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

Welcome to the Entourage Health Corp. Second Quarter 2021 Results Conference Call. [Operator Instructions] 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.

Thank you, Anesthesia, and good morning, everyone. Welcome to Entourage Health's second quarter 2021 results conference call. Please note, this call is being recorded. For copies of our press releases and supporting documents filed on August 10, 2021, or to retrieve a recording of this call, please visit the Investor Relations page of our website at www.entouragehealthcorp.com. The replay will be available later this afternoon. With us on today's call, George Scorsis, Chief Executive Officer and Executive Chairman of Entourage Health and Beth Carreon, our Chief Financial Officer. Today, we will review the business highlights and financial results for the second quarter of 2021 as well as discuss recent developments. Following formal remarks, we will open the floor for 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 several 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. 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 is my pleasure to introduce George Scorsis, Entourage Health's CEO. George, Please go ahead.

Thanks, Marianella, and thank you to everyone for joining us this morning. First off, let me start by acknowledging the positive reception following the announcement of our corporate rebrand to Entourage Health. Our employees, partners, customers, patients and shareholders continue to be supportive in our corporate evolution, and I wanted to give a sincere thank you to all. Over the first half of 2021, we've seen a major transformation, both inside our business practices and in the market, both of which have contributed to the expansion of our performance driven business. It's quite inspiring to see all that has been accomplished in such a short period of time. I can sincerely say that we have built a solid foundation for long-term success rooted in discipline and performance. We continue to see substantial growth in our adult-use brands, Color Cannabis and Saturday Cannabis, sales through expanded distribution with provincial boards and additional retail outlets resulting in key product milestones during the period. Most notably, we captured a 55% sequential increase in retail market share from first quarter. This is a direct result of our robust sales strategy, increased distribution channels and expanded product innovation portfolio, which added a number of SKUs to both our retail and medical markets. With well over 1,000 distribution points in SKUs available across Canada, Entourage products are quickly gaining recognition as leaders in formats, consistently ranked at the top of their categories. How has this significant progress impacted our growth initiatives? This is the first item I want to address today. While the larger players in the industry in Canada are reporting sequential declines in cannabis sales and revenues, Entourage has in fact delivered 3 consecutive quarters of record growth and total revenue increase. In Q2, we reported CAD13.8 million of total revenue, up over 92% year-over-year basis, driven mostly by adult-use channel and our medical channel. As I noted earlier this year, our key focus will be expanded distribution points in adult-use markets and activations in the medical channel as opposed to bulk sales as we've seen in the past. Our team continues to focus on our strategic objectives with the goal of driving higher margins through effective cost cutting and expense reallocation. We are establishing cultivation and production efficiencies, building out our retail outreach to align with our distribution growth and expanding our brand awareness in a very competitive market. These accomplishments represent our strategic pursuits in high-margin channels and our growing direct-to-consumer and direct-to-patient revenues with unique offerings. For example, our newly introduced Saturday Cannabis large format 28 gram flower is a top seller in some of our major growth markets such as Quebec and British Columbia. This alone has resulted in a 500% increase of the format over this quarter. Also in June 2021, the company announced the expansion of Color Cannabis products into the province of New Brunswick, making it accessible to over 95% of Canada's retail market. Another impressive milestone, our pre-roll format saw an impressive 91% increase in market share over the first quarter. This further demonstrates that we are listening to our customers and retailers to gain better insights into what the market wants, and through research and development, we have expanded our product offerings into the right product lines that include pre-rolls-based live resin, with further products being released in Q3, such as edibles, hash and other concentrates. We continue to see steady growth in consumer demand for dry flower in our adult-use market with a revenue increase of over 148% year-over-year. Alongside our friends at Royal City Cannabis, that are producing small batch premium cannabis that will allow us to participate in a new segment that will command a higher price point to focus on quality, we expect to further tap into the craft market, giving us a stronger foothold in an increasingly competitive market. As everyone saw, there's no secrets, and they are well aware this new and exciting category is stealing market share from the larger LPs in the marketplace. We look forward and we are excited about the acquisition of CannTx and Royal City in the upcoming weeks. And I'll update you on that shortly. On the medical side. Our Starseed Medicinal team continues to build on our patient base with activations steadily increasing quarter-over-quarter. We are on track to meeting our target number of patients and with close to 40 SKUs now available, we have grown compared to just over 15 that were offered last year at the same point in time. This also speaks to our distribution and our growth. It's an innovative portfolio that spans a wide range of offerings, including the pending launch of our Mary's transdermal patches and gel pens coming in Q3 of this year. As part of our ongoing transformation initiatives, we also further streamlined our production by centralizing our cultivation, processing, packaging and distribution to our London area facilities. Throughout the second quarter, we continued to divest from our Bowmanville facility as part of our cost-saving efforts that resulted in the asset and leasehold sales being finalized in June. Our optimization initiatives over the first half of the year ensured that our production is consolidated and highly efficient, enabling us to achieve further cost savings that we then ultimately pass on to the customers. Lastly, an update on our acquisition of craft cultivator CannTx Life Sciences. We are on track to closing this transaction in the coming weeks. As a business combined, we are proud to bring on CannTx's many lines of research and product lines, including its B2B and adult-use businesses. The acquisition marks another natural progression in Entourage's growth as well as our mission to work with the best talent and industry experts that develop and manufacture our products. We really look forward to executing our shared vision to strengthen our business and focus on high-margin activities. Before turning the call over to Beth, I'd like to reiterate our business transformation initiatives that have led us to record-breaking growth this year. We built this business on 5 key pillars of growth, optimization, efficiency, quality and most important, the people. We are confident that our strategic transformation will continue to accelerate Entourage on the path to profitability. We are prudent in our capital allocations, and we are constantly evaluating our performance to support optimal operational excellence. We'll maintain our proactive stance on taking advantage of new opportunities in the growing cannabis market as we navigate through the rest of the year. I want to thank everyone. This concludes my opening remarks -- remarks, and I'll now hand this over to Beth Carreon, our CFO.

Thank you, George, and thank you to everyone joining us on our call this morning. Today, I will review the financial highlights for the 3 and 6 months ended June 30, 2021. Please note that the financial information we discuss today is prepared in accordance with International Financial Reporting Standards, or IFRS, and is in Canadian dollars, unless otherwise indicated. To start, our second quarter net revenue grew by CAD4.6 million or plus 81% to CAD10.6 million compared to the same quarter in 2020. We experienced growth across all product channels, with medical growing plus 21%, driven by increase in number of patients. Adult-use growing plus 148%, driven by innovation such as 15 and 78 gram flowers as well as increased distribution points. And finally, bulk, which now made up only 2% of our total net revenue, which grew plus 6%. For the 6 months ended June 30, 2021, our net revenue grew by CAD2.8 million or plus 15.7% to CAD20.9 million. Excluding bulk sales, our net revenue grew by CAD7.6 million or plus 59.2%. To note, our channel mix year-to-date is comprised of 42% medical, 56% adult-use and 2% bulk. On a sequential basis, Q2 net revenue increased plus 3.2% compared to Q1. This was driven by plus 44% sequential growth in adult-use, partly offset by sequential decline in medical of minus 32.6% and minus 34.7% in bulk. In general, the quarter-over-quarter decline in medical sales was largely attributable to health insurance benefit coverage seasonality, which was partly offset by overall patient population growth and new high-THC flower product releases. The strong quarter-over-quarter growth in adult-use was fueled by retail distribution gains across key markets of Ontario, BC and Alberta, an increase in average items carried for retailer reach. Flower, pre-roll and rate formats all delivered shared gains in Q2, helping to drive 0.65 point share increase over Q1. As previously mentioned, bulk comprised only 2% of our total net revenue, and we will leverage bulk sales only to rebalance our biomass inventory. For the 6 months ended June 30, 2021, our average selling price per gram after excise taxes decreased to CAD2.48 per gram compared to CAD2.98 per gram for the same period last year, partly due to mix with higher adult-use sales compared to medical and partly due to lingering market factors related to pricing. Generally, we expect our average selling price on an aggregate basis to remain stable or improve over time as we introduce more premium innovation and form factors. Gross profit before changes in fair value was CAD3.1 million for Q2 2021 compared to CAD0.25 million for Q1 2021 and gross loss of CAD0.9 million in Q2 2020. Gross margin before changes in fair value for the second quarter was 29.4% of net revenue compared to 2.4% in Q1 2021 and minus 15.3% in Q2 2020. For the 6 months ended June 30, 2021, gross margin before changes in fair value was 16.1% of net revenue compared to 2.6% for the same period in 2020. Improvement quarter-over-quarter, partly due to year-to-date true-up of impact of extraction costs and partly due to efficiency in cultivation, production and manufacturing. Improvement versus prior year is mainly due to mix from higher-margin channels, partly due to operational efficiencies and a small part impact of inventory write-down during year end 2020. Weighted average cost per gram from clone to harvest of inventory on hand as of June 30, 2021, decreased by 29% to CAD0.46 from CAD0.65 in the same period last year, while weighted average cost per gram of inventory on hand decreased by 80% to CAD0.5 from CAD2.53 in 2020, partly due to the inventory write-down in the latter part of 2020 and partly due to operational efficiencies. We expect continued year-over-year improvement in our gross profit before changes in fair value, given the business transformation we've initiated and the impact of mix from high-margin products and channels. From an operations perspective, kilograms harvested for the 6 months ended June 30, 2021, decreased by over 2,000 kilograms or minus 21% to 7,519 kilograms during the same period in 2020, mainly due to a more disciplined approach of aligning supply and demand, which has contributed to operational efficiency and resulting in a lower cost per gram from harvest to clone. Moving to expenses. Second quarter of our selling, general and administrative expenses was CAD10.4 million or CAD4.4 million higher than first quarter SG&A of CAD6 million, mainly driven by timing of expenses, such as insurance, software licenses and subscription, API-driven employee retention program as well as expenses related to AGM, our year-end 2020 and Q1 filings, all 3 events of which occurred in Q2. For the 6 months ended June 30, 2021, our SG&A increased by CAD5.1 million or 45% to CAD16.4 million versus CAD11.3 million in 2020. The increase is partly due to higher sales and marketing spend to support a record sales and mainly due to non-repeat professional and consulting expenses incurred during the first half of this year. Given the comprehensive cost-cutting measures implemented across our businesses and the non-repeat nature of majority of the professional and consulting expenses earlier in the year, we expect to see reduction in SG&A for the balance of 2021. Net loss for the first 6 months of 2021 was CAD17 million or CAD0.08 loss per share compared to a loss of CAD17.9 million or CAD0.09 loss per share of 2020. Adjusted EBITDA improved by CAD0.8 million or 18% to minus CAD3.7 million from minus CAD4.5 million during the same period in 2020. Improvement in both net loss and adjusted EBITDA was mainly driven by increase in gross profit, which was partly offset by above-mentioned increase in selling, general and administrative expenses. Turning to our balance sheet. We ended the second quarter with cash and cash equivalents of CAD15.5 million or a reduction of CAD5.5 million from the CAD20.5 million at the end of the first quarter. Cash flow from operations improved by CAD4.8 million to minus CAD19 million for the 6 months ended June 30, 2021, compared to minus CAD23.8 million during the same period in 2020. Related to cash flow from investing activities, majority of the proceeds from the divestiture of Starseed Medicinal Inc. and its related right-of-use assets and license for the Bowmanville facility was used to pay down our debt. As we head into the second half of 2021, we have already entered into discussions on various options that will give us more liquidity and greater financial flexibility to manage our operations and execute on other plans. Current ratio for the second quarter was 1.4 compared to 3.5 in the first quarter and 3.1 at year-end 2020. This change is mainly attributable to the reclassification of loans pertaining to Facilities 1, 2 and 3, which will mature on March 31, 2022. We are currently in discussion with all our lenders to amend payment terms. In summary, the second quarter results reflect our strong sales momentum and our transition into a performance-driven organization. Our sales and production teams fulfilled record purchase orders from every province during the quarter, concentrating on top performing products to drive sales and improve margins. Our fall strategy remains unchanged, with a focus on expanding our product margins and brand footprint into new markets. Looking ahead, we continue to be committed on strengthening our balance sheet, driving sustainable, profitable growth in our key channels and products and delivering long-term shareholder value. At this juncture, George and I are pleased to share that we expect to deliver positive adjusted EBITDA no later than fourth quarter of 2022. Given the quarter-over-quarter growth in our net revenue, increase in our market share and our diligence to manage costs, we have the levers to deliver on that commitment and to demonstrate that Entourage is poised to have a meaningful and profitable presence in the Canadian cannabis market. With that, I'll turn the call back over to George for closing remarks.

Thank you, Beth. Our third consecutive quarter of sequential revenue growth is indicative of our strong sales momentum, our products and the development of brands that are truly starting to resonate with the consumer base that we've built. With our transformation initiatives fully implemented, Entourage has evolved into a performance-driven quality obsessed organization. We're thrilled with our turnaround over the past 6 months, all of which we expect to contribute to a standout year for all of our shareholders. Thank you, everyone. Over to Marianella.

Thank you, George and Beth. This concludes our opening remarks, and we are now ready for the question period. Anesthesia, please proceed with the instructions to call in.

[Operator Instructions] First question comes from Graeme Kreindler with Eight Capital.

Congrats on the quarter. I just wanted to start off with respect to the top line here, looking at the quarter-over-quarter growth from Q1 into Q2, looks like the gross revenue is outpacing on a growth rate than the net revenue. So just wanted to understand the delta there and the various moving parts as we look at the business accelerating over the past couple of quarters here.

Thank you, Graeme, that's a really good question. The mix in terms of products as well as province is affecting the excise calculations. As you know, the excise tax or excess EDRATES varies by province as well as the Cannabinol content per product. So that affects the calculation of the excise duty. That is really the main reason its mixed on both on product as well as province.

Okay. Understood. Then just with respect to -- sticking with the top line here and in relation to the goal of the adjusted EBITDA positive in the fourth quarter here. I'm wondering if you could discuss a bit of the dynamics in terms of what we're seeing with the growth of the overall retail market in Canada. But the sell into the provinces has been stilted for some, and layering that on top of the decision by the OCS here to halt new product calls over the next couple of months. Just wondering if you could discuss some of the challenges and opportunities as it relates to Entourage here as it continues to look to grow the top line as well as its market share across the adult-use market there.

Thanks, Graeme. Good questions. I think you're seeing that in the marketplace overall. And we're seeing some of the pull-through really impacting the larger LPs. I think what we need to get back to is reverse engineer, really the perspective of the consumer and how there's pull off the shelf. What the consumers are really commanding right now is, because the marketing opportunities are somewhat limited, they're asking for quality, and they're asking for quality at a reasonable price point. And I think for many of the LPs, they're seeing a decreased offtake and repurchase, where I think you saw from our sales that our market share continues to increase. So we continue to see growth within our business across all the different segments and all the different boards. So we're not really seeing the same level of decrease within our business. We're actually seeing at the inverse, which is really attributed to our top line from our business. But I think it's really about, again, coming down to the quality, which -- I think it also adds to the acquisition of CannTx and about how it really helps us advance the quality of our products and enter into new areas such as the craft segment. But for ourselves, I can speak candidly, we haven't really seen some of those reverse trends that have impacted the marketplace as many.

And then on from a -- somehow that would impact our adjusted EBITDA cost and commitment for next year, is that as we continue to look at the mix of premium, as we introduce and explore more premium offerings in our portfolio heading into next year as well as looking at operationally, what are the low-hanging fruits for our entire value chain from cultivation to actually getting the products out our door and at the VC of our customers. Those are some of the areas we've already started looking at. And as you can see, we're getting some traction on that H1 year-to-date of this year. So most of the levers we're going to continue to lean on as we head into 2020 to deliver for our commitment of adjusted positive EBITDA no later than Q4 of next year.