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

Thank you for standing by. This is the conference Operator. Welcome to the WeedMD Inc. Third 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, Communications and Corporate Affairs with WeedMD. Please go ahead, Ms. delaBarrera.

Thank you, Anastasia, and good morning, everyone. Welcome to WeedMD's third 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 on today's call are Angelo Tsebelis, Chief Executive Officer of WeedMD; and Chief Financial Officer, Lincoln Greenidge. Today, we will review the highlights and financial results for the third quarter of 2020 and provide a business and operational update. Following formal remarks, we will open the floor for analysts and media 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. Go ahead.

Thanks, Marianella, and thank you, everyone, for joining us today. I'll briefly recap our progress and achievements during the third quarter as well as provide our subsequent highlights. Following that, Lincoln will walk us through financial highlights for the period, after which we'll be happy to take any questions. Before I get started, I want to just send a special thank you to our employees, patients and shareholders. It's been a tough year and while we continue to forge to head together, we remain optimistic about the future. During the third quarter, we really began to see a turnaround from the previous months. We experienced an upswing as a result of our commercial efforts as we kicked off key initiatives to expand our adult-use brands. We continue to focus on our operational improvements and optimization and in the medical market, we continue to improve the overall value proposition for our loyal patient base. We took the time and dedicated the resources to build the color brand. And with the reopening and relaunch of retail stores in Q3, we noticed the ramp-up in the adult-use marketplace, coupled with our investment start producing at scale, Q3 was a bit of a turning point. Our focused retail engagement translated into increased revenues during the third quarter. We reported sequential quarter-over-quarter revenue growth of 8%. This demonstrates the increased momentum we are seeing in our business, particularly in our expanded adult-use segment as we expand our product portfolio and improve our speed to market. In order to support our anticipated growth in the adult-use segment, we recently expanded our national sales team in an effort to drive more brand activations and blood tender engagement. Building on our successes in Q3, we introduced a number of traditional and new products and formats to invigorate our portfolio. Our new string, Black Sugar Rose will start shipping in Ontario this week. Our strain-specific pre-rolled product under the Color and Saturday banner were launched. Nitrogen-refused packaging for our ready to roll in whole flower products and our Color-branded 510 vape carts, which landed in the top 5 status in the first week of availability of the OCS, are just a few examples of some of the initiatives we've taken this quarter. We also entered into a commercial arrangement with Fire & Flower to produce their rebiti CBD product line, which is now available in Saskatchewan. Finally, we signed key brand partnerships that will further enhance our portfolio by offering both in the products in the adult-use and medical channels. Our agreements with PAX Labs and Mary's Medicinals will produce market and sell a lineup of products for both Color brand as well as through the Stars Medicinals platform. More specifically on the medical side, we recently finalized the indication of our 2 medical platforms under one framework. This eliminated the need for 2 commercial platforms and streamlined our offering with improved access for all patients. This consolidate our patient base and provided expanded access to our full suite of medicinal products, assistance with direct billing and other insurance coverages, same-day shipping and delivery in the GTA and access to North Star wellness is virtual clinic and network of health care professionals during this challenging time. Our platform integration also included a renewed marketing effort to rationalize our medical pricing strategy as well as to introduce WeedMD strains that our patients have been seeking. Finally, we announced our medical expansion to Atlantic Canada under the purview of Dr. Julie Hillebrand, a real medical cannabis specialist and advocate. With our medical reach in one of the fastest-growing medical markets in Canada, Dr. Hildebrand will help drive our focused treatment plans around chronic pain and [indiscernible]. This will also be an important rejoice as we look to expand our union reach into other parts of Eastern Canada. Turning to our outdoor cultivation program. We recently completed our outdoor harvest and statutory. Our learnings and experiences from last year's harvest continued to pay off as we instituted new methodologies and processes, having planted just over 19,000 plants on approximately 22 acres, while still early, we are optimistic with the preliminary results to date. Once again, big kudos to the team. They did an incredible job and what turned out to be one of the hottest driest summers on records, which unfortunately was followed by early frost, but the team responded and rallied. Operationally, we continue to take actions to enhance our overall productivity by implementing more automation and optimizing our operations, particularly in our [ Elmer facility. ] We are producing finished products at a much higher patient scale and are already seeing improvements in our costs, which we expect will only get better. Our third quarter also provides us with the opportunity to further stabilize our balance sheet and focus on key strategic opportunities. At the end of the third quarter, we entered into a $30 million credit facility with the LiUNA Pension Fund, which provides us with the financial flexibility to continue to drive the business toward profitability. We further strengthened our company with some key additions to the leadership team. In October, Lous Piscopo, a veteran finance executive, was appointed to our Board of Directors. Lou has assumed the Chair of the Audit Committee and has been a great addition to the Board. His experience and expertise will prove invaluable as we steadily move towards profitability and long-term growth. We also announced the addition of our seasoned HR executive, Deborah Sikkema, as Chief People Officer, bringing over 20 years of HR experience with some of Canada's top-tier organizations such as Shoppers Drug Mart, Canadian Tire and Holt Renfrew. Deborah has been pivotal in finalizing our integration and cultural transformation. This concludes my opening remarks, and I'll now hand it over to Lincoln, our CFO, who will review our financial results. Lincoln?

Thank you, Angelo, and good morning to everyone. Today, I'll briefly review our third quarter financial highlights, as Angelo has already mentioned corporate highlights for the period. Before we get started, I want to echo Angelo's acknowledgment from the top. Again, a special thank you to all our employees, patients and shareholders and relationship partners for working out with us throughout 2020. Thank you. Now on to the financials. We noted a number of key improvements in our cultivation processes, operations and distribution channels. This quarter, our team sharpened its focus to concentrate on capturing long-lasting opportunities and initiatives that will help achieve further cost improvement, margin expansion and drive organic growth across our adult-use and medical channels. Our reported net revenue for the quarter ended September 30, 2020, was $6.3 million, which represents a quarter-over-quarter growth of 8%. As a percentage of gross revenue, directed patients accounted for $2.6 million or 33.5%, and wholesale accounted for $5.1 million or 66.5%. For the 9 months ended September 30, 2020, net revenue was $24.4 million compared to $18 million in the comparable 2019 period. The 9-month increase was mainly attributable to the full period contributions of Starseed, growth in the adult-use market and the sale of dry cannabis to a license holder in the first quarter of 2020. The decrease in wholesale was due to lower sales of bulk products to federal license orders as we continue to focus on the distribution of our branded products. Gross profit before change in fair value was $69,000 for the third quarter of 2020. After adjustments in fair value for the products sold in the quarter and for biological assets in production, gross profit for the third quarter increased by $20 million or 235%. The increased gross profit is mainly attributable to the unrealized gain on change in fair value of biological assets of $12.9 million for the quarter. We expect to continue progress on significantly improving our operations effectiveness through optimization initiatives, which drive efficiencies and reduce our cost of sales. On a weighted average basis, cultivation costs during the third quarter and first 9 months of 2020 was $0.34 per gram and $0.53 per gram, respectively, compared to $0.72 and $0.84 per gram in Q3 2019. Such reductions in costs are mainly due to achieving economies of scale with expanded capacity. In the third quarter of 2020, WeedMD's weighted average cost per gram, inclusive of oil costs, direct and indirect, to produce and package was $2.11 compared to $1.42 in the third quarter of 2019 due to an increase in direct-to-patient sales. Compared to Q2 2020, the weighted average cost per gram declined by 16%, again, demonstrating cost efficiencies as we continue to focus on optimizing our operations. The increase in weighted average selling price, net of excess tax was due to a greater portion of direct to patient sales in the quarter compared to the same period last year. General and administrative expenses totaled $5.3 million for the quarter ended September 30, 2020, which, apart from the onetime costs incurred during a lengthy transition during COVID. Such costs are continuously improving quarter-over-quarter. The year-over-year increase in comparison to the same period was primarily driven by the acquisition of Starseed in December 2019 and the company's overall growth, resulting in increases in salaries and benefits, consulting fees and administrative expenses. The quarter-over-quarter increase in our sales and marketing costs over the previous 2 quarters, resulting from our ramped up commercial, retail and digital marketing initiatives that Angelo alluded to earlier. Professional fees during the period covered auditor and legal fees. Adjusted EBITDA loss totaled $5.3 million for the 3-month period ended September 30, 2020, compared to an adjusted EBITDA loss of $2 million, which is the same -- for the same period in 2019. Primary result of inventory write-off of $1.2 million and expenses incurred relating to increased production, selling and general and administrative expenses prior to optimization initiatives and continue to reduce these costs, albeit at a relatively slower pace. Please note, adjusted EBITDA is not a recognized measurement under IFRS 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, trade value changes and other noncash items and nonrecurring items. This measurement is useful in assessing the results of operations and strategic decisions. Net profit and comprehensive profit for the quarter ended September 30, 2020, was $8.6 million, representing a decrease in loss of $2.2 million compared with net loss of $13.4 million for the prior year. The year-over-year decrease in net loss is primarily a result of the $12 million unrealized gain on change in fair value of biological assets. For the quarter that I mentioned earlier. As for our balance sheet, we ended the quarter with cash and cash equivalents of $31.1 million. Total assets as of September 30, 2020, reached approximately $242.4 million, including inventory and biological assets of $51.2 million compared to $38.9 million at the beginning of the year and $38.6 million at the end of June. Our assets increased as a result of growth of our biological assets and inventory harvest facilitated by cultivation capacity at the Greenhouse expansion as well as the outdoor growth. In September, we entered into a $30 million credit facility with the LiUNA Pension Fund. This non-dilutive financing matures in August 2022 and has provided the company with increased financial flexibility as we continue to expand our distribution channels and brand awareness to drive further revenue growth. To recap, we're moving in the right direction, and we are encouraged by the positive upward trends in all our markets, while continuing to strive to improve each one daily. In the midst of a second wave of COVID restrictions, we continue to focus on the initiatives that will stand the test of time and ensure that we meet the needs of all our customers. Our goals remain the same as we are determined to progress forward to profitability and to sustain this momentum going forward. For further information on our financial and operating performance, I encourage you to review the company's financial statements and management discussion and analysis for the quarter ended September 30, 2020, which has been filed and are available through SEDAR. With that, I'll turn the call back over to Angelo for closing remarks.

Thanks, Lincoln. In closing, we made significant progress during the third quarter of 2020. As a result of our efforts, we are now producing and shipping more product than ever before. Our Color and Saturday labels are gaining greater traction, resulting in increased sales and strong revenue performance for the quarter. Moving ahead, we will continue to launch innovative cannabis products in the fourth quarter and into 2021 and will appeal to our long -- our strong and growing base. At the same time, we will continue to leverage our stars additional platform to drive insured sales of medical cannabis as well as improve the overall access to our medical channels. Looking ahead, we are well positioned for continued revenue growth and improved margin performance during the remainder of this year and well into next. That concludes our prepared remarks. I would be happy to take any questions.

Thank you, Angelo and Lincoln. This concludes our opening remarks. We are now ready for the Q&A session, Anastasia.

[Operator Instructions] The first question comes from Craig Wiggins with TheCannalysts.

Hello?

Yeah. Sorry go ahead.

The Starseed acquisition was touted to improve the balance sheet and cash position of the combined companies at a dedicated medical channel with a sticky customer base, improving gross margin from Starseed no longer buying third-party cannabis and a reduction of SG&A by $10 million across both companies. We're 3 quarters in, 11 months since the acquisition. Medical sales decreased 50% over 2 quarters. GM before IFRS hasn't been higher than 11%, granted, you've had some provisions that have impacted the last 2 quarters, but with $40 million in inventory on hand, against your sales, those provisions might continue. Your SG&A is $1 million less than Q4 F '19 for WeedMD as a stand-alone. How would you grade your performance against the expectations? And what are your obstacles to improving these metrics?

So I just want to clarify, is your question regarding Starseed or the overall company?

The -- well, Starseed -- the acquisition of Starseed was provide those synergies. The medical stickiness of the clients, the improved gross margin, the reduction in combined SG&A, how would you grade A, B, C, D, F, the WeedMD performance since the acquisition across those metrics? And what do you need to do to improve or remove obstacles to get on that path?

Yes. No, I think it's a fair question. I think it's safe to say that we've seen an overall decline overall in the Canadian medical market. The stickiness of the Starseed model definitely has been there. We did see some minor blips during the middle month of the year when COVID was at its peak. We have now seen the rebound of those numbers. And so I think we'll see the year finish out fairly strong in terms of going back to sort of some of the pre-COVID numbers. But as an overall transaction, I still believe that the industry requires more consolidation. I mean it was a strategic deal because it made sense on both sides in terms of what the company has represented, what they had as assets and how they were independently performing. As you said, Starseed was an organization that was not cultivating and was buying bulk product, and WeedMD was in the midst of starting to launch more direct to consumer and direct to finished products, which this, I believe, helped accelerate. I still believe that the deal was a good one. I think that the performance is probably taking longer than we would have anticipated as you can appreciate merging and integrating many 2 companies during any period takes time. It takes a lot of energy. I think we're on the right path. We're close to completion, and it's time for us to start ramping that. So at the end of the day, we've been really focused, though, on ramping our adult-use side as well. The adult-use market, especially with the advent -- or with the recent increase and seeing that the retail stores are finally opening up in Ontario, we think this is where we've shifted a lot of our focus and so we've been able to move a lot of the product that we had into that adult-use piece, creating finished product. We have a consolidated medical platform now that positions us very differently than many other of the medical players in Canada. So at the end of the day, again, I still believe that we're in good shape. And I would -- if forced to give a rating, I'd say we're at about a B.

Could you speak to gross margin before IFRS? Because to me, that's -- sales are one thing, but unless you have gross margin, you're not covering your expenses. So when can we expect to see gross margin return to, say, the 40%, 50% mark as a low bar?

So our gross margin is there. It's at the -- around the 42% range this quarter. It was around 40% last quarter. There's been a lot of cleaning of up...

I'm sorry, I've got it at 21% once I back out the impairments. And like I said, you have a lot of inventory, and your sales aren't there. Like when is the gross margin before IFRS going to get back in the 40%, 50%? Because right now, it's at 21%.

I'd have to go back and reconcile the 21%. So sorry, I can't.

Okay. Well, I took a stab at it. I was hoping for a little bit more detail. I'll let you get to the next questions.

Let's -- I don't know...

Oh, I'm still here. I'm sorry, I didn't mean to cut you off. I just didn't want to take too much time.