Entourage Health Corp. (ENTG) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the WeedMD Inc. Fiscal Year 2019 Financials Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Marianella delaBarrera, Vice President, Communication and Corporate Affairs with WeedMD. Please go ahead.

Thank you, Ariel, and good morning, everyone. Welcome to WeedMD's Fourth Quarter and Full Year 2019 Conference Call. Please note, this call is being recorded. The copies of our press releases and supporting documents filed today -- or rather last night or to retrieve a recording of this call, please visit the Investor Relations page of our website at www.weedmd.com. The replay will be available later this afternoon. With us today is Angelo Tsebelis, Chief Executive Officer of WeedMD; and Lincoln Greenidge, WeedMD's Chief Financial Officer. During the Q&A portion, we will also be joined by Stephen Ng, our Chief Commercial Officer. Today, we will review the highlights and financial results for the fourth quarter and full year 2019 as well as recent developments and provide a business and operational update. Following these formal remarks, we will be prepared to answer your questions. I would also like to remind everyone that during today's call, we will discuss our business outlook and make forward-looking statements. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with SEDAR. These comments are made based on predictions and expectations as of today, and other than as required by applicable securities laws, the company does not assume any obligation to update or revise them to reflect new events or circumstances. Now at this time, it's my pleasure to introduce Angelo. Angelo, please go ahead.

Thanks, Marianella, and thank you, everyone, for joining us on our full year 2019 earnings and business update conference call. As this is my first public conference call as CEO, I'm excited for this opportunity to recap what we've achieved to date and to discuss our outlook for the future. Following that, Lincoln will walk us through the financial highlights of the period, after which we'll be happy to take any questions. For the first few months since my appointment, I've had the pleasure and opportunity to work with one of the most talented teams in the business. Our cultivation, operations, commercial and corporate teams are doing an incredible job, even under some truly challenging circumstances to propel our business forward. Bringing 2 companies together is never easy. Integrating our teams and respecting our physical distancing policies and other measures has added a new dimension of complexity. But I'm extremely proud of the effort and the results to date. We are now looking ahead to drive our strategic plan and to execute on delivering high-margin, high-quality products to the market. The foundation of our business continues to be our stubble cultivation platform. During my most recent visit, I was energized by the passion and enthusiasm of the teams and can proudly report that the rooms and plants have never looked better. The pride in attention to detail that goes into our cultivation platform is impressive, and the proof is definitely in our final product. We are well on our way of achieving our goal of growing craft cannabis at commercial scale. I'll take a few minutes to recap some of the highlights from this past fiscal year. 2019 was a year of significant growth for WeedMD. We experienced 162% year-over-year revenue growth compared to the previous year, and more importantly, we are well-positioned for continued growth given the increased capacity of our production platform. At the same time, we made a series of strategic investments to enhance our infrastructure and improve our overall operations. We capped off the year by completing the transformative acquisition of Starseed Holdings. Our strong medical platform, coupled with the continued development of our Adult-Use brand Color cannabis, continue to be a top priority. With our successful outdoor harvest in 2019, the commissioning of our CO2 extractors and 20 fully licensed grow lights in our greenhouse, we will continue on this growth trajectory throughout the balance of this year and well into next. The company's $2.9 million fourth quarter net revenue was comprised entirely of consumer sales as availability and demand for Color cannabis continue to expand. The strong momentum carried into the first quarter of 2020, where the company generated preliminary unaudited net revenue of $12 million, a record high quarter for WeedMD, with the Starseed medical brand and direct-to-consumer platform contributing significant high-margin revenue. This solid year-over-year and quarter-over-quarter revenue is reflective of our strategy, which emphasizes customer-centric initiatives to drive direct-to-consumer sales, stronger margins and cash flow as we execute on our commercial plan. And we expect it will continue to drive our growth going forward. In addition to our record sales growth, we delivered on a number of other strategic accomplishments in 2019. Some of these include the launch of our Color cannabis brand, our outdoor harvest as one of the first in Canada to cultivate cannabis outdoors. We harvested a yield of over 8 tons of finished product. And I'm happy to report that we just completed planting our second season this week, leveraging our experience and learnings from last season. We licensed our new 50,000-square-foot purpose-built facility, specifically designed for our current and future outdoor cannabis operations and processing. In addition to this new facility, we were successful in advancing and completing a number of other licensing files with Health Canada, including our sales in automated packaging lines at our Strathroy and Aylmer facilities, the licensing and launch of CX Industries, our extraction and processing facility in Aylmer, Ontario, and a research license in our Bowmanville facility, which enables us to expand our human research capabilities. We also finalized the acquisition of our 150-acre property in Strathroy. And finally, perhaps our most notable 2019 achievement was the acquisition of Starseed Holdings, which was completed in December. For those of you not familiar with the transaction, Starseed is a medically focused cannabis company, distributing to insured patients with coverage under their benefit plans. The Starseed merger was a significant achievement for us and marked a major step in our plan to reshape the company into a fully integrated cannabis operator with full processing, production and B2C service platforms. First and foremost, Starseed was the perfect complement to WeedMD's existing high-quality cultivation and operations. Already widely recognized throughout the cannabis industry for its cultivation, acclaimed genetics library and one of Canada's first and largest outdoor cannabis harvests, our cultivation costs are among the lowest in the industry. Having said that, prior to the Starseed acquisition, WeedMD's business model primarily focused on wholesale LP-to-LP product distribution. Now the combination with Starseed has brought a rare and unique direct-to-consumer medical platform onto WeedMD's high-quality cultivation, extraction and manufacturing infrastructure. Starseed partners will provide us with benefit plans and other insurance providers to offer medical-grade cannabis and services to patients. Its closed-loop medical system has direct and exclusive access to a consumer audience of over 350,000 patients. Additionally, Starseed enjoys third-party distribution agreements with notable retailers such as Shoppers Drug Mart and has access to over 40 independent cannabis clinic network across Canada. The Starseed transaction brought WeedMD a valuable medical sales channel to generate superior margins through its direct-to-consumer sales model. It has also substantially strengthened our balance sheet with concurrent financing that occurred earlier this year. We believe the revenue mix shift from wholesale to direct-to-consumer will continue to drive stronger margins and cash flow. This model, coupled with our solid operational infrastructure and emphasized balance sheet, positions WeedMD for continued growth on a clear path to profitability. Our first quarter 2020 net revenues of $12 million represents 320% increase -- quarter-over-quarter increase, reflecting the company's first full quarter with Starseed. Revenue from Adult-Use and Medical channel increased meaningfully quarter-over-quarter to record high sales in Q1 of 2020, driven by higher product availability and customer acquisition initiatives. Additionally, WeedMD completed a substantial landmark sale of its inaugural outdoor-cultivated biomass earmarked for extraction in international markets. In addition to these preliminary revenue results, our strong business momentum has continued in 2020 as Starseed Medicinal has added 4 more strategic partners to its already strong base. These include LiUNA Local 1059 from London, Ontario; The International Union of Painters and Allied Workers; the Insulators Local 95; and myHSA, a digital provider in administrative health care spending accounts. We expect to add additional partners during the coming years. More companies are recognizing that wellness programs are an effective way to engage their employees in healthier living. As we move ahead, we look forward to executing against our commercial plan by focusing on the following key initiatives during 2020: scaling our unique medical distribution business model by way of paid benefits, delivering quality cannabis to the Adult-Use market via our Color brand and launching quality customer-focused cannabis products in traditional and new formats to drive greater revenue across all markets. This includes our recently introduced oral vape that will launch in our Medical channel in the coming weeks. A critical component of our strategy is continuing to improve operational performance as we complete the integration with Starseed. This, combined with our revenue growth, puts us firmly on the road to profitability. We are working towards profitability by sustaining and operating a lean and efficient business across our streamline sites, capturing higher-margin products rooted in the low-cost quality cultivation platform and securing an estimated $10 million in synergy or in SG&A cost reduction run rate by end of 2020. As part of these efforts in 2019 and early 2020, we have already successfully completed the integration of our Toronto offices, bringing many of the Starseed and WeedMD professionals -- professional teams together for more efficient collaboration and to streamline costs. Likewise, our production facilities in Aylmer, Bowmanville and Strathroy have been integrated to better support the increasing product demand that we've been experiencing with our continued increase in new patient registrations. To summarize, we accomplished a great deal in 2019 and in early 2020. We achieved substantial revenue growth, reached a number of key operational milestones and completed our transformative acquisition of Starseed. The acquisition of Starseed complements our strong cultivation and product development capabilities, while further solidifying our medical position in Canada. Looking ahead, we see multiple drivers for our continued growth and margin expansion, including some favorable market trends that continue to drive the Canadian and global market, our unique B2C medical platform and further expansion of our market share with a focus on high-margin, high-finished products by capitalizing on our mass craft [indiscernible] spreads. We believe these factors will continue to substantially expand our revenue and contribute to long-term positive EBITDA. We're extremely optimistic about our prospects and look forward to updating you as we continue to execute our strategic plans in 2020 and beyond. One of the other highlights I should mention is that in March, we announced the appointment of Lincoln Greenidge, our Chief Financial Officer. Lincoln brings over 20 years of corporate finance, M&A, capital markets and operations experience to the WeedMD team. We are very excited to have him here with us and look forward to his continued contributions to our organization's success. This concludes my opening remarks, and I'll now pass the call over to Lincoln, who will review our financial results. Lincoln?

Thanks for the warm welcome, Angelo, and good morning to everyone. There's no better time to learn about a company than coming in during a time leading up to an earnings release, and on top of that, in the midst of a pandemic. However, I'm happy to be here with you all. Today, I'll briefly review our fiscal year 2019 financial highlights. I'll keep my comments focused mainly on our full year 2019 results as Angelo has already mentioned, the highlights of the fourth quarter. We reported net revenue for the year ended December 31, 2019, of $20.8 million, representing an increase of $12.8 million or 162% year-over-year, primarily attributable to increased sales to LTs and the provincial distribution channel for the Adult-Use markets. As a percentage of revenue, direct-to-patient sales accounted for $1.8 million or 8.6% and wholesale accounted for $19 million or 91.4%. 2019 gross profit before changes in fair value was $5.3 million, a 19% gross margin compared with 41% in the prior year. The margin decrease was primarily due to the company ramping up production, as it brought newly licensed cultivation rules online as well as decreases in selling prices due to the implementation of excise tax, partially offset by improved cost to sell. We expect to see tangible improvements as we continue following structured ramp-up to full capacity in the second half of 2019, with additional greenhouse and outdoor growth. Other initiatives included packaging automation and optimization operations at each of our Aylmer, Strathroy and Bowmanville sites. It should also help to improve our gross margin moving forward. General and administrative expense has totaled approximately $19 million for the year ended December 31, 2019, compared with approximately $10 million for the year ended December 31, 2018. The change was mainly attributable to an increase in our operational footprint and an increase in headcount to support the company's growth. Total square footage of our operations increased significantly over the prior year. Consequently, also resulted in a significant year-over-year increase in head count. Adjusted EBITDA was totaled $13.9 million for the year ended December 31, 2019, as compared with a loss of $5.7 million for the prior year period, mainly driven by increased general and administrative expenses of $8.5 million, partially offset by the improvement of gross profit before changes in fair value of approximately $1 million, which is driven by the sales increase. Please note, adjusted EBITDA is not recognized measurement under International Financial Reporting Standards. And this data may not be comparable to data presented by other companies. Management believes adjusted EBITDA to be an important measure of the company's day-to-day operations by excluding interest, tax, depreciation and amortization; stock-based compensation; fair value changes and noncash items and nonrecurring items. This measurement is useful in assessing the results of operating and strategic decisions. Net loss and comprehensive loss for the year ended December 31, 2019, was $10.4 million compared with a loss of $895,000 for the prior year. The year-over-year increase in net loss is primarily a result of the favorable $8.8 million gain recorded in the fourth quarter of 2018 on the termination of an office space as well as year-over-year increases in general and administrative expenses, share-based compensation and amortization, partially offset by an increase in sales and unrealized gains on changes in fair value of biological assets. As for our balance sheet, we ended the year with cash and cash equivalents of $8.2 million. Total assets as of December 31, 2019, reached $209.8 million, including inventory and biological assets of $39 million, an increase of 388% over the prior year. Our assets increased as a result of increases in inventory and biological assets, primarily driven by the increase in cultivation capacity at the greenhouse expansion as well as the outdoor growth. As Angelo noted earlier, in February 2020, we secured $25 million strategic equity investment from LiUNA Pension Fund of Central and Eastern Canada relating to the closing of Starseed. LPF's investment has strengthened our balance sheet to support our continued commercial growth and our expanded distribution channel. Before turning the call over to Angelo, I want to offer some insights on our performance during the first quarter, as we saw the heights of the coronavirus impact in the global markets. While the COVID-19 pandemic has affected the global require, we continue to see the fundamentals of the Canadian cannabis industry strengthening as we see retail momentum accelerating post-COVID, build-outs of retail locations in provinces like Quebec, Saskatchewan and Alberta advance and new cannabis products commonly referred to as cannabis 2.0 going to production. As Angelo mentioned earlier, we achieved preliminary unaudited first quarter 2020 revenue of $12.1 million, which is a record for the company and represents the first full quarter of our integration with Starseed Holdings. I believe this revenue figure is quite telling as it demonstrates the strength of our fully integrated sales model and improved operational infrastructure. Also, it's important to mention that the first quarter revenue mix was quite diversified, including significant Medical and Adult-Use sales, and the large scale sale of almost half of our outdoor-cultivated biomass. With our best-in-class operations, unique medical distribution platform and enhanced balance sheet from the $25 million strategic investment we received from the LPF, we believe WeedMD is well-positioned for continued growth and a path to profitability as we continue to capitalize on the increasing medicinal and adult-use utilization of cannabis, as growth resumes in the capital markets. Our integrated cultivation, extraction and fulfillment operations will enable us to produce low cost, quality cannabis to create a wide range of quality, high-margin finished products, which should significantly add to our profitability during the remainder of 2020. With that, I'll turn the call back over to Angelo for closing remarks.

Thank you, Lincoln. In closing, 2019 and early 2020 has truly been a transformative period for WeedMD. In 2019, we made a series of planned strategic investments and completed the build of our vertically integrated infrastructure, encapsulating indoor and outdoor cultivation, combined with in-house extraction, product development and manufacturing. It encompasses our historical strengths as one -- as Canada's one of -- as one of Canada's first and largest outdoor cannabis harvesters, and our strong brand and customer recognition built from providing high-quality products for Medical patients and Adult-Use consumers. We have taken the necessary steps to transition our business into a higher-margin direct-to-consumer operating model, accomplished in large part due to the acquisition of Starseed and by integrating this unique direct-to-consumer medical platform into our overall operations. We are accelerating our medical revenue growth and captive channels with Starseed, but we'll also be launching a new medical brand under the WeedMD label Entourage. In the coming weeks, we will also be announcing the launch of a new medical delivery product -- program, which kicks off in the Greater Toronto Area. We are simplifying and streamlining our production processes by optimizing our facilities. Strathroy is our cultivation hub that will optimize overall biomass production, everything from Grade A flower through to extraction, creating biomass for our outdoor operations. Aylmer is our extraction facility that is now commercializing that biomass into bakes and other new formats and products. And Bowmanville is our medical fulfillment center, but we are also exploring opportunities to incubate startup ventures and partnerships in the industry. Before we take your questions, I'd like to expand a little on Lincoln's remarks about COVID-19 and its impact on the capital and cannabis markets as well as specifically how it relates to our company. Certainly, the pandemic has impacted all of us, and we continue to work through these unprecedented times. We have taken all of the precautionary safety measures such as physical distancing and following our stay-at-home policies that would have seemed almost inconceivable to most of us just a few months ago. At WeedMD, we have a dedicated team actively monitoring the situation and business continuity plans in place to ensure we keep functioning and continue functioning at maximum capacity. Our team is well-equipped to handle this outbreak, regardless of its duration. We continue to follow government and health care recommendations and guidance to ensure the safety and well-being of our employees and customers. Protecting our employees and the community is always our top priority, and we are taking steps to keep everyone safe. We recently took additional steps to maintain our financial footing and ensure our business continuity. We are continuing to scrutinize and manage all discretionary and nonessential expenditures. I want to thank our colleagues for their professionalism and dedication during these difficult times and their continued commitment to our patients and customers. As the situation continues to improve, we are reviewing a phased approach for a return-to-the-workplace strategy. Despite the presence of COVID-19, we anticipate that growth expectations for the Canadian cannabis market and WeedMD will continue to improve as we move into the second half of 2020 and beyond. In the long-term, my team and I remain confident that WeedMD will emerge as formidable leader in the Canadian market. Our combination with Starseed has squarely positioned us to capture meaningful market share, and we have a strong balance sheet to support our expansion and pathway to profitable growth. We remain excited for our prospects and look forward to reporting our continued progress to you on future calls. This concludes our prepared remarks, and I'll now pass the call back over to Marianella, so we can open it up for questions.

Thank you, Angelo and Lincoln. This concludes our opening remarks. Ariel, we are now ready for the question period.

[Operator Instructions] Our first question comes from Neal Gilmer of Haywood Securities.

Maybe I wanted to start with respect to the sort of those wholesale sales that you touched a bit of it on your prepared remarks. But it's obviously a little bit lumpy in nature and affected Q4 and then -- and obviously positively Q1. How should we be looking at that going forward? You sort of have a base of little over $7 million, if you exclude that in Q1. Is that what we should be looking for as a build off into the Q2 and subsequent quarters? Or are you looking to do further wholesale sales of that remaining outdoor biomass that was harvested last October?

The biomass and large LP-to-LP bulk sales is really not core to our strategy going forward. As we mentioned, even in Q4, we started seeing the real ramp-up of our consumer and direct-to-consumer model, whether it's through our medical or retail channels in the Adult-Use sector. Obviously, large -- having the large biomass for the outdoor, and we'll continue to be opportunistic if opportunities present themselves, but it's not core to our growth going forward.

Okay. All right. And then yes, as you did touch on, you've showed some really solid growth in the Adult-Use, I sort of make out sort of 48% on a quarter-over-quarter basis in Q1. And medical, it's obviously a little bit skewed with the Starseed acquisition, but still strong growth there. Can you comment a little bit on where you saw, at least on the Adult-Use side, some of that growth come from? Is that in any particular province? Or that's, I think, above what you've seen from some of your peers, if you can provide any color on that Q1 growth in the Adult-Use, that would be great.

Yes, sure thing, Neal. I mean our Color cannabis, really -- we really started transitioning and ramping up sales and marketing activities at the end of 2019, and we started seeing some of those results. Q1 was really all about positioning ourselves in that, what we'd like to call that mass craft segment. It -- we really do take pride in the quality of the cannabis we're putting out. And really, that's where color will shine. But being able to do it at scale. And so really turning around a number of processes and operations from a packaging and processing perspective into more automated, streamlined processes in Q1 was the key and really getting a balanced sales and marketing strategy across the country. We saw some pretty good results across multiple provinces. And really, the question continues to be how can we do more of that and get more of our product in the market. So we are really starting to see some real energy built around Color, and the provinces are definitely responding.

Maybe 2 more, if you don't mind. You talked in your prepared remarks about achieving those $10 million in synergies through the combined organization. So can you tell us sort of where that comes off of? Is that from the Q4 levels? If we annualize sort of your Q4 operating expenses, by the time we get to December this year, we're expecting that to be around $10 million lower or maybe just a little bit more color on where those synergies come from and how we should be looking at it from a modeling perspective?

Yes. Really, that $10 million number was really a synergy that we had identified when we were putting -- finalizing the transaction, quite frankly. So a lot of it is -- was planned SG&A savings that we'll continue to work through, but also the synergies in bringing the 2 organizations together. Obviously, that happened at the end of Q4. So really, it's really from those numbers. And you're right, looking at the end of 2019 as sort of a comparison point. And I'm happy to say, and we mentioned a couple of those initiatives already underway, we started by streamlining the operations and activities that occurred at each of our facilities. We've synergized and brought everybody together in a Toronto office right now. So we've now finalized org charts, where we're working towards that leadership team and working its way to the organization as we continue to work with a number of different initiatives throughout the rest of the year. So pretty confident and hopeful that we'll get there.

Great. And my last one would just be sort of on some of those 2.0 products. Do you have an estimated time line of when you think those will be in the marketplace?

So as I mentioned, we will have the launch of our first phase imminently. We're launching in the medical channel first. We felt that this was a real strong position for us. With the number of competing bakes in the marketplace, it made total sense for us to focus on our captive channel and being able to capture a more unique product. But we will be launching Color bakes, I would say, sometime in Q3. We'll be more specific as continue to progress. And I'm hopeful and without -- don't quote me on it, but we're probably looking to launch at least one more 2.0 product later in the year.

[Operator Instructions] Our next question comes from Graeme Kreindler of Eight Capital.