Thank you, operator, and good morning, everyone. We appreciate you joining us for this morning’s call.

I’d like to begin this morning’s call with first highlighting a number of Flower One’s operational achievements in the current quarter of Q4 and then provide an overview of our operational highlights for Q3 2019. I’ll then turn the call over to Geoff Miachika our CFO who will provide a summary of our financial highlights for Q3 and then have our Chief Strategy Officer, Kellen O'Keefe review our brand and retail partnerships.

Certainly, I am pleased to report that our operational and revenue performance in Nevada is going better than even we expected. Most notable, the compound growth and weekly sales continues at a very strong 15% since our first sale out of the greenhouse in August of this year.

In addition, I am very pleased to report that just this month Flower One surpassed $1 million in weekly sales orders for the first time. This is particularly impressive when one considers we have only been actively selling greenhouse-generated inventories for less than four months.

With our revenue performance to-date, Flower One is positioned to end the fiscal year strongly and is on a clear path to profitability in the first half of 2020. Geoff, Kellen and I will speak further on this as we move through this morning’s call.

Now to talk specifically about our operational achievements for the third quarter, first, in September, we successfully completed and fully commissioned our 55,000 square foot production facility, which is adjacent and adjoined to our 400,000 square foot flagship greenhouse. Having our greenhouse and production facilities interconnected creates a seamless flow between our cultivation, post-harvest, extraction and packaging SOPs, allowing us to efficiently leverage our significant scale in the Nevada market.

Our production facility houses our post-harvest semi-automated processing line, ten high-tech [drawing] [ph] rooms, a full-scale extraction lab, and various packaging line - excuse me - various packaging lines we use to produce a wide array of flower and oil-based products. Next, we entered three new brand partnerships, La Vida Verde, The Clear and Deuces 22 further expanding and diversifying our brand portfolio.

And finally, we had our first official sales of branded flower products from our greenhouse in August and first official sales of finished product derivatives from our production lab in September. These first sale milestones strongly reflect Flower One’s executional excellence and our ability to quickly and successfully transition to meaningful revenue once our facilities are up and running.

Since these initial first sale transactions and as I mentioned earlier, Flower One has experienced a strong compound weekly sales growth rate of 15%. In terms of cultivation, our greenhouse continues to outperform our original forecasted estimates.

Year-to-date, our cultivation yield is equivalent to 192 grams per square foot per annum and our harvested cash cost per gram is $0.44. In terms of extraction, in September, we completed the commissioning of all of our equipment and officially launched our production lab.

This launch strengthens our large-scale product fulfillment capabilities and enables us to focus on bringing our brand partners’ products to market, which we have initiated in earnest with five brands in the market today and another two to three brands to be launched before the end of the year including leading California edible brand Kiva, this commercial launch in Nevada we just announced yesterday. Our new extraction lab has the capacity to process between three thousand pounds and five thousand pounds of biomass and between one 100 liters and 150 liters of distillate per week.

We specifically designed the lab, so that it is capable of performing all three major forms of cannabis extraction, Co2, LPG, and ethanol, all at scale. Similar to our cultivation performance, the initial performance of our extraction lab is industry-leading with our bulk distillate process train having great success with 90% of early lots achieving potencies of 90% or greater in Delta 9-THC levels.

With these accomplishments in mind, let's turn briefly back to our growth strategy. Flower One's core focus has always been to establish industry-leading competencies in the cultivation, production, and brand fulfillment verticals.

Key to our success has been our ability to facilitate and accelerate the entry of leading cannabis brands into the Nevada market. As many of you know, it's not permissible for cannabis to cross state boundaries.

So all cannabis legally sold in Nevada or any state for that matter must be grown in-state. Cannabis brands looking to enter Nevada need to invest significant time and capital to either establish licensed cultivation and production infrastructure in-state or enter a fulfillment partnership agreement with an existing licensed operator like Flower One that has the capability to deliver finished product at scale and sell these SKUs direct to Nevada's licensed cannabis retailers.

We are pleased to report that our portfolio now includes 15 brand partners, including many award-winning brands such as Kiva, Cookies, Old Pal, and The Clear, which will benefit greatly from leveraging our unique seed-to-sales solution. After successfully delivering in Nevada in record time, we're also making sure we carefully lay the foundation for longer-term success in the U.S.

cannabis market, which we believe includes an eventual expansion into California. Originally, we plan to enter the California market in early 2020.

However, while we have not abandoned our ambitions to enter California, after listening carefully to our shareholders and reviewing current market conditions, we have made a decision to pause on California entry and we will reassess this sometime later in 2020. Our shareholders know we are on a strong path to delivering against our plan in Nevada and they would like us in the near-term to remain sharply focused on this goal.

And in doing so, it's worth noting that the Nevada market remains very strong. It is one of the most densely concentrated and efficient cannabis markets in the world with 80% of cannabis sales occurring in a single county, a county which needless to say includes Las Vegas.

Since the end of the state government's fiscal year in June, cannabis sales in Nevada have increased over 20% year-over-year to US$639 million. To put that into perspective, that increase is larger than the entire Canadian cannabis market sales in the first ten months post-legalization.

Over the coming months, we will continue to direct our efforts on delivering strong results in Nevada, where we are very excited about both our pace of sales and our brands launched to-date. I would now like to turn the call over to Geoff Miachika, our CFO to discuss our Q3 performance in further detail.

Geoff?

Thank you, Ken. As noted at the beginning of the call, all figures discussed today are in U.S.

dollars unless otherwise noted. Revenue for the third quarter was $2.5 million, representing a significant sequential increase of 292%.

We began recording revenue on November 9, 2018 subsequent to the acquisition of the assets of NLVO. In August of this year, we also began generating revenue out of our flagship greenhouse.

Revenue for the third quarter includes both of these locations, $1.8 million revenue generated from the greenhouse and $696,000 generated from the NLVO property. Cost of goods sold was $1.9 million, inclusive of production cost expensed and cost of inventory sold, which resulted in a gross margin of 25% for the quarter, a significant increase over the negative margins in Q2.

Given we have only began selling into the greenhouse for half of the quarter, management is pleased with the progress on our gross margins. As sales out of the flagship greenhouse continued to expand and our sales mix shift towards this lower-cost product, we expect cost of sales on a per gram basis to decrease further.

This, coupled with the upcoming brand launches, we expect our margins to increase. As the company moves out of the initial startup phase, and into steady-state operations, we expect the per gram cost of goods sold to decrease further as operation gains efficiencies.

As we transition to using our Bruce Street greenhouse more actively, we will use the Neeham Property to test strains from our genetic library and to grow select premium craft indoor cannabis. G&A expenses for the quarter totaled $4.4 million, which included $640,000 in accounting and legal fees.

$794,000 in wages and salaries, $558,000 in consulting cost and $677,000 in rent and security costs. Third quarter net income totaled $15.7 million, in addition to the revenue and cost of goods sold, net income was driven by $18.4 million gain on the growth of the biological asset; $9.7 million gain on a fair value of derivatives; and net income was partially offset by $3.7 million in finance expenses; $1.1 million in share-based compensation; and $3.9 million in deferred income tax expense and G&A costs previously described.

In regards to the biological assets, we saw a decrease in the balance of this asset as compared to Q2 which was a result of the lower plant counts in the flour and vegetation rooms, as well as the focus of the company to cultivate specific streams for our brand launches, which is resulting in higher quality lower-yielding strains currently being grown at the greenhouse. Additionally, due to the timing of the period end, the plants in the flower rooms are not as far along in their growth cycle as compared to June 30th 2019.

As noted, during Q3, the company was focusing on cultivating specific strains for anticipated brand launches in Q4 and through the first half of 2020. As a result of this, we have accumulated an inventory of high-quality flower, totaling approximately $51 including $40 million of fair value adjustments.

Through the remainder of Q4 and into 2020, we will continue to cultivate additional strains, as well as shift a large portion of that dried flower into the extraction lab to facilitate the launch of derivative branded products. With the lab capable of consuming approximately 3,000 pounds to 5,000 pounds per week of bio assets, we're now seeing inventory levels shift to a more balanced mixture of flowers and oils and concentrates, as inventory levels have been drawn down since September 30th through flower sales and transferred product to the extraction labs.

At the end of September, we had working capital of $38.2 million, including $5.6 million in cash, while our cash position enable us to maintain our current operations in order to advance the continued launch of our brand partners in Nevada; maintain additional resources for working capital; and assess our geographic expansion, earlier this month, we announced an offering totaling 20 million Canadian dollars. The offering closed last week and I am happy to say it was oversubscribed.

In addition to further free up the balance sheet, during the quarter, we entered a sale leaseback transaction with Treehouse for a 25 thousand square foot facility at Neeham for US$20 million. This agreement also closed last week.

We greatly value our shareholders’ support and look forward to the opportunities as additional capital provided to us. Given our strong revenue performance to-date, we're now forecasting that the company will achieve approximately $9 million in revenue by the end of calendar 2019, which would equate to Q4 revenue of approximately $5 million.

Keep in mind that this figure represents less than six months start from the active selling of product out of our greenhouse. This revenue guidance ultimately contemplates a roughly 250% increase in our Q3 numbers, a testament to our ability to continue to expand Flower One’s leadership in the Nevada market.

Now to provide a deeper understanding of the growth opportunity ahead of us, I will turn the call over to Kellen, our Chief Strategy Officer to discuss our brands and sell-through approach Kellen?

Thanks, Geoff. It has certainly been an exciting quarter.

With our greenhouse now licensed to sell and production lab live, we are able to generate a much larger number of products for our growing list of industry-leading brand and retail partners. I want to spend a moment clarifying how significant these milestones are and provide some examples of how these milestones have already translated into sizable revenue for Flower One.

To help put this in perspective, Old Pal, one of our first brand partners is now the top-performing flower brand in Nevada, an incredible accomplishment achieved in less than three months from its first license sale out of our greenhouse. We are very proud of this achievement and believe it speaks volumes about the potential of our brand partner program and ability to execute.

Beyond Old Pal, we have launched several other brand partners that continued to gain positive traction in the market, as Flower One continues to build deeper and more meaningful retail partnerships, we can expect sales to increase in volume and include a larger number of products. We are constantly reminded of the need for our services in Nevada and beyond, as we continue to be actively pursued by cannabis brands across the country for some form of partnership.

Just this last month, we have announced partnerships with leading brands such as Cookies, Kiva 22Red and The Clear to name a few. To dive in a bit further on a few brands, Cookies is an industry-leading cannabis brand famous for their award-winning genetics.

They've amassed a cult-like following of dedicated customers that proudly wear the brand's clothing line or adorn tattoos featuring the brand's signature C. Cookies’ commitment to quality is unwavering and our partnership is a true testament to Flower One’s cultivation abilities.

We are excited to bring Cookies portfolio of brands to Nevada in 2020. We also announced a partnership with edibles brand, Kiva Confections.

Kiva is California’s leading edible brand in terms of sales and it currently represents five out of ten of the top-performing edible SKUs in the state. Kiva is famous for their delicious low-dose, high-quality confections and is set to launch their first-line in Nevada next month with additional SKUs in 2020.

And last, but certainly not least, just two weeks ago, we added California Cannabis and Lifestyle brand 22Red founded by Multi-Platinum recording artist Shavo Odadjian, of System of a Down. A true advocate and passionate cannabis leader, Shavo has built a strong following for 22Red and their premium cannabis products.

22Red will be available for purchase in Nevada in the spring of 2020 and has already established partnerships with some of the state’s leading retailers. Moving to our retail and white-label solutions.

In addition to licensing our greenhouse, we continue to diversify our genetics by adding some of the most desired strains to our portfolio. This stream diversity allows us to customize our offerings to both brands and retailers, driving sales across several key product categories.

With our production lab live, we can leverage these new genetics to offer a variety in nearly every cannabis derivative, including the fastest-growing categories such as Live Resin or sauce and other custom formulations that require large volumes of cannabis-derived terpenes and fresh frozen cannabis to produce. Flower One has a distinct advantage here and will be the first cannabis producer in the country to offer a menu of these products at scale.

Our ability to recognize and respond to market demands is second to none and we will continue to drive additional sales from brands retailers and our white-label clients. With that, I will turn the call back over to Ken for his concluding remarks.

Thank you, Kellen. In closing, while Flower One's third quarter was another strong result for the company, it is where we stand today as a business that I think is worth mentioning again and repeating.

Revenue is growing as I indicated earlier at a compounded rate of 15% every week since we began selling product from the greenhouse. The company recently surpassed $1 million in weekly orders for the first time.

The greenhouse continues to be an industry leader in cultivation performance with year-to-date yields of 192 grams per square foot on an annualized basis and a year-to-date harvest cash cost per gram of $0.44. Since the beginning of the fourth quarter, Old Pal in and NLVO are amongst the top ten selling flower brands in Nevada and as Kellen mentioned, Old Pal is the leading flower brand in the market today and holding four of the top ten flowers SKUs in the state currently.

Just yesterday, we announced the commercial launch of Kiva Confections, a leading edibles brand from California. And we have now begun selling our first run of packaged concentrates, which are going out to the market initially in white-label form.

And as Kellen also mentioned, we also recently announced two additional brand partnerships, very significant ones in Cookies and 22Red, our retail penetration rates in the market today stands at 85%; and finally, the company is forecasting that it will achieve approximately $9 million in revenue by its fiscal year end of December 31, 2019 and is on track to be cash flow positive in the first half of 2020. When we entered the Nevada market, we had a vision of becoming the largest and most efficient cultivator and producer in the state.

We have now delivered on that promise and by doing so, have quickly become the largest brand fulfillment partner in Nevada. Our solid Q3 performance and the current revenue performance of the company is a testament of that success.

I would now like to turn the call over to the operator.

Good morning, everyone. Thanks for taking my call.

I just have a few things here. So, you noted on the top of the call here that revenue grew at 15% a week since August.

I am wondering what kind of growth probably you're expecting going into 2020. And how you expect the growth to trend in the event that the injunction on dispensary license is or isn't lifted?

Hi Patrick, I will start and then I'll also have Geoff pipe in on the answering the question. So, at the moment, obviously, the thing that we've been observing and trying to get a better handle on is, really what is the pace of our ability to channel fill at retail level and I think what we're very pleased to see is that there is this very consistent pace to our channel filling.

So, having that consistency through the last 90 to 100 days is significant. We only have five brands in the market today.

And so, really what that indicates to us is that when we move into 2020 and we begin to launch additional brands, Kiva, as we mentioned is just launched in the market. We truly believe major industry-leading brands like Cookies are going to have a very significant impact on our top -line.

So, I think it's safe to say that as we move into 2020, we expect that compounded weekly growth rate to increase as we go into next year. And in terms of retail, obviously, I think the injunction rate now is impacting the ability for those additional retail outlets to open.

We certainly have heard on the ground locally that as we move into 2020, some of these retailers with provisional licenses that were granted late last year will have the opportunity to open. I think the state has sort of indicated approximately half of the 67 provisional licenses will move forward in some way shape or form over the course of 2020.

Geoff, I don’t know if you want to add to that?

I think, I'd just echo Ken’s comments. I mean, we only have five of these brand partners launched right now and as we move into 2020 and we see those Kivas and the Cookies and the 22Red, I would expect - and of course, if we can get some of these the traditional retail locations opened that that weekly growth rate will at least maintain and if not increase for us as we move through the first half of 2020.

Okay. Great.

And I guess, you are a little bit more on that. So the looking back at state tax data available, it looks like the wholesale market has been about $25 million a month for the last six months of data that's available.

So what - I guess what are the catalysts besides the view dispensaries take that higher? Is it new products being introduced from players like yourself into the market?

Or what are the [indiscernible] I guess you see increasing in that total or form the share of the total?

Yes, I think. I'll start and maybe just make a few comments initially.

As I mentioned, I think, our pacing of commercial launches of our brands and additional SKUs will be very significant in terms of gaining market share. And you really have to look at our business and look at two things.

One is - or actually three things. One is obviously the new brands we're bringing into the market.

And secondly, it's the SKU extension of these brands. So as an example, we're starting with very specific SKUs for Kiva in preparation for really our hard launch early next month in December.

But you'll see additional SKUs for Kiva consistently come out as we move into 2020. I think a lot of our brands will follow that same kind of trend with SKU extensions.

And then, I think, and Kellen can speak to this in a lot more detail, but we certainly believe there are significant white-label opportunities in the market. We're already seeing that in specific SKUs like concentrates.

Certainly, our RDT, quick strip technology was brought into our brand partnership portfolio specifically for the intention of two things, being able to leverage the white-label opportunities in the market and secondly, be able to sort of expand the SKU extension of our existing brands. So, I think that combination of opportunities is really what will be the major growth catalyst in terms of driving our market share going forward.

Kellen, I don't know if you want to add to that?

Yeah, I think that's really important what you mentioned, Ken, is the number of SKUs that each of our brand partners have and what is going to be the timeline for us to roll out all of those SKUs, because brands like Kiva, Cookies, and a number of our other partners are hoping to roll out dozens of SKUs, in some cases even more. We will have to wait or we will have to do that in phases based on the ability to add our commercial kitchen and continuing to ramp up our abilities to launch additional brand partners.

So I think it's important for everyone to understand that those products, as they become available to the market are also likely to expand the size of the market. If I look at the dispensary offering in the State of Nevada, I think that the average ticket is low in stores and a lot of the offering of products is limited if you compare it to a more evolved market like California.

So, I think one of the things we are doing is bringing a number of new SKUs into the market with qualified brand partners and I think that's going to continue to allow us to take more and more market share over time.

Hi guys. Just a couple of questions.

Could you maybe just sort of talk about your brand partnership pipeline? You've got 15 brands right now.

But how many other guys you're sort of talking to? And how many are you potentially looking to sign up through the remainder of the year and into 2020?

Sure. I'm happy to take that one.

The reality is, right now, we have a very, very long waiting list of brands and retailers that would like us to make additional products for them that we are in the process of prioritizing. So, from our standpoint, we want to make sure that we're working with the largest brands and the ones that capture not only do the largest volume in terms of sales, but also capture the best margin and have real brands, as well.

So we're open to continuing to evolve our program. I don't think we have set a specific number of brand partners, as again some brand partners might - it might be better for us to work with less brand partners that have additional SKUs versus adding more and more in total volume.

So I think, that will depend on how the how each of the brand partners perform in each of their respective categories and then we'll make a strategic decision based on the success of the brands. And then also, it's important to keep in mind the demand and the white-label solutions that we're providing for our retail partners.

We are not naïve to the fact that the more and more white-label solutions and house brands that we're able to fill for retailers will often probably have an effect on the amount of product that is purchased on the brand side. So we're - we will make a strategic decision based on our allocation of product that takes good care of both our retailers, our white-label clients and then the brand partners themselves.

Right.

And Greg, if I can – sorry, if I can just add to Kellen’s comments, I think the other way to look at our portfolio of brands is not just the number of brands, but how we leverage those brands with our - ultimately with our retail customers. So, I think even with five brands in the market today, one of the things we're observing is, when you look at the retail buying pattern in Nevada, it remains a pretty complex relationship between suppliers and the retail buyers.

And so, if you're in the market today and you are a retail buyer for a major dispensary chain, you are still dealing with 50 to 60 different suppliers. And that becomes - when you're when you're trying to manage our business day-to-day, that's a pretty arduous task.

And so, what we're already finding even with five brands and what we still consider today a fairly limited initial SKU count is that the buyers are really attracted to being able to deal with a single supplier like Flower One in the market that can provide that sort of one-stop opportunity to pick up multiple brands and multiple SKUs. And so, going forward, our ability to do exactly what we said in our business model which is, leverage that arrangement for volume discounts, just-in-time delivery and efficient supply chain management model are really the things that are going to come into play early in 2020 for us.

I mean we're already seeing it today. But again, I think as we expand the commercial launch pace here going into Q4, we're going to have at least another two to three brands in the market by the end of the year.

So, we'll have a critical mass, which will allow us to really leverage those points going forward early in the New Year. So it's not just number of brands.

It's really strategically how we leverage those brand offerings with our retail customer base.

Great. And maybe just help us understand sort of a brand launch.

How long does it typically take for a brand to get fully ramped up in the market? I mean you've just got your first five brands launched.

You're doing $1 million. You just had your first $1 million per week order.

You're adding more brands. But when you add in a new sort of brand partner, how long do you feel it sort of takes before you get to a critical mass where you're sort of achieving what you wanted with that brand partner?

Yes. It's a great question, Greg.

I mean, I think the first thing I would say there is, it's a rigorous and complex process and we've learned that very, very quickly as a company. It is not easy to launch brands in any market.

And I think what you're seeing the evidence to Nevada is that there aren't a lot of brands coming to market, because it is very difficult. So, again, I think for our business model, we benefit, because that's core to our business.

And so, when you look at a task or component to getting a product to market like compliance for labeling and packaging, getting state approvals on any hardware tied to that SKU, those things take time and you have to understand the regulatory process of dealing with the state. The average operator might launch one or two SKUs a year and have to go through that process, our team is dealing with that every week with the state.

So, those types of efficiencies are really important. But when you look at timelines, to answer your question, you're really looking at, on average, depending on the type of product, whether it's a flower-based product or an oil-based product that involves hardware, anywhere from at least five to ten months.

And it's a really intricate process because you're dealing right from the type of strain you're growing and consulting your brand partner on what is that to you to see terpene profile need to be to satisfy what they want in their product, to as I mentioned the detailed labeling requirements. How you market that brand in the market.

Your ability to seed-to-sale track, all the way through. All the Nevada testing that you have to do and that includes your five pound dry flower test, as well as any testing you would have to do on an edible.

You have to do homogeneity testing. You have to do testing of your finished product lots.

Your ability to sort of interface with the brand and make sure that they're providing all of the required SOPs to develop that product and get it to market. Those SOPs have to be approved by the State.

So, the last thing I'll say is that, when a retail buyer purchases those lots for those SKUs, they're very particular about being able to choose from a limited number of lots as opposed to – so, in other words, if you're ordering 1500 pre-rolls as an example, they don't want it to be cut across four different lots. So, little details like that.

They add up overtime. And if you're not in the business daily of launching and managing brands going into the market, that becomes a really overwhelming process and a real hurdle to get into the market.

And so, we think again we've gained a lot of proficiency and efficiencies in getting products to market. We will only get better at that over time.

And I think the brands recognize that in addition to capital and how difficult it is to get products into any market including Nevada. They really look at our turnkey model is being the way forward to get quickly into the market.

Thank you. Good morning.

I just wanted to ask, I guess on California, the expansion plans. Maybe you can just give us a bit more color on what what's changed on your end in terms of pausing?

I mean, I guess, it was only a few weeks ago that I think you announced that you were ahead of schedule there. So maybe just give us some color on what your thought process is with California?

Yeah, I think the first thing to say is that California remains the interest of the company. We - nothing has changed in terms of us viewing that as a significant market opportunity.

And just to kind of briefly review why sort of uniquely for Flower One that's a market that strategically has a lot of accretive value for us longer-term. The first is, just looking at obviously the size and scale of that market.

When we take 80% of the fact that – sorry, 80% of the revenue in Nevada is contained to a single county in the lower part of the state and you couple that with the geographic mass of California. There is no - I mean that represents $4 billion in cannabis sales today, probably growing to about $8 billion in five years.

And there is no other geographic footprint anywhere in the U.S. where you're going to get that kind of market opportunity.

So, the fact that we've got that sort of concentrated market opportunity is significant. Secondly, again, when we look at execution in cannabis, I think we all can appreciate that for every business or every company in this space, it's difficult.

We know that firsthand given what we've been through in the last 19 months. We've done very well.

But it's been seven days a week to get to where we are today. So our ability to concentrate our mind and matter between two major markets, two strong markets is significant.

In the end, when we do enter California, our two facilities will be one-hour apart and that's significant. We're in the same time zone.

It's not like we have to move right across the country to manage our business. We will be able to really gain some efficiencies there.

And then, thirdly, which is probably the most obvious one, more than half of our brand partners today are from the State of California. So that brand connectivity really does give us an accelerated opportunity into that market.

So, I think that's the first thing that we just want to highlight is that nothing has changed in terms of our interest in that market because it is very significant long-term. I think where we are today is that we certainly recognize there are unique market conditions at play right now.

I think it's very difficult to say how those market conditions are going to change going into next year. But we have to look at that in a very realistic way and factual way and we also have to listen to our shareholders.

We are very fortunate to have a cap table that consists of a lot of very significant and meaningful shareholders and we've talked to them. They've approached us and they've also given us their view which is that, now is not the right time that execution is important.

That's always been our focus and we shouldn't stray from that and we need to continue to deliver on the opportunities in Nevada first and foremost. And so, I think that's really where we are.

And as I said earlier in the call, I think as a management team and as a Board, we will continue to assess California and we’ll come back to revisit a clear plan and a timeline around California sometime in 2020.

Okay. Okay.

I'll leave it there. And then, I guess on - in terms of the - I just wanted to also ask on the inventory level.

So the build I guess in the quarter obviously, as you're ramping up, I am just wondering, maybe you could give us some color of how many months of inventory is that? Or I was just trying to think I got my thinking around managing your operations like if the pace of production at the NLVO greenhouse flexible.

And the reason I'm asking just because it seems like the inventory level is already quite significant. And I am just wondering how that would tie into your operational plans going forward in terms of – I mean, I just - I just don't want to see you get into a situation where you have an excess of inventory that's just too much.

Maybe you could give us some color around how you're managing operations in light of where the inventory level is?

Yeah, sure, sure. So, Geoff may have some comments as well on inventory from a financial perspective as well.

But I think I'd start by saying, first off, when you look specifically at the third quarter, we commissioned our lab in mid-September. So, specific to the quarter, we only had two weeks of extraction in that quarter.

And so, when you look at our - even going back to our Q2 call, we expressed to the market even at that time that our intention was to continue to build inventory in anticipation of the high throughput we would get - excuse me - we would get out of our extraction lab. So, today if you were to look at our extraction lab, we're currently - our throughput on the lab is 3,000 pounds to 5,000 pounds per week.

It's really significant. And so, if you take that you translate it over a month, you're already dealing with processing up to 20 thousand pounds of flower.

So, that number alone should kind of put it into a little bit of perspective as to where our inventory is today and why it is as notable as it is. We have to be able to safely manage that throughput.

Particularly in the context of all of our brands, it's a lot of forward planning to be able to manage and deliver on all of those brands. And so you need to have not just dry cannabis inventory, but you have to have significant distillate inventory, as well.

The second thing I would say is that, our brands are more and more and Cookies is the best example. Kellen made a really good point that Cookies is known for their genetics.

More and more brands are getting very specific about the types of strains that they want to see going into their products. And so, if you looked at our performance through Q3, we harvested 20 strains.

And so, again, on a strain-by-strain basis, you're accumulating some inventory. So even if you did 1,000 pounds or 2,000 pounds of inventory accumulated by strain to meet the requirements of your brands, you're already at again at a significant number in terms of inventory.

The last thing I'll say on inventory which we reiterated or indicated on our last quarterly call was, it's only proper business to manage your inventory such that you can control against any downside risk on supply and a big part of our business is our cultivation. And we've been very fortunate not to have any crop failures.

But that ability to sort of have a contingency of inventory remains an important part of our business. And again, we have a high degree of - we've built a high degree of confidence with our brand partners that we can deliver consistently at volume to their market for their SKUs.

And so, they want to have confidence that there is really a sufficient contingency reserve built into our inventory levels. And then, from a performance perspective, Nav you sort of mentioned how are we managing that inventory as we go through this quarter, I think, one point we can make is that, in the eight weeks going into this quarter, we've already decreased our inventory because of the brands that we're bringing to market.

I think we're already down about 10% on that inventory. So, it's going as planned in terms of inventory management.

That inventory will continue to get drawn down as we launch more products into the market. Geoff, I don’t know if you want to add?

I think further to that, as I noted in my part of the call, that flower inventory is going to shift over to an extraction process. So as Ken noted, we are moving a lot of product into the extraction lab, which between that and the sales that have happened since September 30th, we have drawn inventory flower down by about 10%.

Good morning and thanks for taking the questions. Let me follow-up on that as you see the shelf mix kind of from flower moving into the oil-base, can we expect that to kind of be consistent with the penetration percentages of the categories that are happening in Nevada and do you break out kind of what percentage is going to be flower versus oil for this quarter and then kind of going forward?

Yes, I guess, what I would say just on general trends and Kellen and Geoff will probably want to add to this. But definitely, there - from a consumer standpoint, I think when you look at edibles, when you look at oil-based products, when you look at concentrates, the demand is certainly increasing.

So, as we sort of look at our SKU portfolio, we're going to see a greater mix in the short-term and as we go into 2020 with a heavier weighting towards these higher margin advanced product derivatives. And that's only good news for our business obviously.

But I think Nevada is still showing itself at least for now to be still a very strong flower market. All of the flower that we have that we're moving into flower-based products is moving very, very well.

And again, just using the Low Pal as an example, that's a pretty good example of showing how strong the market is in terms of flower-based products. So, we think that'll continue.

But for us, I think the benefit is, when you look at our portfolio of products that are in the market today and will be in the market in the next couple of quarters, we're really touching every type of SKU and every price point. And so, we have a pretty good handle and we're interfacing with retail really well.

We have 85% penetration. So, we're able to see and react to those shifts and how the market is changing.

And again, I think that's one of the benefits for brands to be working with us. We are so tightly interfaced with retail that if we do start to see some notable shifts, we're able to respond pretty quickly in terms of adjusting our SKU count or our SKU portfolio accordingly.

Kellen or Geoff I don’t know if you want to add anything.

You mentioned the dispensaries doing about 85% while there is 65 dispensaries there. Obviously, 80% comes from the Las Vegas market.

You see probably half of those new licenses moving forward. So that gets you up to about 90 or 100 dispensaries for 2020 looking out.

Kind of what's your target? And then, Kellen, maybe on that side, are the brands displacing other brands and new brands coming in?

Or kind of what are the retailers - are they adding these to the store shelves? What are the retailers telling you with the new brands that you're providing to those retailers going forward?

It's a great question. Scott, I think, it's a combination.

So, yes, some brands without question will be displacing other brands. But I also believe some brands will be adding much needed new SKUs like low-dosed edibles like Kiva brings that are not currently in the market that would hopefully increase the average ticket inside of a dispensary.

So, I think it's a combination of both.

And then as far as the retail penetration, how do you guys continue to kind of work with those partners in establishing more SKUs and more brands into maybe a 100% of the retail or…

Yes, our goal is 100% penetration when it comes to retail without question. And I think we just simply do that by the value that we offer the retailers.

So whether and what we've done is, rather than trying to force the retailers to accept a particular brand, we really try to serve the retailers as our partners and help them capture additional margin and attract new customers. So, we worked hand-in-hand with their buyers to try to give them the best shelf that they can.

And for us, that's the ability to offer them a complete offering across the dispensary, across the shelf so that includes premium products, luxury products, value products, and branded products, as well as white-labeled products under their own house brands. And so we kind of leave it to the retailers to make the decision about what they want to push.

But we're there to serve them and help them capture additional margin.

And I think the other another point there too is, is a lot of the new dispensaries coming online or extensions of the dispensaries that are already in play in the market. So, we have those relationships already and as they are opening their new stores, then we will be there to fulfill on that.

Yes. And that's a good point that Geoff raises, because the conversations have already started with a lot of those operators in anticipation of knowing those stores are coming online that they're looking at efficient ways to fill their shelf space.

And to add to that, the retailers are also identifying they know that the big brands are going to attract their customers. So they are actually looking at their product mix now and their offering inside the store and trying to determine where the best places are to offer their house brands and where the best places are to feature the most well-known brands like Cookies and Kiva and alike.

So I think, we're going to see that continue to evolve and hopefully that works out really great for Flower One, because we are not only providing those brands, but we're also white-labeling their house brands. So for us it's a win-win regardless.

Thanks guys for taking my question. Just wanted to, first of all clarify the brands that you are selling right now.

Just you mentioned five that are launched, I believe I know which five they are. But just to make sure my notes match up with yours, what are the five brands that you have launched?

And then, you also said, two more brands will be launched by the end of the year. I think, you mentioned Kiva is one of them.

Just wondering what the seventh one is?

So, yes, in the market today, we have RDT, Palms, Old Pal, Flyte, and CannAmerica Brands, which was our first edible. As we go into this quarter, we obviously announced yesterday, Kiva.

So we're starting with an initial SKU in terms of getting Kiva into the market focusing on getting some good solid sell-through through December. And then, we're looking at two other brands.

One is, HUXTON, an Arizona-based brand. We will be launching pre-rolls associated with them and then likely having Ignite in this quarter, as well.

And then, in addition to that, Jason, as you know, we have our in-house brand, which is unique obviously within our portfolio. It was acquired as part of our acquisition of NLV Organics.

That brand is which is a premium brand in the market, flower-based largely brand has continued to do very well. So, we're continuing to leverage our 25,000 square foot indoor cultivation and production facility specific to NLVO and basically everything that we harvest and process out of NLVO moves into the market immediately.

So, in respect to that it's really six brands that we've got in the market today. So, that's kind of what Q4 looks like.

And then, 2020 or the early part will be very significant for us between Cookies, 22Red and The Clear and some additional SKUs for Kiva. So, we've got a good pace to total commercial launches well into 2020 for the business.

Okay. Perfect.

Thanks for clarifying that. Just in terms of production, it looks like you've - based on your initial harvest, it looks like you got pretty low cash cost for production.

Just wondering - two questions, one, what what's your expectation of total production in the fourth quarter? And like I mentioned, it's a great low-cost number.

Just wondering whether you're still achieving efficiencies and should we use that current rate as sort of our cost basis going forward? Or do you think you can actually get lower than your current to what you stated in your press release?

Yeah, I'll take that. I mean - we the $0.44 of year-to-date, so of course, there is definitely inefficiencies as we're going through the startup phase and those early cultivation.

So, from our perspective, we expect to try and bring that number down. One of the things too is, a lot of that cost in this quarter was driven by - even electrical costs that the greenhouse which are definitely in their higher peak rates during the summer time.

There is a four-month period from June 1st to September 30th which can drive some of that. So, Q4 we would expect those costs to come down.

And then, through our drive to profitability, I think we are definitely focusing on these cost efficiencies and bringing other cost-downs such as labor and whatnot. So, we expect to see some drops hopefully in Q4 and into Q1 and Q2.

And again, just to add to that, I think, when we look at our business, one of the things we wanted to kind of underscore on this call is, in looking at Q3, we really only began selling out of the greenhouse midway through the quarter. And obviously with advanced product derivatives, really just in the last two weeks.

So, when you look overall at the business, whether it's cultivation or production in our gross margin, I think we're at 25% today, which we feel is very good, given we're still really in the startup phase of the business. And I think as we eventually get into a stronger steady-state and as we launch more SKUs into the market and our top-line increases, it's not going to take much for us to be able to increase those margins in a significant way when you look broadly at the business.

Okay. Perfect.

And any comment on total production in Q4? I am just getting an idea of how close you are to full production to stay?

When you say - when you say production are you talking specifically, Jason, about cultivation?

Yes. Sorry, yes.

Okay. Yes, I think it's actually a great question, because again, when you're in the startup phase and you're growing cannabis at scale for the first time, you're going - even for us there is always a bit of a learning process.

And so, one of the things that we - as most on the call will know, we did our inaugural harvest in June. So again, it's still early days for us even on the cultivation side despite having such strong analytics to our cultivation vertical.

But when you look at how we've been cultivating, we've been doing a number of things. Obviously, we've moved a number of strains through the greenhouse.

We have a significant genetic library of more than a 150 strains within our business today. So we have the luxury of - given the scale and the footprint of our cultivation to really test a variety of strains, both based on quality of the flower and how conducive they are to growing in the greenhouse, as well as just yield performance.

And so, we've been able to go through that, as well as a number of notable plant density trials. And so, I think already when you look at where we are in the greenhouse today, we've been able to make some good adjustments that are relevant in terms of looking at profitability.

So, what I mean by that is, it's not just about yield on a per square foot basis. It's also about the quality of that product coming out of the greenhouse.

And I think we've identified some lower-yielding strains, which are actually higher-quality. And when we look at that higher-quality of flower coming out the greenhouse, it ultimately is going to lead to a higher-margin product.

So, that for us is significant. And so, we've adjusted the greenhouse and our crop mix to reflect that.

And then, secondly, I think, as we look at some unique brand partners that are bringing leading genetics to the greenhouse like Cookies, we have to reconfigure our crop mix again and adjust the greenhouse to be able to plan for those new genetics coming into the greenhouse. So, those adjustments will see an overall - I would say, on average lower plant count in the greenhouse.

But more importantly, a much higher yielding higher-margin type of flower coming out of the greenhouse in Q4.

Thanks. All of my questions have actually been answered.

Thanks for just that – I wanted to ask one more question which was around your CapEx plans for 2020. I guess, obviously the NLV greenhouse is basically complete.

But I think you’re looking at expanding or adding a kitchen at NLVO. So just wondering if you could - what's their CapEx budget or plans for 2020?

Yes, we are looking at just some reconfigurations and renovations at NLVO for the commercial kitchen side of things. Of course, we have sold that NLVO facility to Treehouse last week.

So, this will be tenant improvements done through Treehouse and we have some pre-approved budgets from them. I think we're looking in the $1.8 million roughly.

But it will be tenant improvements. And the NLV greenhouse itself is fully complete now.

Yes. So, in terms of your portion or your expenditure on that commercial kitchen, that amount is - how much is that amount?

So, that will be any on our part. So it'll be a tenant improvement.

Okay.

Funding from Treehouse.

Okay. Got you.

Okay. Thanks.

Real quick. I know you guys have put California on a whole, but do you look at maybe splitting up where you could maybe address an outdoor grow potentially as talked about for next year to kind of start that process without the larger greenhouse?

Sure, I can take that one. I mean, we continue to explore all of those opportunities.

We think that California is going to be ripe with a lot of distressed assets and new licenses coming online as well. So, whether it'd be the thousand licenses or a 150 licenses coming online in Santa Barbara County or other places where we would have the opportunity to look and explore outdoor, I think we'll take a very close look at it.

But again, I think it's important that we focus on executing in Nevada. But without question and we're keeping a very close eye on the market and any opportunities that might exist there.

Okay. Thanks.

Thank you, operator. Our success today cannot have been accomplished without the support of all of our stakeholders and most importantly our shareholders.

So as always, we want to thank them for their continued confidence in Flower One. We've had a great quarter and as we mentioned and we really wanted to make the effort here this morning to give a good - a pretty clear picture of our current business, given we're more than halfway through Q4 and things are going very well.

So, we're certainly pleased and we're excited about what 2020 has to offer for the company. So, on behalf of everyone at Flower One we want to thank you for joining the call this morning.

And for our U.S. investors, we want to take the opportunity to wish you a very happy Thanksgiving and for all the folks joining in from the West Coast, it's early in the day.

So, again thank you for taking time out of your day so early to join us for the call. Thanks everyone.