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

Thank you for standing by. This is the conference operator. Welcome to the WeedMD, Inc. First Quarter 2020 Results 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, Sachi, and good morning, everyone. Welcome to WeedMD's First Quarter 2020 Conference Call. Please note, this call is being recorded. For copies of our press release and supporting documents filed today or to retreat 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 on the call are Angelo Tsebelis, Chief Executive Officer of WeedMD; Lincoln Greenidge, WeedMD's Chief Financial Officer; and will also be joined by Stephen Ng, our Chief Commercial Officer, during the question period. Today, we'll review the highlights and financial results for the first quarter of 2020 as well as recent developments and provide a business and operational update. Following our 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 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 our first quarter 2020 earnings call. Today, I'll briefly recap our progress and achievements during the first quarter as well as some of the business highlights subsequent to the quarter end. As we had previously announced, we had a record quarter with net revenues of $12.2 million. In addition to the strong revenue growth, Q1 was also a period of strategic transition for WeedMD. The change in leadership midway through the first quarter marked the point of change in the strategic direction for the company. With a focus on integrating and combining the Starseed and WeedMD teams, our renewed commercialization plan focuses on strategic sales channels and delivering finished products to the market. Our driving operational efficiencies and focusing our attention on our costs and OpEx, we continue to drive -- to identify opportunities and synergies to further integrate our operations and execute against our plan. In the first quarter, we experienced substantial increases in both revenue and gross profit. As I indicated, this includes a record net revenue of $12.2 million, a sequential increase of over 327% compared to the 2.9% in the previous quarter. This increase was driven by successes across all parts of our business. We saw strong sequential growth in Adult-Use sales as Color cannabis continued to be in demand by consumers; robust organic growth in our medical channel, which included a full quarter contribution from Starseed Medicinal; and a substantial sale of wholesale outdoor product. Let me start by highlighting our retail engagement ramp up with our Color cannabis brand. Last June, WeedMD expanded its sales distribution channel with the launch of Color, a dedicated Adult-Use brand. Since that time, we've continued to experience increased brand recognition and positive retailer feedback across the country. In Ontario, the country's largest market, WeedMD's flower products have consistently appeared in the top 5 most popular brands within the categories in which they compete. We also continue to receive extremely positive retail responses from all of our strains, in particular Pedro's Sweet Sativa and Ghost Train Haze from both retailers and customers alike. While COVID has created some obstacles in how we interact with the market segments, we've been able to pivot and align with our distribution agencies to provide education and behind-the-scenes engagement opportunities for the budtenders and retailers alike. For example, we recently partnered with the OCS to host a couple of virtual lunch-and-learn sessions to share our unique cultivation story as more and more people look to better understand cannabis from seed to sale or in our case, [ flower ] to sale. While we continue to focus on delivering quality product cannabis at scale to the adult-use market, we're also engaged in developing high-quality customer-focused products in traditional and in new formats for the retail market as well as our high-marginal -- high-margin medicinal business. On that note, we experienced a significant uptick in our medical sales since merging with Starseed. The value from the Starseed brand has been our strong contributor to the impressive revenue and margins in the first quarter. Our closed-loop medical sales model, combined with our strategic partnerships with insurers and notable retailers, such as Shoppers Drug Mart as well as access to over 40 independent medical and cannabis clinic networks across Canada positions us well to become leaders in the medical cannabis space. We believe this potential access to a substantial and direct consumer audience of over 350,000 people will drive further revenue growth as well as margin expansion as we continue onboarding new partnerships and business development opportunities in 2020. As a reminder from our previous call, we enlisted 3 -- 4 new partnerships at the beginning of this year, with LiUNA Local 1059, International Union of Painters and Allied Workers, the Insulators Local 95 and myHSA. With direct access to our large patient base, we are well positioned to introduce new formats and products directly to our medical channel first. We recently launched our new line of medical vape products called Aurum through Starseed medical channel. The Aurum vape line is the first of many future formats for patients looking for alternative ways to treat their medical conditions and ailments. These products were all produced and formulated in-house at our extraction hub, CX Industries. In addition to developing a pipeline of new products and formats, we are also continuously improving the overall customer experience by enhancing our service offerings. In June, WeedMD launched the same-day medical cannabis home delivery service with express delivery to the Toronto area patients. The customer-centric strategy pilot -- project called PatientDirect services local patients with order fulfillment from our centralized medical fulfillment center in Bowmanville, Ontario, which is just outside of GTA. Next, I want to provide you with a brief update on our outdoor cultivation program. In January of this year, WeedMD completed a substantial landmark sale of its inaugural outdoor cultivation, earmarked for extraction and international markets. This was a sizable sale in the first quarter for WeedMD that validated the quality of our outdoor biomass that provided us with the assurance that our second year of outdoor growing with the best practices in hand and our process is well defined, will definitely be a success. As one of only a handful of LPs to successfully enter its second year of outdoor operations, I can tell you that we're already impressed with what we're seeing progressing outdoors right now. Our cultivation team has worked tirelessly over the past few months to improve our outdoor efficiencies. Building on our experience from last year's outdoor season, I'm very pleased with what we've been able to achieve. We will continue to find ways to further optimize and manage our production costs while also improving yields in cannabinoid content as a way to maximize the commercial success in our outdoor. Let me change gears for a second and provide a quick update on CX Industries. With our 2 Vitalis Q90 extractors fully commissioned earlier this year, we expect to scale our production to peak at over 50,000 kgs of biomass annually. Additionally, there are a number of ongoing discussions underway, from tolling, white labeling and cross-collaborations that we will share more news as soon as they are available and if possible. Finally, the first quarter was a step in building a sustainable financial foundation. As part of the Starseed transaction, WeedMD closed a $25 million equity investment from the LiUNA Pension Fund of Central and Eastern Canada during the quarter. This investment strengthens our balance sheet and reaffirms the commitment of a strategic partnership with long-term institutional investor whose interests are clearly aligned with ours. Additionally, subsequent to the quarter, we also amended the terms of our senior secured credit facility, whereby certain financial covenants were extended by 1 year and principal repayments were deferred to the end of 2020. This additional financial flexibility combined with the LPF investment will help support the company's commercial growth initiatives. As we look ahead, we believe WeedMD is well positioned for continued sales growth and long-term profitability. Our best-in-class cultivation and processing operations are among the finest in the industry, and our commercial team takes great pride in leveraging our cultivation platform to deliver craft cannabis at scale. With our valuable medical sales channel and our growing Adult-Use brand, Color cannabis, we will continue to make the development of our market position top priority moving forward. We believe all of these factors, combined with our customer-centric initiatives will ensure our continued growth as we move forward through the balance of 2020 and beyond. I will now hand the call over to Lincoln, our CFO, who will review our financial results. Lincoln?

Thank you, Angelo, and good morning, everyone. Today, I'll briefly review our first quarter 2020 financial highlights, as Angelo has already mentioned corporate highlights of the first quarter. In addition, this first quarter of 2020 also represents the first full quarter of our integrated -- our integration with Starseed. Our results reflect the underpinning of a strong and fully integrated sales model and improved operational infrastructure. For the quarter ended March 31, 2020, we reported net revenue of $12.2 million, a sequential increase of 327%. Our strong revenue performance was also attributable to the large scale sale of almost half of our outdoor cultivation from biomass as well as increased sales to LPs and the provincial distribution channel for the adult-use market. Our first quarter revenue mix was also quite diversified, including significant medical and Adult-Use sales. As a percentage of gross revenue, direct-to-patients accounted for $5.3 million or 38.6%, and wholesale accounted for $8.3 million or 61.4%. First quarter 2020 gross profit before changes in fair value was $1.4 million. Gross profit before changes in fair value was $1.4 million, representing 11% gross margin compared to gross loss of 7% in the prior quarter, mainly attributable to increased revenue from the sale of dry cannabis and revenue generated during the period from the full quarter following the completion of the Starseed's acquisition. In the first quarter of 2020, WeedMD's weighted average cost of sales per gram, inclusive of all costs, direct and indirect, to produce and package, was $2.64 compared to $2.90 in the first quarter of 2019. Greenhouse cultivation cost per gram was $0.84 for the quarter, and outdoor cultivation cost per gram was $0.11. This improvement is a direct result of increased economy to [ sixth ] scale as we have increased our capacity and continue to drive efficiencies. We expect this improvement to continue following Strathroy's ramp-up to full capacity with additional greenhouse and outdoor growth in the second half of 2019. We expect that other initiatives, including packaging, automation and optimizing operations at each of our Aylmer, Strathroy and Bowmanville sites should also help to improve our gross margin moving forward. Selling, general and administrative expenses totaled approximately $6.5 million for the quarter ended March 31, 2020, compared to $3.6 million for the quarter ended March 31, 2019. The change was mainly attributable to an increase in our operational footprint and an increase in headcount to support the company's growth as well as our integration with Starseed. As an example, on the operational footprint comment, the total square feet of operations increased significantly over the prior year. Consequently, also resulting in a significant year-over-year increase in headcount at WeedMD. As we noted, this was indeed a period of transition, whereby we assess synergies, optimizations and cost savings for execution. Even so, we are now halfway through the year and have reached just over half of our estimated savings for 2020. Adjusted EBITDA loss totaled $5.1 million for the quarter ended March 31, 2020, as compared with a loss of $3.1 million for the same period in 2019 and compared to a loss of $8.2 million in the previous quarter, mainly driven by production ramp-up and increased selling and general and administrative expenses, also partially offset by the improvement in gross profit before changes in fair value of approximately $2 million, driven by sales increase. Please note, adjusted EBITDA is not a recognized measurement under IFRS. And this data may not be comparable to data represented by other companies. Management believes adjusted EBITDA to be an important measure of the company's day-to-day operations excluding interest, tax, depreciation and amortization, stock-based compensation, fair value changes and other noncash items and nonrecurring items. This measurement is useful in assessing the results of operating and strategic decisions. Net adjusted operating loss for the first quarter increased by $1.7 million to an operating loss of $7 million compared to a loss of approximately $5.3 million last year. This improvement was the result of the increase in revenue from multi-sale channel. Net loss and competitive loss for the quarter ended March 31, 2020, was $9 million compared with a loss of $2.4 million for the same period in the prior year. This change is primarily a result of the increase in revenue more than offset by an increase in operating costs as more rooms came online in the second half of 2019, requiring ramped up cultivation activities to support an increased capacity. As for our balance sheet, we ended the quarter with cash and cash equivalents of $14.2 million. Total assets as of March 31, 2020 reached $213.7 million, included inventory and biological assets of $37.8 million, a 3% decrease from the previous quarter or 173% increase over the same period of the prior quarter. Our assets increased as a result of changes in inventory and biological assets, primarily driven by the increase in cultivation capacity and the greenhouse expansion as well as the outdoor growth. As we have previously discussed, in February 2020, we secured a $25 million strategic equity investment from LiUNA Pension Fund of Central and Eastern Canada relating to the closing of the Starseed transaction. LPF's investment has strengthened our balance sheet to support our continued commercial growth and our expanded distribution channels. More recently, this month, the company amended its $39 million senior credit facility, securing the deferral of its financial covenants by 12 months to June 30, 2021, and quarterly principal repayments have been rescheduled to commence on December 31, 2020. We appreciate LiUNA's continued support, which provides us with greater financial flexibility to support our continued growth. In summary, the first quarter of 2020 began to show the benefits of our combination with Starseed, increased economies of scale and improved capacity and operating efficiencies. With the $25 million strategic equity investment we received from LiUNA Pension Fund and recent amendment to our credit facility, we have a solid operational infrastructure already in place and an enhanced balance sheet to support our continued commercial growth and broader distribution channels, we look forward to meeting the growing demand for our high-margin premium finished products. At the same time, we will continue to focus on improving our operational performance, cash and inventory management and controlling expenses. With that, I'll turn the call back over to Angelo for closing remarks.

Thank you, Lincoln. In closing, with the benefits of our fully integrated business model, scaled cultivation and production capabilities, combined with our strong distribution channels, WeedMD is uniquely positioned for continued growth and a clear path to profitability. Before we get to the questions, I would like to briefly touch on the impact of COVID-19 on WeedMD and the industry. The Canadian cannabis industry fundamentals continue to remain relatively solid despite the devastating impact that the pandemic has had on many other industries. We're seeing retail activities in locations in Ontario, which are now 100 stores strong, Québec, Saskatchewan and Eastern part of Canada advancing. With the current business environment continuing to be affected, every day, we are seeing a positive turn from our normal business operations as both individuals and companies adjust to operating in the new environment. As the situation continues to stabilize, our leadership team continues to assess a phased approach for a return to the workplace strategy. Of course, it goes without saying that the safety of our employees and the community remains our top priority. We will continue to follow government and Health Canada recommendations and guidance to ensure everyone's safety and well-being, even as we maintain our operations at the fullest capacity and continue to manage all discretionary and nonessential expenditures. This concludes our prepared remarks. 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, and we are now ready for questions. Go ahead, operator.

[Operator Instructions] The first question is from Neal Gilmer of Haywood Securities.

Perhaps I want to start from that wholesale transaction you had in the quarter and how we should be looking at future potential wholesale transactions. I think you mentioned it was about half of the biomass from the outdoor harvest last fall. So is it safe to assume the other half has gone towards extraction? And for the next couple of quarters, there'd be minimal wholesale with potential for that to return following this year's outdoor harvest?

Neal, it's Angelo here. I think that, that is a fair assumption. A good portion of the remainder has been earmarked for our own extraction as well, and we continue to explore other opportunities, but I would not suspect that we would see anything of that magnitude. And yes, we are already starting discussions with a number of groups around our second year harvest. So more to come on that.

Okay. I wanted to see if we could dive a little bit further in, you did touch on it somewhat in the prepared remarks, Lincoln, but on the gross margin profile, quite frankly, it's a little bit below my expectations for Q1. And I guess, part of that would be driven by it looks like the $1.25 price that you disclosed for that wholesale transaction. How should we be looking at that going forward? How much is that of an influence on that 11% gross margin in the quarter? If we tick that out, can we -- is there any sort of normalized level you can sort of give us or what your targets are? I know you talked about some automation with some of the packaging and so forth. Where would you like to get your gross margins to, say, for at the end of 2020? Or any sort of visibility you can provide on that level, please?

Yes. Neal, it's Stephen here. I think, certainly, the wholesale transaction had an impact there on margins for sure. If you look at our cultivation costs to begin with, that -- there certainly was an improvement in this quarter, down to $0.84. We continue to work through operational improvements on postharvest activities. So we're looking to improve that on a cost per gram basis. We're not really giving sort of a specific target in terms of gross margin, but we are looking to move it up substantially from where it was this past quarter.

Okay. Maybe my last, and I'll get back in the queue, is what are your CapEx plans for the year? Do you have a number that you're disclosing as far as what sort of CapEx dollars we should be expecting to be used this year?

I would -- it's Angelo here, Neal. I would say that our CapEx is going to be fairly minimal for the balance of the year as we had previously disclosed. Really, 2019 was really the year of establishing that platform, both on the Starseed side as well as the WeedMD side. There are a few initiatives, as Lincoln alluded to, things like enhancing some of our automation and some of -- optimizing some of our postharvest production and processing. But I would say that we wouldn't expect a significant outlay for any sort of CapEx.

The next question is from Graeme Kreindler of Eight Capital.

I wanted to follow up with respect to the revenue mix there. And I appreciate the comments regarding wholesale transactions. I was wondering if you could share what the demand outlook looks like for Q2. What we should be expecting across the medical segment as well as the Adult-Use segment? There's been quite a drastic shift in trends from the consumer side of things, and it looks like demand might be leveling off a bit on that period on the Adult-Use side, but I'd just be curious in terms of what you guys are seeing and what that could mean for expectations for the top line?

Yes. Graeme, it's Stephen here. For sure, I think Q1, as I think Angelo and Lincoln alluded to, was really focused on enforcing -- reinforcing and building upon the plan to sell certainly a lot more volume into direct-to-consumer channels in both medical and rec. And I think you saw that in terms of the mix. Again, sequentially, in both medical and recreational, I think we're up 30%, 40% sequentially in both medical and rec. So we certainly saw healthy volumes and healthy sales into both of those channels. Q2 will certainly -- will be the quarter where I think we see some impact from COVID, certainly. As you probably know, I think things started to pick up again in the later part of Q2 for the industry overall. And on the medical side, I think the benefit with medical was just given the direct-to-consumer and virtual nature of a lot of the transactions and interactions with customers. So certainly, relatively less impacted by COVID there. But I think things certainly began to pick up again industry-wide, I would say, towards the end of Q2.

Okay. And then to follow up on that. We've seen a trend in the industry of many licensed producers trying to go after the value segment here. And I'm wondering, you have the pricing disclosed for the sales made to the provincial control boards. I'm wondering if the increase in popularity and competition in that segment, whether that is expected to have weigh on the average pricing. Or so far what you've seen into Q2 and beyond, you've been able to hold in or potentially raise prices. What should we be -- how should we be thinking about that going forward?

Yes. No -- thanks for the question. No, certainly, we've been following the developments in that portion of the market for sure. And look, I think the reality is a lot of folks are looking at their -- it begins with their own capacity and how they think they can monetize what they have coming down the pipeline. For us, we're certainly not a massive scale producer, and we continue to feel confident we can move the product that we have coming down our pipeline internally, continue to focus on other segments other than aside from value. So I certainly can't comment on others in terms of what they're seeing from a pricing standpoint with respect to provinces, but as you noted, we haven't -- we certainly haven't faced any material or any decline in pricing with respect to the provinces. So it hasn't impacted us directly. And again, I think, ultimately, retailers, provinces want to ensure that there's a healthy mix of product in the marketplace, including moderate- to higher-priced product, because that means there is ultimately more margin in the channel for everybody through and through. So I think we're well positioned where we're at today and don't have any plans in the near term to participate in that value segment.

Okay. Great. Then to follow up regarding the gross margin. I was wondering, would it be possible to provide what the gross margin was by revenue segment, just to get a better appreciation of how that might look going forward, especially considering that you're not expecting to have any large wholesale transactions in the near term.

Yes. I think maybe one simple way to sort of look at it because we certainly do report the average selling price per gram for the quarter. And if you compare it against the all-in cost of goods sold that was reported there, you'll see that medical certainly had a premium in terms of a margin relative to rec. So I think if you do the math, just based on the numbers that are available there, you get a pure product gross margin in rec of about 40%. And in medical, somewhere north of 60% or so on a pure product incremental gross margin basis. So that will probably give you some sense of the incremental margins in those 2 channels.

Okay. Got it. And then my final question is with respect to the balance sheet, and I think you ended the quarter with about $14 million in cash. You mentioned earlier that you're expecting minimal CapEx for the balance of the year. So I wanted to get some color regarding whether that cash balance fund you for the remainder of the year? Or if that's not the case, then what sort of initiatives or options are you looking at in order to keep the operations funded across the medium term?

Graeme, it's Angelo here. Maybe I'll take that one. And so with respect to our cash position, specifically, you're right, we don't have any major CapEx expenditures coming up as we identified, but we are having proactive discussions in managing our cash and capital raise situation. And quite frankly, we're very confident that we'll be able to manage through this in a very responsible way. And if you look at our situation, we have a large insider shareholder base that is fully aligned. And at the end of the day, our interests are with them and with us. And so we know how to manage through that. More importantly, we have optionality. So we're having several various conversations and options of where we can go and look at ways to manage some of that and raise some of that capital if needed. And at the end of the day, we understand how the capital markets work. We have a deep understanding of this and with our previously LiUNA financing been a great example of that. And so we'll find ways to make sure that we have what we need to work through the balance of this year and well into next. I mean, at the end of the day, I have to say that we're really excited with our position right now. We did a lot of heavy lifting back in 2019 in setting ourselves up. We took care of a number of items that we needed to in the first half of the year, and we have the solid foundation, infrastructure as well as that distribution platform that I think positions us really well to manage through this on the back half of this year and then especially into 2021.

The next question is from Craig Wiggins of TheCannalyst.

Congrats on the bank deal amendment. That's a big one this quarter.

Thank you.

The question I have for you is looking at your disclosure from your Q3 and Q4 last year and this Q, you had wholesale to federal LPs of about 50 -- about $5 million this Q. Your delta in extract inventory between Q3 and Q4 '19 was roughly $5.3 million. This has some of the hallmarks of possibly being a biomass swap with the extraction prior -- extraction delivered prior to the biomass. Was the buyer of your biomass related to the supplier of your extract?