Canopy Growth Corporation
Q3 2020 Earnings Call Transcript

Published: 14 Feb 2020

[Operator:]

Good morning. My name is , and I will be your conference operator today. I would like to welcome you to Canopy Growth's Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.

[Judy Hong:]

Thank you, and good morning, everyone. We are glad that you have taken the time to join our third quarter fiscal 2020 financial results conference call. On the call today, we have David Klein, our CEO; and Mike Lee, our CFO. Before the market is open today we issued a new release announcing our financial results for its third quarter fiscal 2020 ended December 31, 2019. This new release is average on Canopy Growth's Web site, and has been filed on SEDAR. Certain matters discussed in today's call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are made available on SEDAR. During this conference call, we will refer to supplemental non-GAAP measures, adjusted EBITDA and free cash flow. Adjusted EBITDA and free cash flow are defined in the press release issued this morning as well as in this period's management's discussion and analysis document filed on SEDAR. Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by David and Mike, we will conduct a question-and-answer session. With that, I'll now turn the call over to David. David?

[David Klein:]

Thank you, Judy, and good morning everyone. I am very excited to be on this, my first earnings call, as CEO of Canopy Growth. To begin my remarks, I will offer a perspective on why I decided to join Canopy. First, I believe the cannabis market is one of the most exciting business growth opportunities of our lifetime. We are taking part in the creation of a new regulated consumer market the likes of which we have never seen. Second, having been an early advocate of Constellation brand’s investment in Canopy Growth and having been on the Board since October 2018, I firmly believe Canopy is well-positioned to win in the global cannabis market. We have a leading market share in the recreational market in Canada, and a strong position in the medical market in both Canada and abroad. Additionally, I believe Canopy has the opportunity to create an unassailable global position in cannabis. Canopy possesses excellent know-how, industry experience, intellectual property, and talent. The combination of these assets has the ability to set us apart from the competition. Another asset of Canopy that cannot be overlooked is the strength of our balance sheet. In a sector, where capital is becoming increasingly costly, if it’s available at all, the value of having $2.3 billion in cash cannot be understated. Our job is to nurture these strengths and ensure that we build a profitable, world-class company with brands that consumers trust.

[Mike Lee:]

Great. Thanks, David. Good morning, everyone. Let me begin my remarks with a brief review of the progress that we made during our third quarter of fiscal '20. Total Net Revenue grew 13%, excluding the impact of portfolio restructuring charges last quarter. Our business generated gross margins of 34% before fair value impacts. Total SG&A decreased 14% quarter-over-quarter and adjusted EBITA came in at a loss of €92 million, compared to a loss of €156 million last quarter.

[Operator:]

Your first question comes from the line of Chris Carey of Bank of America.

[Chris Carey:]

Hi, good morning.

[David Klein:]

Good morning.

[Chris Carey:]

First of all, David, congratulations on your new role, and I guess, like clearly a number of line items were quite a bit ahead of expectations on revenue and profit, right, but I think as you implied in the prepared remarks, the one area which still underwhelm was free cash flow, which is really where I think the debate around the Canopy’s story is focused now, and it sounds like we're going to get more details around that in fiscal Q4. So, perhaps I'll approach this question little differently. You mentioned that managing inventory relative to demand was a key focus, and you're reviewing your footprint. Clearly that could imply shutting down some production capacity, and I just wonder from a practical standpoint how difficult is that kind of endeavor, and what could that mean to near-term margins even if positive for the long-term, and I guess, connected to that is, Mike, you had mentioned that you're expecting 40% gross margin over time essentially, that's a mixed comment on the fiscal Q4, but does that imply that the 40% is more kind of a fiscal ‘21 reality? Anyway, so thanks for all those.

[David Klein:]

Yes, sure. So, yes, Chris, so first of all, we are not going to run out of cash, and we have a lot of levers to pull in that regard, and as I indicated, we'll talk about that more on the next call. Clearly, we have to do a better job managing inventory and overall working capital. We have to slow our CapEx spend. We will pull back on the M&A activity that the business has been doing, and we need to do a better job with our P&L. So literally, we need to work across every line item. We're going through the review process. I've been in the role actually, it's one month today, and I will say that the team is a fairly very strong team at the leadership level at Canopy, and the team is very committed to the objectives that I talked about -- my priorities that I talked about in my script. So, I'll let Mike comment on the timing of margin achievement, but we will do the right thing for our stakeholders, which means our shareholders, our consumers, and our employees, and we'll communicate that as soon as we can, and then when we do, there will be an obvious flow-through that will have to be taken into account.

[Mike Lee:]

And I would just add to that, that whatever we do, we want to do it with an eye toward not just what works for today, but what works for the long-term as well, and as you guys have heard me talk about over the last year, starting up and shutting down facilities is really hard. So, we need to be very thoughtful about it, very mindful about it, and we're taking a strategic approach to say, "Look, we want to make sure that we're designing our supply chain and our footprint for not just the realities of today, but the realities of the next year, two years, three years, as the size of the market develops, but also as the various categories of the market develops, and we know that the value category is here to stay. We're quite happy with how TWD is performing in the market, and we want to make sure that regardless of what consumers are buying, that we've got line of sight to deliver our target margin profile across the entire range of products that we offer to our consumers." So that's the work that's underway, and really to engineer the ideal supply chain that allows us to achieve those financial objectives. So, in the short one, are we going to face some headwinds with some of the cannabis delays? Yes. Are we going to face some headwinds from some potential de-leveraging of facilities in the short run as we make some fine-tune adjustments? Yes. Is that going to move us materially off of our 40% gross margin goal? I do not think it will.

[Operator:]

Your next question comes from the line of Glenn Mattson of Ladenburg Thalmann.

[Glenn Mattson:]

Hi, thanks for taking the question. David, you made very specific comments about the U.S. market opportunity, I believe you said that you see a need to move faster in the U.S. creating brands, specifically and getting distribution to customers who can buy them. So I'm curious what you meant by that a little bit. Number one is do you see yourselves having to make a significant further investment in the U.S., and then number two, when you mentioned customers who can buy them, are you talking about THC based products to customers in the U.S. and maybe just flush out those comments little further? Thanks.

[David Klein:]

Yes, so we know where we sit today. It's really focused on hemp derived CBD. And there are states where we're free to sell our products and other states where we're not, so that was really the point of that comment. And I don't see significant investments clearly, no incremental capital required in the U.S. It's really more about getting our brands on the shelf at retail as much as we possibly can across the U.S. We launched First & Free in December, it was mostly an e-commerce launch, we now need to get on the shelf with First & Free and with some of our other products such as BioSteel with CBD in the U.S. So it really is more about execution, and quite frankly, Glenn, I think that's a point that I can make about Canopy in general, I think we're well positioned in terms of product development and production capacity, we now need to begin to really connect with that consumer and execute from a sales standpoint and a brand building standpoint so that we can create that those trusted brands in the minds of the consumer, that's the next stage of our evolution and clearly we’ll be focused on that in the U.S.

[Operator:]

Your next question comes from the line of Vivien Azer of Cowen & Company.

[Vivien Azer:]

Hi, good morning, and congrats David on the new role. Thank you very much for the prepared remarks. I was hoping to get some perspective strategically, David from you on kind of the balance of priorities between top line growth and profitability. It seems from your commentary that clearly there's a laser focus on right sizing the business from you and Mike, which I think is encouraging, but you did make a point of reinforcing your market share of leadership in the category and so I'm just trying to understand, how committed are you to market share leadership, are you willing to sacrifice that to attain your profit aspirations because given your background, you certainly I think would be comfortable not being a market leader, but operating from a position of market share gains, once you've achieved the right profitability framework. So any commentary on that would be helpful? Thanks.

[David Klein:]

Yes. So look, that's why we haven't raised to put out cut numbers for staff what you're seeing across the industry, because I think it's important to understand where we need to win and where we want to win and where we can profitably play in the business. And then, we'll continue to invest in those areas, and we'll pullback spend from the areas that that don't fit into that category. I think the thing that we do have to keep in mind now is that we are in a growth industry and I know there's a bit of a pall over the industry of late, but we need to keep in mind that this is a growth industry. We're still attracting new consumers to the space, we see ways for us to be profitable across the spectrum as in consumer preference, as Mike talked about, our ability to be profitable at the value and as well as our ability to be profitable at the premium end and we just need to get our business focused on executing in those in those areas. I think there is a school of thought though, that we can continue to drive industry share leadership and improve profitability at the same time by simply creating a tighter focus on the consumer proposition.

[Operator:]

Your next question comes from the line of Adam Buckham of Scotiabank.

[Adam Buckham:]

Hey, good morning. Thanks for taking my question. So I was just hoping we could get a little more color on the B2B segment. So, just want to get an idea whether there is any bulk sales in the quarter and if there was what the magnitude of those were versus previous quarters? Thanks.

[David Klein:]

Yes, thanks, Adam. We did have some bulk sales in a prior quarter. This quarter was nonexistent to my knowledge continues to be an area of consideration as we think about right sizing our inventories cross certain segments of the value tier but at this point, we're focused on getting our product to market and not necessarily pursuant to wholesale, but that's an option that continues to exist.

[Adam Buckham:]

Okay, great. Thanks.

[Operator:]

Your next question comes from Andrew Carter with Stifel.

[Andrew Carter:]

Hi, Good morning. I just want to return to kind of the comment around the modest revenue growth quarter-over-quarter and just kind of help us understand what that means for the rec business you called out the $5 million of seasonality, suggesting 119 base but how should we be thinking about Canadian recreational business? I would assume that the business is now kind of aligned where shipments will better match kind of the consumption growth with the market. Should we be factoring in a lot of price compression? You obviously will have some second wave shipments, just help us understand how you're thinking about that line item?

[David Klein:]

Sure, Andrew. We are not modeling in anything for price compression at this point. We are modeling in that the mix in the category continues to evolve as TWD establishes itself in the marketplace and that brand is performing quite well, but the high-end is also performing quite well. The pre-rolls are performing quite well. My comments around the modest growth in the quarter are really driven by just you know, as I mentioned some of the seasonality benefits from S&P and even our retail stores in Canada benefited from a very strong December. So there's a bit of a headwind going into the next quarter as a result of that, and store count continues to increase and you're correct, we are seeing tremendous benefits of supply chain stability. All the provinces are now getting their inventories in order. And we're starting to establish the cadence of not quite a mature industry, but there's minus site to get into a mature industry in the near-term. And quite honestly, our biggest opportunity today to grow and what's relatively a static sort of store account environment is continuing to get the right product at the right time as the purchase orders come in from the provinces, driving our fill rates up by better forecasting and better fulfillment. So that's where our growth is going to come from in the near-term. And then, as the stores continued to increase will continue to deliver

[Operator:]

Your next question comes from the line of John Zamparo of CIBC.

[John Zamparo:]

Thanks. Good morning, I wanted to ask about the retail function at canopy be subsequent to the quarter you announce the meaningfully increase in the total footprint in terms of the Ontario license lottery winners. So I assume it's fair to say that you think something about retail it's made you want to get more involved. So I'm wondering is it a simple as unit level economics really attractive or is it more the ability to sell your own brands? But just I would like to get a sense of how you view retail and maybe how much capital you might allocate to that over the next couple of years? Thanks.

[David Klein:]

Yes, great. So yes, store count continues to increase. I think, we added 15 stores in the quarter, 12 stores in the quarter from 15 to 27. Between own stores and partner stores, but we were very happy with our store performance and the economics become very attractive in our stores when canopy share of store sales reached at 60% plus range, which we're starting to see across our network, but that gives us the best opportunity to build brands to educate consumers. It allows us to do popup activities to help educate consumers on different formats and things like that. And then, as cannabis, 2.0 rolls out, it's going to be an incredibly valuable format for introducing new consumers to these new products as well. So we expect to continue to add stores in a very strategic way. Ontario's our biggest opportunity in front of us and we had a press release about that a few weeks ago that I'm sure you saw. So it continues to be a priority for us.

[Operator:]

Your next question comes from the line of Michael Lavery of Piper Sandler.

[Michael Lavery:]

Thank you. Good morning. You touched on a couple of the drivers of the inventory build, and I'll see some of the 2.0 launch and building into that is a part of it as well. Can you just give us a sense of how it's likely to evolve from here and was this last quarter the peak inventory levels, or is there any reason it might actually still go higher? How do we, how do you see that working down, and then what kind of speed?

[David Klein:]

I'll let maybe Mike comment on some of the details, but you know, my early observations, Michael, are that we're, as a company, we built inventory, but we need to get better at connecting the consumer demand signal to the inventory that we're building so that we can deliver that high-end consumer experience that is expected of, leaders in a space and I think we're in the early innings of brand building in cannabis. And so, we need to be on the shelf with the high THC bud that the consumer is demanding at the right price points. And so for us, we're going to continue to make sure that we're not stocking out at retail, which is not good for us. It's not good for brand building; it's not good for our retail partners. At the same time, we need to be able to bring down our total inventory balance, and that, as I said, is the work that's going on as we look at our footprint because we need to be able to both decrease our inventory, make sure we stay on the shelf at retail and deliver the quality experience that's that we feel should be expected of our brands.

[Mike Lee:]

I would just -- I think that's very comprehensive. I would just add, Michael that I would not model that this is our peak quarter. I think as we do the strategic review, there's a lead time to any decisions that we make. That being said, I would not say that the increase is going to be material in Q4. I just don't think we can call it a peak at this point until we finish the strategic review of our footprint, but directionally, we know that we can do a better job of managing inventory relative to overall sales. And everyone knows the story of anticipated market growth and where we are. So we're working through that as we speak.

[Michael Lavery:]

Okay. That's helpful. Thank you.

[Mike Lee:]

You're welcome.

[Operator:]

Your next question comes from the line of Aaron Grey of Alliance Global Partners.

[Aaron Grey:]

Hi, thanks for the question. I just want to dive back a little bit into the market share trend. So I believe you said 22% for the wreck market in the quarter. I think last quarter was just north of 25. So could you talk a little bit about the market share trends you saw during the quarter? Would it be fair to think that, as a quarter went on, you saw the market shares fall as you saw that aggressive pricing from competitors? And then, as we see this aggressive pricing of competitors and potential shakeout, is it fair to think that we continue to see some at least near-term share being lost with the aim of long-term share gains, as you've kind of made it clear that you're not going to comp plan those super low price categories, what they will come out more premium product and just having TWD, so -- and how you think about near-term shares and kind of that long-term share aspirations? Thank you.

[David Klein:]

I'll take this one. So yes, we did see some modest share declines as you referenced, but I would also point out that there has been some variability in that as the industry has developed. What I commented on earlier around some of the isolated pricing actions, we've made a decision to not chase those price points in some instances, so there has been some shared impact as a result of that. However, our goal continues to be achieving between the 25% and 30% market share, there is going to be a little bit of noise with some of these isolated pricing actions that we think will go away over the next several months, but 25% to 30% is really our goal. And we think we're well positioned to achieve that, but yes, you might see some noise in the numbers between now and call it the longer-term.

[Mike Lee:]

And what am I do, Aaron, is almost come back to Vivien's question and say, we like to split in the market with maybe 40% is more premium of the total market and saying 30% of that value, we won't chase market share at any cost, but I think the best thing we can do to continue to drive market share for us is to make sure that for our premium products that we are on the shelf consistently at retail. I think that more than anything else can move the needle for us in terms of holding share or growing share in the near-term.

[Operator:]

Your next question comes from the line of Rupesh Parikh of Oppenheimer.

[Rupesh Parikh:]

Good morning. Thanks for taking my questions. So I wanted to go back to your other businesses and the acceleration that you saw there. So outside of I know there was a seasonal benefit that you saw, but if you look at the stores in Bickel vaporizer business and This Works, just want to get a sense of in terms of what's driving the strength of both businesses and just how to think about them going forward outside of that seasonal benefit.

[Mike Lee:]

Yes, we have a -- it's a few things, there has been a number of new items that we've previously press released. So innovation is driving a good portion of the growth. We have a new distribution agreement with Greenlane in the U.S., so we're seeing some good growth there as well. And we've built a good business as you guys know, this is a fantastic brand, and as we talk about the brand, building and being more consumer aware, I think David and I are of the opinion as many of our management team is S&B is an amazing brand that we could leverage for so much more than what we are today. So we're working on future plans to further exploit that brand globally, but a lot of innovation coming next year as well. So we did have some seasonal benefits, but that being said, we still see that as a growth business over the next year or two.

[Rupesh Parikh:]

Anything…

[Operator:]

Next question comes from Graeme Kreindler of Eight Capital.

[Graeme Kreindler:]

Yes. Hi good morning. Thank you for taking my question. I wanted to follow up Michael, in the prepared remarks. You mentioned that there was higher capacity utilization in the quarter. When I look at the kilograms harvested figure. If my numbers are correct, it was around 29,000 kilograms this quarter, and in the previous quarter it was 40,000 kilograms. So that number coming down, just want to square that away with the higher capacity utilization, and also tying that back to talking about right sizing the footprint whether we're already seeing some evidence of that given where the harvested number is going quarter-over-quarter. Thank you.

[David Klein:]

Sure, two things I would point out. Number one, given our large greenhouse footprint, yields vary throughout the year based on the season and yields certainly are lower in the October, November, December timeframe, which we model in and take that into account and all of our standard costing. During December, we did take down some capacity at our delta facility and British Columbia is one of our first steps to help bring supply and demand into balance. There are some fixed costs de-leveraging impacts of that to the tune of around $850,000 a quarter, but we also believe that in concentrating our efforts at Delta, we actually get benefits with the remaining facility and helping to improve yields there as well. So the very balanced approach, but when we think about broad utilization across our network, our overall network despite the fact that yields ebb and flow throughout the year, the actual number of square feet in our facilities are operating more in line with their goal with the retrofit activity being largely completed.

[Operator:]

Your next question comes from the line of Owen Bennett of Jefferies.

[Owen Bennett:]

Good morning, guys, and more of a modeling question from me, and obviously because you have a revenue line and accelerating quite strongly which you expect to continue. I was just wondering, could you give any insight into gross margins and in the overall revenue and businesses and even potentially kind of international medical business? And to kind of help with how we see that sort of gross margin progressing throughout the year and what supposedly be that? Thank you.

[David Klein:]

So, Owen, my recommendation would be that we talk to you offline about that versus going into a lot of details, but the S&B First & Free C3 businesses have all been performing at that 40% plus margin and in some cases, C3 is materially above that is our pharma grade cannabinoid-based business. In terms of guidance on that from a modeling perspective, I think modeling S&B and First & Free in that 45% range is a good estimate, and C3 has been in the 65% to 75% range, and we expect those to hold over the short-term.

[Operator:]

Your next question comes from the line of Matt Bottomley of Canaccord.

[Matt Bottomley:]

Yes, thanks. Just wondering if you could provide any color on the assumptions going into, I think was about a $5 million price provision or sales allowance provision, this quarter for related to particular skews or any other assumptions, and then also, if I could just sneak in there if there's any color on the proportion of your inventory balance, excuse me at period end, how much of that relates to things like dry bud versus product in the pipeline to be launched in Cannabis 2.0? Thanks.

[David Klein:]

Sure. So yes, we booked about $5 million in the quarter as a revenue provision, and I think just going forward, as we think about revenue provision, it's a cost of doing business. And every CPG company I've ever worked at has always had an ongoing provision. And it's really a function of what are your customer agreements. In this industry, our customer agreements in Canada are very favorable to the customer meaning they can return anything at any point in time, which is a more, I'd say, liberal approach than what I've seen elsewhere. And hence, we take a slightly more cautious approach in booking revenue provisions. As I think about modeling going forward, 3% to 4% of revenue is a very reasonable number, given the risk profile, the amount of inventory that we see at the province level, and I would expect that to be kind of the normal range going forward, but we true it up every quarter, we look at what's actually come back. And it's meant to cover not just returns, but also any provisions for any potential markdowns or we call them buy downs at the province level, just for the inventory that's within their four walls. This is not meant to be a provision for what exists in retail, it's meant to be just a provision for what exists at the wholesale level. So as a wholesale inventories come down to that $4 million to $6 million range, there's just not much risk out there. So the $5 million is in terms of unpacking that for you, a $1 million of that, $1.5 million, I think it was for potential returns on just random products across the supply chain, where provinces are long on certain skews, it's very immaterial, and the balance was a provision for potential pricing impacts on certain skews in certain markets where we're not quite aligned to our national pricing architecture and we wanted to provide that allowance, so that we could get things lined up properly, but it's on the grand scheme of things, it's 4% of revenue. And that's just going to be our normal course going forward. So I would build that in.

[Matt Bottomley:]

Thank you.

[David Klein:]

In terms of inventory, Owen, I think your part two of the question was on inventory, so I apologize but on inventory yes, so our inventory we think about our inventory really in a few buckets. Number one is how much of our inventory is distillates and isolates and whatnot. And a lot of the inventory that we're showing there is the anticipation of Cannabis 2.0 and Jury's still out on how big each of these categories are going to be, but we are well-positioned on the distillate and isolate to fuel whichever category of Cannabis 2.0 skews really take-off and the shelf life on the isolate is very high. So, we don't have any concerns around quality of that inventory relative to the shelf life. The balance of the inventory is really our bud inventory and we feel very good that we're balanced on high THC bud, we feel very good that we're balanced on low THC, high CBD bud, the Mainstream bud, which is a balanced is what we call it. We're a little longer than what we'd like to be today. And that's the piece that we're continuing to work through.

[Operator:]

Your next question comes from the line of Jason Zandberg of PI Financial.

[Jason Zandberg:]

Hi, thanks for taking my question. Just first of all wanted to applaud the reduction operating expenses this quarter, especially in the G&A, one line-item there that I think is positive that is increasing is the R&D line. And I wanted to sort of dig into that just for sort of future modeling purposes. You described the increase were kind of in the mid-teens in terms of a percentage of revenue. Talk about some clinical trials with CBD based studies as well as some product testing for Cannabis 2.0. So, is this a sort of one-time bulge in? Not one time, sort of over next couple of quarters of bulge in R&D or should we expect this line item to increase sort of what's your long-term goal as a percentage of revenue?

[David Klein:]

So, Jason, when R&D is an area that I've already spent some time on since I've been in new role, I think as we look at focusing the business, we have to decide where we're going to invest from an R&D and innovation standpoint, and by the way, there's a bunch of stuff in that line-item. It's not pure R&D, some of it’s engineering activities. Some of it is even manufacturing engineering, right. So there's a lot of, there's a lot of noise in that line, when we get on the call in the fourth quarter and we're providing more clarity on specificity of that focus that I want to bring to the business, we will make sure that we address the R&D line in detail.

[Operator:]

Your next question comes from the line of Pablo Zuanic of Cantor Fitzgerald.

[Pablo Zuanic:]

Thank you and congratulations, David, on your appointment and on the good quarter. Look at just one question. It's a bit of an industry question. I think you said that value for U.S. 30% of our portfolio, I'm hearing from other people, it's close to 50% of the industry. If that's what we are seeing in the flower market, does that say something about the Canadian consumer in cannabis being very thrifty and does that bode badly for the 2.0 category as a whole, given that the price points are much higher, if you can comment on that. And then just, if I can sneak in a quick follow-up, it'd be nice if you can clarify of the other line, what percentage of that revenue is outside North America? Thanks.

[David Klein:]

Mike will handle the revenue, the other revenue, but yes, Pablo, so I think the thing that's interesting to me is, we have an existing consumer today that's been pulled largely from the illicit market, and if that consumer today is say 40% of the spend is happening in the Premium segment in the market. So I'm kind of flipping your question around a little bit. We feel pretty good about that because I think that looks like a lot of other CPG categories. It's my belief that as we bring 2.0 consumers in, they're likely to come in at the higher-end of the category because they're going to want as well as premium bud, they're going to want experiences in other product categories like vapes and edibles, drinks, gel caps. We just see them coming in differently. Not what I will say though is that I believe that that’s probably a longer build. So it will take awhile for that market evolve. I keep talking about there are lot of consumers that we -- in the market today and we need to delight those consumers, but there are also a lot more consumers that don’t even know that they love cannabis, but they will learn that over time. And I think those folks will come in at higher price points and at the premium end of category.

[Pablo Zuanic:]

Thanks. The other revenue…

[Operator:]

Your next question comes from the line of Endri Leno of National Bank.

[Endri Leno:]

Hi, good morning, and thanks for taking my questions. Just wanted to go back quickly on the cannabis 2.0 and particularly on the beverages first, but just if you are able to clarify what caused the initial delay and where are you now resolving the cause of that delay? And then more on the overall 2.0 portfolio, like, how do you see developing vis-à-vis the dried bud only that you have right now? And how much could you contribute towards say your previous guidance of $250 million revenue per quarter? Thanks.

[Mike Lee:]

So Chris, if you don’t mind, I want to take Pablo’s question because he got off there, but we will follow-up. Tyler can follow up. Judy can follow up with you, but international revenue today defined as revenue outside of Canada is around 35% of total revenue, and Judy or Tyler will follow up with you after the call to make sure you get your questions answered, and with that, I will turn it over to David to answer that beverages.

[David Klein:]

Yes, so look on beverages, whenever you launch a beverage whether it’s alcoholic drinks or non-alcoholic drinks and clearly cannabis drinks, it takes awhile to get your formulation exactly as you want them. You need to ensure that you are having appropriate stability that we want the product to look appropriate when it’s on the shelf, and we had time to do this work at lab scale leading up to obtaining licenses from Health Canada on 2.0, but kind of post obtaining those licenses, we have only had a very short window of opportunity to go from lab scale production to commercial scale production, and we have had some issues as we have made that jump, and also understand that it’s a very involved quality process that we are putting ourselves through because we believe these are spectacular products. We want to make sure that when the consumer tries them that they decide that this is their thing. So, we want to get it right. We are taking maybe more precautions than what would otherwise happen in terms of working our way through the quality process. We have some outstanding scientific and engineering and innovation talent working on our 2.0 launches. And as I said, it’s just taking longer than we would like, but we think it’s worth getting the products right as opposed to just rushing them out there to make an end-market date.

[Operator:]

Your next question comes from the line of Chris Blake of Laurentian Bank.

[Chris Blake:]

My questions have been answered. Thanks very much.

[David Klein:]

Okay.

[Operator:]

Your final question comes from the line of John Chu of Desjardins Capital Markets.

[John Chu:]

Hi, just quickly, so with the aggressive U.S. expansion on the product launches, you got edible launches coming up now. And then those sides you are going to be potentially adding quite a few more new retail stores especially in Ontario. From a sales and marketing perspective, should we see that jump up for the next several quarters at least? Or you are trying to position the products and the launches accordingly?

[David Klein:]

No. Again, we are still doing the work, John, and preparing for kind of the next phase actually even working on next year’s plans. So, I don’t have a definitive answer, but you won’t see the number jump up.

[Operator:]

Those are all the questions at this time. This concludes today's conference. You may disconnect at this time.