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

I will now move to the next item of business. The next item to be addressed is to approve the amendment to the Omnibus Equity Incentive Plan of the corporation to change the plan from a rolling 10% plan to a fixed plan, pursuant to which the aggregate number of common shares to be issued shall not exceed 20% of the corporation's issued and outstanding common shares as of the record date. A summary of the fixed plan is included in the management information circular. I would ask that a motion be brought to approve the amendment to the Omnibus Equity Incentive Plan to change the plan to a fixed 20% plan. .

I, Gail Paech, move that the resolution approving the amendment to the corporation's Omnibus Equity Incentive Plan, as set out in the management information circular, be passed.

I, Marianella delaBarrera, second the motion.

Registered shareholders or duly appointed proxy holders have been provided with ample time to register their votes. Accordingly, the polls will be closing in 20 seconds. Once the electronic ballot closes, the voting page will disappear, and your votes will automatically be submitted. [Voting]

The polls are now closed. I would ask that the scrutineer compile the report on the results of voting on all business matters. I have been advised by the scrutineer that the ballots and proxies deposited have been voted in favor of all the resolutions, and that Jason Alexander, George Scorsis, Gail Peach, Lu Cacioppo and Bruce Croxon have been elected to the Board of Directors. Therefore, I declare all the resolutions to have been carried. I direct that the results of the ballots to be annexed to the minutes of the meeting. Is there any further business? As there is no further business to come before the meeting, I move and second that the formal portion of this meeting now be terminated. As the formal business of the meeting has now been concluded, I would now like to offer some remarks about the corporation and our business as well as an opportunity for registered shareholders to ask any questions following the presentation. Thank you, and good morning, everyone. I'd like to welcome and thank our shareholders again for joining us today. This is a quick recap of our agenda for today. When we met last year around this time, you'll recall that we embarked on our business transformation. Today, I'm pleased to have us joining us with some new results and new additions to our team. But before I get into that, I'm thrilled to confirm that in just a few minutes, we will be joined by our newly appointed CFO, Vaani Maharaj, to say a few words. For now, I want to kick off by giving you a snapshot of just how far we've come in the last 12 months, which is quite significant. As noted, we spent a good part of 2021 transforming our business and operations. In order to do that, we asked ourselves some very, very tough questions about our strategy, and here are some of our responses. Mainly our operations and facilities, are they state-of-the-art, efficient, and can we actually produce the premium products that the market wants? As you can see, with a 535% increase in sales over previous year, we're not only producing some of the best products in the Canadian market, we're also steadily capturing market share from the bigger cannabis players. In fact, we captured over 2% of the Canadian market share in 2021, thanks to many business transformation initiatives we've undertook as well as more aggressive sales tactics to increase our brand awareness. A testament to this, you can now find our Color cannabis and Saturday cannabis retail products in over 80% of the Canadian retail stores. Our premium cultivars and genetics helped us increase our total revenue service -- our total revenues in 2021 to $55.2 million, representing over 56% growth year-over-year. The second question, does our company have high-margin products and strong brands that differentiate us? Yes. Over the course of 2021, on the medical side, we launched over 40 medical cannabis SKUs for our patients, launching soft chews, transdermal patches and high THC cultivars for our medical clients. And there's more to come as we continue to expand our medical line and offerings. I'll touch on that shortly. But for now, I do want to point out that by investing in new genetics and tissue culture businesses, we're ensuring quality products are in the pipeline for all of our channels. Having recently acquired one of Canada's premium micro propagation businesses, we are now producing a steady stream of cultivars with terpene-rich profile that consumers want. The next question is, how is Entourage continuing to innovate? We're watching the market closely and noted that the sharpest increase for us was in premium cultivars and the pre-roll segment. It's there that we saw the biggest gains. We are now taking 5% of the pre-rolled market segment. We recently invested in 2 top-of-the-line pre-roll machines that can produce 2,000 pre-rolls an hour. It's our fastest-growing segment in Canada, and we're fully prepared to take advantage of it and take on more market share in a more efficient way. As a recap, our management team is being presented today. We brought together 2 solid teams of talented leaders. Each one is a subject matter expert in their own areas with discipline that will bring our company to the next level. I want to point out, with the addition of the CannTx team in late 2021, we strengthened our cultivation and propagation team by adding tissue culture and genetic specialists. As well, we added a strong leader in the supply chain management and quality assurance, important steps as we took to stabilize our production with consistent output in products and innovation as we move forward. But to understand where the industry is going, we must first reflect on the present sales and state and acknowledge that cannabis continues to be a dynamic market. There are challenges constantly arising, but only players that find ways to turn challenges into opportunities will outlive this entire market and continue to be leaders. The industry is extremely complex and challenging for that matter. There is no doubt that we'll continue to succeed. So in fact, over the last few weeks alone, here are some of the headlines that many of you have seen. Many well-known players are navigating complex industry issues that include retail market price compression, huge losses in the billions, facility closures across Canada, oversaturated adult-use cannabis stores. The question is, how do you reconcile these challenges and turn them into opportunities, especially when market analysis is still showing that over the next 5 years, cannabis sales in Canada are projected to expand into an $8.8 billion industry? So how do you score into the big net with so many obstacles in the way? Well, you got to skate to where the puck is going, to be quite honest. Every Canadian knows that analogy because standing back and assessing the landscape gives you the best chance of scoring, and that is exactly what we did in 2021. It's no coincidence that we invested in tissue culture and new cultivars to move us into the premium market. According to the recent Brightfield Group report published in March 2022, premium products is what will drive the category to the $8.8 billion. Our long-term outlook, we are seeing early signs that our strategy for developing higher potency, high-margin products is beginning to pay off. We are also dedicated to innovation with the products that lead in the market share, drawing on our consumer awareness in the sector and bringing legacy users to the lead market. We want to expand our consumer and customer base by capturing new consumers for a focus on health and wellness, a significant market expecting to grow in 2022 and beyond. Additionally, we'll continue to increase automation and efficiencies aligned with lowering our cost to produce and achieving sustainable, profitable growth. Building on a promise for premium brands and products, again, this exemplifies just how well we are executing on our plans to expand into the premium flower segment and the largest growing segment of pre-rolls. As I noted earlier, during the first quarter, we increased our flower and pre-rolled sales by close to 20% over previous quarter. Compared to many of our competitors who are reporting market share losses and lower revenues, we are now a top 5 producer in the pre-roll market. In addition, our [indiscernible] have been holding steady between 4.7% to 5% of the market share over the last year. That means 1 in every 20 pre-roll sold across Canada is now a Color cannabis product. With our automation going into full swing this summer, with the ability to produce over 2,000 units per hour, we fully anticipate we'll be able to continue capturing a significant portion of market segment with expanded margins as our cost to produce come down further with automation. Moving into the medical cannabis segment. This is another major opportunity for Entourage. So while other LPs are abandoning this segment, we're actually doubling down. The medical market has become a high-margin revenue stream for Entourage. In fact, as noted in this graph, while clients registered in Canada has dropped significantly, our Starseed Medicinal brand is seeing a consistent pattern of growth in patient registrations. We hold 5% of the market share, and it's still growing. Cannabis Benchmarks notes that industry expenditures for medical use, cannabis dropped 13%, while Entourage Starseed Medicinal channel has seen 20% year-over-year revenue growth, resulting from patient registrations, increased basket sizes, innovative product launches and a dedicated customer care team. While we're not bullish on this segment -- while we're so bullish on this segment, that we're making additional investments to attract more patients. On that note, as we continue to drive enterprise value, I'd be remiss, if I didn't address our stock price. As a shareholder, I know it's unsettling to see the decline in your investments. But I can say that this is a downward trend that is not unique just to Entourage. In fact, it's appearing across the global cannabis industry and more pointedly, to our peers in the industry. This chart demonstrates our competitors share price downwards trend impacting the entire sector. And while that's not comforting to hear, what I can say is that I'm optimistic that we'll continue to see this correction. With everything I've just shared, I want to leave you with a sense of just how far our turnaround has come. We started off 2022 in a position of strength with record revenues, all signs that our cost structure is improving, and I am happy to share the company is on the path to financial stability. This success is due to a threefold targeted strategy: one, drive revenue; two, grow margin sustainability; and most importantly, manage SG&A. We are also in active discussions with our lenders and CD holders to improve our capital structure to better service our debt, all of which I know will improve our enterprise value in the long run. And speaking of improving our enterprise value this is a perfect time to is our newest addition to the team, our CFO, Vaani Maharaj. Vaani joined us about 6 weeks ago and already has a year-end audit, Q1 financial filing and convertible venture negotiations under her belt. She's been a wonderful addition to the team. I'm looking forward to hearing her insights on how far Entourage has come from a financial growth perspective and work for the remainder of 2022. Vaani?

Thank you, George, and thank you to the leadership team here at Entourage for the warm welcome. It's certainly an exciting time to be joining this company and this industry. As George noted at the top of the presentation, we're seeing early signs that our strategy for developing premium, higher potency, higher margin products are beginning to pay off, as reflected in our $55.2 million revenue target over the past year. Our Q1 2022 results of $17.4 million in gross revenue is even more evidence that our strategy is sustainable. The revenues have grown exponentially over the past 5 years, and it's a trend that's optimistic with an impressive 145% compound annual growth rate. Our best-in-class commercial team are dedicated to innovation and products that lead in market share. We constantly monitor the market to note changes in consumer preferences and to be nimble in our product offering. We're also laser-focused on growing our market share by capturing new consumers to the space who are focused on health and wellness. This market is expected to grow in 2022. In short, our revenue growth is promising. Our approach to the market provides a strong foundation for us as we continue on our path. Let's move on now to how we're using this positive momentum to drive value. As discussed in our Q1 call, we expect to do so on our three-pronged approach that George referred to earlier. Our first prong was driving aggressive sales growth. And as per the prior slide, you can see significant growth in our revenue, and this momentum will continue through the course of 2022. Our second prong is [ cost ] control. We are already starting to note an improvement in our COGS year-over-year and automation will continue to drive this as well as continued site optimization initiatives, and we expect to see consistent improvements in our gross margin through 2022. Further, our SG&A costs have come down as well. Improvements in our working capital will also take hold as we implement aggressive demand planning and sourcing. Both of these are key to improving our liquidity position. So far, we improved our liquidity position with the additional borrowing capacity extended by our strategic investor, LiUNA Pension Fund. First, $20 million at the end of December 2021, and then in April, another $15 million in non-dilutive financing. This credit facility, coupled with our senior secured debt rates priced at market, gives us increased liquidity and additional working capital to drive sales and to support our continued growth and financial objectives. To summarize, our largest priority remains improving liquidity and adjusted EBITDA. I'll now pass it back to George.

Excellent update, Vaani. Thank you. In closing, we continue to focus on revenue growth while driving margin expansion across all our direct-to-consumer patient channels. We are definitely seeing the benefits of the initiatives we implemented over a year ago. We have experienced tremendous growth, and we are demonstrating panful results in 2022. We will now move on to the Q&A period. Once again, if any of our shareholders or proxy holders wish to submit a question, please do so via the chat forum on the webcast. As there are no further questions, I'd like to conclude the meeting. Again, on behalf of Entourage team and our Board of Directors, thank you to everyone who has spent today signing in. Our employees, shareholders, customers and patients, again, thank you for all your ongoing support. We look forward to briefing the market at our Q2 financial results conference call expected to be held in late August. Please note, a recording of today's proceedings can be found at the Investor Events page of our website, www.entouragehealthcorp.com. Thank you, and have a great day, everyone.

Ladies and gentlemen, thank you for attending today's meeting. You may now disconnect.