question. Your first question comes from Andrew Carter with Stiefel. Hey, thanks. Good morning. I wanted to start it off with asking about the gross margin. On the gross margin side, I understand the expected continued fluctuations, but excluding the charge, the margin would have showed progress. So first off, kind of where do you think your inventory levels are? but then also throughout the year you do have internal supply for GroCo coming online and you have Israel Domestic coming online. So should we see in rest of the world like significant gross margin expansion at least on an underlying basis throughout 2021? Thanks. Good morning, Andrew. Thanks for the question. I think you're still going to see some fluctuation in that gross margin as price and mix change from quarter to quarter and what to really touch on that.

22:32 That mixed change is not only the products that we have in the Canadian market, but as you point out, the change in the Israeli market when you think about the ROW segment. And we're in the early innings in Israel. It's just ramping up. So I think as that becomes a bigger portion, you'll also have some mixed changes as we launch oil in that category. And as you know, we took some price decreases over the second half of 2020. Different products have different margin profiles in different provinces in Canada, which also leads to some of that mix change. And while we are buying third-party flour every quarter, the price has continued to come down. You need to play through that inventory that you've bought in previous quarters.

23:17 So we expect that our cost per gram on the flour side of the business now, depending on how mix changes, will have an impact to that. So I think it's hard to predict what it will be in the future, but we definitely see some volatility in margin going forward. Understood. Thanks. I'll pass it on. Your next question comes from Vivian Azar with Cohen. Hi. Good morning. I want to follow up on that line of questioning, please, if you don't mind. Just trying to get a better sense of the output that you guys are producing now, plus your inventory, because I feel like we're hearing slightly mixed messages around price deflation. I think net for the entire category on a weighted average basis, yes, it's deflationary because you and many other competitors have introduced value and deep value, but I'm not hearing as much price compression as premium segments.

24:10 So I'm just trying to understand what you guys are producing now. Is that at risk of price deflation too? And then what's the incremental risk that's still sitting on your balance sheet? Thanks. Yes, sure, Vivian. Thanks for the question. You know, I still think the Canadian market is deflationary across all price points, whether it be premium, the mid-tier, or the value play. You're seeing that across all categories. And so, you know, as we've looked at our brand offerings of both Cove and Spinach and tried to make sure that we're at a price point that's competitive, you've seen that we've taken some of these price changes across the second half of the year. And I don't know when that Your next question comes from Raul Sarugasa with Raymond James.

25:24 Morning, Kurt, Mike, Jerry. Thanks so much for taking my question. So, you know, one of the bright lights you saw was especially the doubling of revenue in the U.S. CBD channel. Kurt, you referred to sort of, you know, challenges around retail in the U.S. Of course, you know, without having a big crystal ball as to what happened post-COVID, can you maybe talk about how you see that trajectory? Are you looking at a continuing doubling? and any more color on expansion in that channel? Yeah, well, you know, I think, you know, the COVID impact of, you know, restricted store openings, you know, and other related things for pandemic has certainly hurt.

26:10 But as the vaccination rolls out, we believe, you know, things are going to start turning, right? And we're already seeing green shoots in that area. It really comes down to the brand strength and investment. In the U.S., for Happy Dance, we're very pleased. We just announced the Ulta partnership, which is certainly going to be an accelerant for that business. You're going to see investment in marketing on both our Lord Jones and Ulta brands. Again, our focus is on growth. As we get through this pandemic, when it comes to the U.S., I think the second half of the year, everybody is feeling fairly confident that we'll be, you know, fairly well with the vaccine, fairly well penetrated. So we should see the retail sector continuing to open up, and that's a good sign, obviously a good sign for us.

27:01 Terrific. Terrific. Thank you very much. And just as a follow-up, you know, one area, as you know, that we're quite interested in is the partnership with Ginkgo and the Bison Initiative. You talked about focusing on CBG. Mike had previously referred to September being the timeline. We currently expect to achieve commercialization by the third quarter of 2021. and, you know, as you said, as I said in my opening remarks, we really are prioritizing the real cannabinoids because we believe that's going to be a greater ability to innovate and provide consumers with differentiated products.

28:00 And so we're really excited about that. I don't want to go on the exact products right now. But, you know, we're well on our way. So, you know, again, we are on track and we're feeling very good about it. and obviously the rare cannabinoids offer some really unique differentiated consumer products and benefits that we obviously want to focus on. Indeed. Thanks for taking our questions. Again, if you would like to ask a question, please press star then the number one at this time. Your next question comes from John Zamparo with CIBC. Hi. Good morning, everyone. I wanted to ask about the creation of the internal team looking at the U.S.

28:45 market, and specifically, do you have levers you can pull today to deploy capital into the U.S. without a full-scale legalization, whether it's optionality deals or arrangements with CBD brands or potentially partnerships with retailers? Just any thoughts or observations on that front would be helpful. Yeah, this is Kirk, Doug. I'm going to kick it off, but I think this is important to hear from Mike. So Mike will comment on this as well. As you guys know, when it comes to active or really direct investments in the U.S., it's important that we get federal action that removes cannabis or THC as a controlled substance. Also on that is the operation side, and there's a number of targeted bills that allow for really streamlining and making an effective industry.

29:36 And again, Mike is looking at a range of entry strategies besides these active investments. So, you know, it would be great that Mike comments on that at this point. Sure. Thanks, Kurt. Hey, John. So, you know, when we think of the U.S., there's really three phases that, you know, we try to think of. The first would be the phase that we're in now where, you know, the legal regime, as Kurt noted, means that we can't directly and actively enter. but I think there are certain levers that can still be pulled. The next phase is really what you hear talked about the government right now where cannabis prohibition in the U.S. ends and that would allow us to actively and directly participate in states that have put in place responsible cannabis frameworks and then finally a responsible and comprehensive framework that at the federal level that provides for interstate commerce and high product standards And when we think about that third phase, that's really where our strategy is focused on positioning ourselves right now so that we can eventually deliver value there. And we still believe it's going to be authentic brands that are built on technology that differentiate the products, and that's what's going to ultimately drive terminal value. So any levers or anything that we're looking to pull now is really thinking in the future, how are we best set up to win?

30:59 And that's really where our focus is. Okay, that's helpful, thanks. And if I could follow up on that subject, on the formation of the UFCC, I would have thought maybe at first that the goals of those parties might, the parties involved might differ a little bit. So what does that say about the fact that there's American and Canadian participants coming together to work together on this? and I guess what are the priorities near term of the USDC? Is it getting something done like the Safe Banking Act or is it maybe more of a transformative goal than longer term goal? Yeah, this is Kurt. Good question. You know, our view is it really needs to be a comprehensive approach, right?

31:45 And that includes a bunch of areas, you know, such as addressing the historic injustice for communities of color which have disproportionately faced in this area. It could include executive orders that we believe should be coordinated between the various departments, which would be very important, such as the DOJ, Treasury, FDA, and HHS. And legislative action would provide additional clarity, right? And there's several directions Congress can take. And through the Council and through our partnership with Altria, we are very much focused on having a seat at the table and being able to deliver on that. but in essence we do need a comprehensive approach in order to really create the right environment for the market and for the various issues that are happening right now in the U.S.

32:39 And we're reasonably confident that it's starting to move in the right direction. All right. That's helpful. Thank you very much. Your next question comes from Michael Lavery with Piper Sandler. Thank you. Good morning. Just curious if you can elaborate a little bit on CBG, and it sounds like you've got the biosynthesis part down, but as far as the consumer, how much education do you have to do on the benefits of that, and how do you plan to go to market with it? Good question. We have tremendous capability in our consumer insights group.

33:25 So in parallel to developing these rare cannabinoids, we are looking at the product innovation side and how we're going to talk about it, what products we're going to put that in. I don't want to get into what exactly we're going to do, but all that is well on its way. I will say another thing that's interesting about these rare cannabinoids is you can Google these products on THCV and CDN and CDG, and you're going to get a wealth of knowledge and a wealth of how people are talking about these and the benefits of these products. So, you know, in some ways, consumers are really focused on these and they understand some of the benefits in these things. So that's sort of built in right now.

34:13 But again, it's very difficult. They're called rare cannabinoids because they're very difficult to get and scale. And that's what we believe we can deliver. And we could use our innovation and consumer insights and our innovation team to develop some really unique products to deliver on those consumer promises. Okay, that's helpful. And then just on ProCo and adding capacity here, somewhat unique in the industry doing that these days, can you just give a sense of the industry landscape and how you see capacity broadly? Is it in right size or is there still excess capacity and is Your initiative is primarily just to ensure quality products. What's some of your thinking on just bringing that online?

35:00 Well, you could think of it kind of a hybrid model. So, we can source from GroCo. We can source from other third-party biomass. So, we want that flexibility on it. You know, GroCo received their license in 2020, cultivation license. So, we expect that facility to come operational in phases. beginning in the first half of 21. And what they benefit for us is it's partnering with an eye expert, which, you know, they're an expert in the field, and they can provide high-quality biomass at a low cost. But it really is managing this hybrid model in the Canadian market at this point. And it's kind of an approach we've taken to Israel as well. Okay. That's helpful. Thank you.

35:47 Your next question comes from Matt Bonley with Canaccord. Hey, guys. Good morning. Thanks for taking the question. Just curious if you can provide any more color on any of the dynamics you're seeing in the adult use market with respect to your brand penetration, whether that's, you know, the sequential, I guess, movement in how many orders the province has been buying from you, and then if you have further data on how your products are selling to end consumers this quarter relative to last out of the retail touchpoint correctly. Well, we don't give revenue guidance. Yeah, Jerry, you want to take that? Sure. Yeah, we don't give forward-looking revenue guidance. But I think, you know, some of the impacts of COVID that you've seen, especially in Ontario, where they had store closures and go to curbside pickup, you know, I think you saw that early on in COVID when it first happened, that you saw, you know, the growth slow a little bit. And so you saw that in December and January across the categories. We think our brand penetration has been quite good.

36:52 I mean, you saw the growth sequentially every quarter in 2020. I think we're making great strides in that area. Perfect. And do you have any estimate? I know you don't provide it, so potentially not, but any sort of goalposting of where you think your market share is in Canada right now on a branded level and how that's moved in the last year or so? There's not a lot of good data in Canada to try to really get that. So, you know, in normal CPG, there's Nielsen data or some other quantitative metric. I mean, we try to monitor ourselves internally, but it's difficult and it's also difficult to look at because of all these big value players and larger formats coming into the market.

37:40 It's a bit challenging for us to look at it that way. So we're really focused on growth of those brands and revenue growth. Okay, understood. Thank you. Your final question comes from Theo Wang with Chevries. Hi, good morning. I'm asking a question on behalf of my analyst, Ellen Bennett. So I just want to briefly touch on the product mix because currently the majority of the sales are still from the cannabis flowers, and, you know, there's very limited increase sequentially from the extracts. So I wonder, what's your outlook on the product mix and do you expect that to kind of stay at the current proportion level going forward? Thank you. Yeah, good question. This is Kurt. Well, one of the things we're seeing is the trend during COVID, right? And Jerry just talked about that.

38:31 We have consumers on lockdown and generally less mobile. And so we've definitely seen that preferences have shifted towards buying more volume in the flour category over base or even pre-rolls. because it's a better-to-go solution. And since, unfortunately, in the last three months, no one's really been going anywhere. So this has driven our sales as well as the Canadian market to be more heavy-oriented towards flower categories. However, as things start to get better and we start opening up retail and people have more mobility, we don't expect this to persist long-term. So, again, we look forward to launching new and innovative products across the 2.0 spectrum. over the course of 2021. So we do have plans.

39:16 And again, I'm very hopeful as the vaccination starts rolling out and we start getting back to normal, we'll start seeing the market develop as we saw pre-COVID. Okay, thanks a lot. That's very helpful. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's call. You may now disconnect.