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

Thank you for standing by. This is the conference operator. Welcome to the WeedMD Inc. Second 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, Ariel, and good morning, everyone. Welcome to WeedMD's Second Quarter 2020 Conference Call. Please note, this call is being recorded. For copies of our press releases and supporting documents filed today 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, we have Angelo Tsebelis, Chief Executive Officer of WeedMD; and Lincoln Greenidge, Chief Financial Officer. Today, we will review the highlights and financial results for the second quarter of 2020 as well as recent developments and provide a business and operational update. Following these formal remarks, we will be prepared to answer your questions and will be joined by Stephen Ng, our Chief Commercial Officer, for the Q&A portion of the call. I would also like to remind everyone that today's call -- on 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. Please go ahead.

Thanks, Marianella, and thank you, everyone, for joining us today. Before we delve into the progress and results of Q2, I want to take this opportunity to provide a personal account of the year-to-date as this is the first full quarter that I'm reporting on as CEO. Shortly after being appointed CEO, I set out a plan around 3 key priorities for the company: to establish a clear vision and corporate structure, to drive the business integration and to execute our commercial strategy and plan. It is these priorities that have laid the foundation for not only Q2 but for the rest of 2020 and beyond. The strategic shift from bulk or wholesale B2B sales to becoming a consumer-focused packaged goods company has been at the core of not only our operational transformation but also our corporate mindset. This is being evident in our sales mix, our customer and stakeholder engagements as well as the overhaul of some of our operational infrastructure. As such, we continue to drive the business integration of WeedMD and Starseed operations. We successfully consolidated our medical channel into a single platform. We reintroduced our Color brand and expanded the product line with new strains, launched new product formats, significantly upsized our cultivation, consolidated operations to realize greater economies of scale, introduced automation in both labeling and packaging to drive our efficiency and speed to market, concentrated on bringing down our SG&A, signed additional union groups and benefit insurance providers and that's just to name a few items. A critical step in riding the shift has been the continued effort to clean up the balance sheet we inherited by paying down over $12 million in payables since the beginning of the year as well as identifying and writing down, trimming old inventory from previous years. It is through decisions like these that we have managed to unencumber ourselves and continue to find efficiencies through consolidated activities and removing duplication. At the end of the day, our success ultimately speaks to our people and their ability to drive to execute the commercial plan. We have assembled the best leadership team in the industry, and our employees' passion and engagement is clearly evident in the energized cultivation, processing and packaging teams as well as a bolstered sales and marketing team. Notwithstanding these great accomplishments in the first half of the year, our second quarter results were not immune to the effects of COVID-19. Our inability to conduct our live education and activation initiatives with our union and insurance partners and their respective members resulted in a flattening of new patient registrations and softening of medical sales. Our combined second quarter net revenues of $5.9 million also reflects some of the changes in consumer-buying behaviors, which saw a load-in of sales in late March and much of April, which ultimately included a reduction of in-store purchases as well as reduced consumption of some retail formats such as pre-rolls. For the 6 months ended June 30, we recorded net sales of $18 million compared to $11.3 million for the same period in 2019. The 6-month revenue increase in 2020 year-over-year was mainly due to the full period of contribution of Starseed, the growth we've continued to experience in adult-use market and, of course, the substantial sale of outdoor biomass to an international license holder at the beginning of the year. Despite COVID-19 headwinds to our business, we are encouraged by the level of consumer activity and sharp, upward movement we are currently seeing throughout our operations. Since late June, net sales have continued to climb back to pre-pandemic levels as the overall industry has rebounded, and we are confident in our ability to grow near-term revenue as we continue to drive towards profitability. Starting in the second half of 2020, we have seen an uptick in customer activity, both from our direct and consumer and patient sales channels. We are on the path to profitability as is evident by our steady improvement in gross margin performance quarter-over-quarter. The increased harvest as a result of our greenhouses being fully operational delivered cost per gram from postharvest of $0.55 in Q2 compared to $0.96 in the comparable period for 2019. Coupled with the continued effort to introduce and drive efficiencies to streamline activities like the introduction of automation and some improvements in packaging, we feel we're in a strong position to drive through the rest of the year. We are now harvesting product in 17 rooms in our greenhouse. It's truly impressive, taking into account that 10 of these rooms were just brought online in the latter months of 2019. To note, WeedMD is currently producing the most quality, cultivated cannabis that the company has ever produced in a single period. Importantly, we significantly increased our capacity in 2020 without sacrificing our product quality. We also began our second season of outdoor cultivation, which we anticipate to have an impressive harvest over the coming weeks. By building on our experiences from last year's harvest, we achieved even greater progress to date and are well on track to harvesting a crop that is looking exceptionally promising. I'm very pleased with what we've been able to achieve and want to personally thank our seasoned cultivation team for all their hard work and dedication in bringing this season to fruition. Importantly, we remain disciplined in controlling expenses and reducing our SG&A by $1.7 million as a result of ongoing integration and other operational efficiencies. Lincoln will provide additional details on our second quarter financial performance shortly. Over the past few weeks, we've shared a stream of steady news, which I encourage you to read at your convenience. But to highlight some of those, we announced the expansion of our product offerings across all channels with our Cannabis 2.0 lineup of vapes, topicals and gels, including key strategic partnerships with Mary's Medicinals and Fire & Flower. We secured an amendment to our Strathroy sales license to include the production and sale of all cannabis formats from the site. Our adult-use brand, Color Cannabis, introduced a new cultivar, Black Sugar Rose. We merged our WeedMD and Starseed medicinal channels under one streamlined platform. And most recently, we secured $30 million of nondilutive financing from our strategic partner, the LiUNA Pension Fund. This financing comes at an inflection point in our development as it provides important working capital to drive sales and marketing initiatives for both our medical and adult-use brands, especially as we look to add more distribution channels for greater market penetration as the retail segment doubles in size over the coming year. I want to thank the LiUNA leadership and the pension fund for their continued support on our shared strategic and commercial vision. Their investment underscores their dedication to delivering medical cannabis as a safe alternative to opioids as well as the commercial value we see in both our adult-use and medical service offering. In summary, despite some challenging operational conditions in Q2, we continued to make significant progress, we remain focused on executing against our vision and we are well positioned for continued growth. This concludes my opening remarks, and 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 the second quarter 2020 financial highlights as Angelo has already mentioned second quarter corporate highlights. We reported net revenue for the quarter ended June 30, 2020 of $5.9 million compared to $8 million for the quarter ended June 30, 2019. As a percentage of revenue, direct to consumer accounted for $2.6 million or 45%, and wholesale accounted for $3.3 million or 55%. For the 6 months ended June 30, 2020, net revenue was $18 million compared to $11.3 million in the comparable 2019 period. The 6-month increase was mainly attributable to the full period contribution of Starseed, growth in adult-use market and a significant sale of dried cannabis to a license holder in the beginning of 2020. The second quarter 2020 gross loss before changes in fair value was $0.9 million, a 15% gross loss compared to an 11% gross margin in the previous quarter and 46% in the prior year. The 15% negative margin was primarily due to $3.9 million of noncash items, which included a $1.4 million impairment charge on inventory taken during the quarter and steps taken to automate and optimize operations at the Aylmer, Strathroy and Bowmanville facilities. As we fully ramp up, driving towards the end of the year, we expect to see improvements in our costs at various stages along the value chain. Now I'd like to provide some greater context into our gross margin results. Looking at our gross margin before changes in fair value and noncash items, the result reflected a [ 65% ] gross margin versus the negative 15% reported, demonstrating our continued efforts to streamline and gain efficiencies along the value chain as well as acknowledging the cash and noncash impacts of our cost of goods sold. In addition, I'd like to offer some additional clarity on the inventory write-off. In the first half of the year, we conducted an inventory assessment, which is customary in our industry. After assessing the inventory that was carried over from previous years, we elected to take an inventory write-down in the quarter in accordance with WeedMD's production and quality standards on the salable product. In the second quarter of 2020, WeedMD's weighted average cost of sales per gram, inclusive of all costs, direct and indirect, to produce and package, was $2.52 compared to $1.84 in the second quarter 2019. We have cultivation cost per gram for $0.55 per gram for the quarter compared to $0.96 during the same period in 2019. This improvement is a direct result of economies of scale as we have increased our capacity and efficiency, including the initiatives taken at each of our Aylmer, Strathroy and Bowmanville sites that I mentioned earlier. We expect this improvement to continue throughout the second half of 2020 within our greenhouse and outdoor growth activities. Bringing down our payables that accumulated prior to Starseed and WeedMD integration has been one of our key objectives. In fact, we've paid over $12 million in payables during the 6-month period ended June 30, 2020. We also realized operational efficiencies in our cultivation, which is now fully ramped. We continue to optimize our sites and, most critically, began executing on automation, which is yet to be initialized at that point. We maintain that the growth expectation for the Canadian cannabis market and WeedMD will continue to improve as we move into the second half of 2020 and beyond. General and administrative expenses totaled approximately $4.8 million for the quarter ended June 30, 2020 compared to $4.4 million for the quarter ended June 30, 2019, and down from $6.4 million in the previous quarter. The year-over-year increase was primarily driven by the acquisition of Starseed in December 2019 and the company's overall growth, mainly resulting in increases in values and benefits. However, as noted, we are seeing improvements quarter-over-quarter, resulting from a conscious effort to reduce [ overall overhead ]. Adjusted EBITDA loss totaled $5.0 million for the quarter ended June 30, 2020, as compared to a loss of $0.7 million for the same period in 2019, mainly driven by the impairment charge of inventory during the quarter that I mentioned earlier, substantial expenses incurred related to increases in production and selling and general and administrative expenses prior to optimization initiatives as we reduce these costs in the second half of 2020. Please note, adjusted EBITDA is not a recognized measurement in the IFRS. And with that, it may not be comparable to that as presented by other companies. Management believes adjusted EBITDA is an important measure of the company's day-to-day operations that excluded 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 loss and comparative loss for the quarter ended June 30, 2020, was $8.9 million compared with income of $12.6 million for the same period in the prior year. The year-over-year increase in net loss was primarily a result of increased operating costs in relation to the production ramp-up and expansion of the cultivation facilities, the impairment charge on inventory that was included in cost of sales and the realized fair value adjustments on inventory sold. As for our balance sheet, we ended the quarter with cash and cash equivalents of $5.7 million. Total assets as of June 30, 2020, reached $203.7 million, including inventory and biological assets of $38.6 million compared to approximately $29.4 million during the same period last year. As previously discussed -- disclosed, in June, we amended certain terms of our senior secured credit facility entered into on March 29, 2019. Under the terms of the credit agreement amendment, we secured a deferral of certain financial covenants by 12 months to June 30, 2021, and quarterly principal repayments are rescheduled to commence at the end of 2020. Additionally, the company agreed to a 50 basis points increase in the applicable interest rate margin on credit facility. This amendment to our credit facility will provide us greater financial flexibility to support our continued commercial growth and our expanded distribution channel. And more recently, as Angelo mentioned today, we entered into a $30 million credit facility with LiUNA Pension Fund. This nondilutive financing matures in June 2022 and provides the company with a financial flexibility to drive WeedMD's commercial initiatives, in the next stage of growth. For further information on our financial and operating performance, I encourage you to review the company's financial statements and management's discussion and analysis for the quarter ended June 30, 2020, which have been filed and are available through SEDAR. Before turning the call back over to Angelo, I'd like to talk about the current state of the COVID-19 pandemic, how it has impacted our business and our expectations going forward. Throughout this pandemic, WeedMD has continued to conduct its operation to the fullest extent possible while continuing to take actions to protect the health and safety of our employees, suppliers and customers. During the first quarter of 2020, the coronavirus did not have a material impact on our business. As we progressed to the second quarter, we experienced a decline in sales relative to the first quarter, which, in part, can be attributable to economic uncertainty caused by the pandemic. Towards the end of the second quarter and early in the third quarter, we began to see increasing customer activity in the majority of our markets, reflecting the reopening of the Canadian economy and the steadily decreasing impact of COVID-19. This positive momentum has continued throughout the third quarter to date, including increased sales since the onset of the pandemic. While we remain optimistic that operating conditions will continue to improve, we will remain prudent and continue to be disciplined in controlling our expenses. We intend to continue improving our operating efficiencies, which will enable us to deliver improved margins and meet increasing consumer demand as the market for Cannabis 2.0 products continue to develop. Additionally, the $30 million credit facility from the LPF will provide us increased financial flexibility as we continue to expand our distribution, banner and brand awareness, which should drive further revenue growth. With that, I'll turn the call back over to Angelo for closing remarks.

Thanks, Lincoln. In conclusion, we are very excited about our prospects for the remainder of the year and beyond. We accomplished a great deal during the first half of 2020 and are proud of what we've already achieved. Importantly, we have laid the groundwork for our continued success moving forward even as we face some challenges and fix some difficult steps along the way. As we move forward, we will continue to focus on driving increased revenues and gross margins, expanding our product offerings in both traditional and Cannabis 2.0 formats and leveraging our strategic Starseed platform to drive organic growth across all our medical channels, optimizing our Color and Saturday cannabis brand presence and further growth in the adult-use sales, forming new commercial partnerships to generate incremental revenues and exploring new ways to enhance our customers' overall experience. My team and I want to thank our employees and shareholders for their continued confidence, patience and support and we look forward to updating everyone at our Q3 earnings call. Now we're happy to take your questions.

Thank you, Angelo. This concludes our opening remarks and we're now ready for the question period. Ariel, please proceed with the instructions to polling.

[Operator Instructions] Our first analyst is Neal Gilmer of Haywood Securities.

Yes. Maybe I wanted to start, Angelo, on some of your prepared remarks. I'm just trying to make sure I understand or the takeaway is accurate. You commented just that you're sort of seeing sales now above the pre-COVID-19 levels. So I assume that's sort of what you're sort of seeing most recently perhaps in the month of September. But for Q3, I'm trying to get a feel for whether we're expecting growth off of the Q1 level or growth off of Q2 but still -- maybe still not quite back to where we saw. And when I refer to Q1, I'm excluding that, obviously, that wholesale payment and more looking at sort of the direct-to-patient and the wholesale into the provinces. So any sort of further color you can provide on sort of what those sales levels you've seen recently are.

Sure. And thanks for your question, Neal. Hope you're well. Definitely. And obviously, without trying to provide any sense of formal guidance, the remarks are really about coming back to monthly run rate that we were seeing really going into March. We really -- as you recall, coming into this late January and early February, we really had that focus around turning around not just our medical sales but reintroducing that Color brand. And so we were really starting to see that ramp up. Obviously, close to the end of March, once the pandemic hit and things became a little more serious, we saw that pulling forward at stockpiling, if you will, of -- in all industries, not just cannabis. We -- there are some seasonality to -- for our medical business, but more importantly, what -- that, coupled with COVID, I think what we're starting to see now is sort of mid-August and really in the latter part, September, in particular, we're really starting to see that rebound back to what I would say the Q1 run rate that we were seeing. So feeling quite positive about where things will net out. We haven't obviously calculated Q3 yet. But when I think about our results, we're probably closer to a jump-off point of Q1 than Q2.

Okay. Appreciate that. And then can you provide a little bit more color on the medical side? Like if you go back -- obviously, I guess your -- when the transaction with Starseed closed, let's call it, towards the beginning of this year, and I guess the philosophy there was as far as the ability to grow that medical side through some of those agreements, is there any sort of anecdotal comments you can provide as far as how that's progressing, I guess, maybe again post sort of the main disruption in Q2?

Yes, happy to. I mean just to reiterate, you -- our model is quite unique, right? They are signed partnerships and arrangements with unions, employers, and it's really all about that cannabis as a paid benefit, quite frankly. The significant driver of our business is obviously patient registrations, and a lot of that had to do with our ability to be there in person, in activations and really around driving awareness through education. Obviously, with social distancing, that's significantly flattened. The other piece is we had a number of new partnerships that were lined up that we were prepared and hoping that we'd be announcing in Q2. Obviously, financial prudence during a global pandemic is something that has slowed some of those, what I call, B2B discussions. And we're optimistic that we might see some of that materialize in the latter half of the year or it may actually get pushed out to 2021. We'll see what that looks like. But there is inherent seasonality in some of that medical business, and we tend to see a bit of a flattening during the summer months. That, coupled with the pandemic, is kind of where we saw that compounding effect. But I'm, again, quite positive and quite optimistic, just given the most recent month and the last number of weeks, that we are starting to climb back into that regular run rate and growth rate that we were experiencing.

Okay. And then I didn't quite hear clearly one or two of Lincoln's comments on the gross margin. So I just want to make sure I have my takeaway here. I thought you said -- I believe you said $3.9 million total noncash charges and that included a $1.4 million impairment. And I think you mentioned what -- if you normalize, if you exclude some of those onetime items, what would your normalized gross margin have been for the quarter?

Yes. It's Lincoln. That's correct. I thought it would be important to provide a bit of color on our cost of sales and certainly our gross margin because we did absolutely have [ $2.9 million ] of noncash items. And when you back that out, you get a 50 -- actually 52% gross margin.

Okay. Yes. That is helpful. And then sort of you took that impairment on the inventory. And obviously, you still have, whatever, you have $35 million in the inventory and some more biological assets. But do you feel now that there is, at this current time, I guess, and I understand how the market can always change, but you're not expecting further impairments? Do you sort of feel like you're comfortable with what you've done with that impairment?

Well, the way it was is that you have to look at the assessment that has to be done on a periodic basis. Certainly, from our standpoint, we believe that the inventory that is currently on our balance sheet is what will be sold. And we were doing everything in our power to ensure that we have the sales team hitting the road and working through all our -- the markets to sell every single product that we have. So that's basically our way of doing that at this point.

Our next question comes from Patrick Sullivan of Eight Capital.

I know -- understand the headwinds experienced in Q2. I definitely see it not only in WeedMD's results but other companies as well. I was wondering if you guys -- do you guys have any sense on where your market share was in the context of Q2? Was that -- were you still able to grow it? Or was it in line with Q1 or anything you can offer in that regard?

We have some insights, and maybe I'll turn it over to Stephen to...

Yes. Pat, I think it varies by -- province by province. So just to give you a sense, I think our market share was probably relatively flat, I would say, in some of the key provinces that we're in.

Okay. Great. And then I guess just for -- in terms of ramping things up, and you guys had some press releases about kind of 2.0 products and launches. When likely do you expect that stuff to really hit the income statement? Like when were orders taken out or when were things shipping? And will it be meaningful in the next quarter?

Yes. Fourth quarter will be the quarter when you'll see -- when we'll see that revenue hit our P&L.

Okay. Awesome. And then we're starting to hear more and more about the outdoor crops and getting the harvest and stuff like that. I wonder how are buyers assessing the quality of the outdoor products? Because it sounds like there's going to be a bit -- quite a bit hitting the market. And I'm not sure exactly how people are being assessed, I guess, on quality. So is it just THC content at this point? Or are there other metrics that people are looking at?

Yes. I'm happy to kind of at least give initial thoughts, and Stephen, feel free to jump in if there's anything I leave out. Typically, we were actually quite happy with the way we're able to commercialize some of our product last year. We actually found some of our outdoor being used in our finished goods and not just necessarily moving into extraction as most might think. The challenge, obviously, is with outdoor, there are a number of risks, and it's difficult to truly plan on what those product formats could be. We have, obviously, our pre-roll formats. We have our ready to roll, and we were quite happy with the cannabinoid content and terpene profiles that we had last year, and we think this year should be just as good, if not better. So we'll -- fingers crossed. I mean, at the end of the day, we are in the final stages right now. And as we mentioned, things are looking quite good. The challenge is all the various materials that we would also find in those products, right? And so for the most part, we don't plan on being able to sell dry bud, for example, as from the outdoor, just because of the variability of the product. Now some of it is looking quite good, and it might be possible. But for the most part, you're right. There is a lot of biomass that is -- looks like it's coming online, and I guess it really will come down to the overall quality because, as you know, cannabinoid content and THC levels continue to be the primary drivers. And failing that, you end up having just a lot of input material otherwise, and so I think that would be the key. I think we're feeling good about where we're at.

Okay. Great. So just to be clear, it sounds like that the dry flower is going to be directed to mostly extracted products as the end product, not sold as dried product, dried bud?

No. We will do both. We will have pre-rolls and our ready-to-roll formats, absolutely. It's just it won't be sold, as I said, whole bud. And then...

Oh, won't be sold as whole bud.

Yes, yes.

Got it. And then one last one here for me, and I'll get back. Is there anything you guys can provide with respect to CapEx for the remainder of the year? Is there some sort of a guidance on that?

I don't have official guidance, but we've been saying all along that our infrastructure is actually quite solid. We've -- we're in a very positive position that, at best, it remains modest. There are some maintenance and slight improvements that we continue to make, but there is no material CapEx that is required to fulfill and execute against our plan.

Our next question comes from Chris Damas of BCMI Research.