Entourage Health Corp

XTSX:ENTG

Earnings Call Transcript

[Operator]

Good morning, everyone, and welcome to the Entourage Health Corp. Second Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] A replay of this call will be available on the Entourage Health website later today and will remain posted for the next 90 days. I would now like to turn the conference over to Marianella delaBarrera, Senior Vice President, Communications and Corporate Affairs with Entourage Health. Please go ahead, Ms. delaBarrera.

[Marianella delaBarrera, executive]

Thank you, Chau, and good morning, everyone. Welcome to Entourage Health's Second Quarter 2022 Results Conference Call. Please note, this call is being recorded. For copies of our press releases and supporting documents filed on August 29, 2022, 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 Vaani Maharaj, our Chief Financial Officer. Today, we will be reviewing business highlights and discussing financial results for the second quarter, as well as recent developments. Following formal remarks, we will open the floor to questions.

I would also like to remind everyone that during today's call, we will discuss our business outlook, which will contain certain forward-looking statements. Actual events or results could differ materially from those expressed or implied by such forward-looking statements 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. Please go ahead, George.

[George Scorsis, executive]

Thanks, Marianella, and thank you to everyone for joining us this morning. Once again, it's my pleasure to be with you today, and here's hoping we're all having a wonderful summer. Before I get into our performance during the period, I want to share a high-level midyear status update on the market. As you're all aware, a combination of factors brought unprecedented challenges to the cannabis sector in the first part of the year. For starters, market stressors and macroeconomic factors resulted in falling valuations across the board. But more pressing, we all noted increased competition, price compression and oversupply as new products flooded the market. Added to this, many companies were challenged with the ability to raise capital due to scant funding options.

But I have to say, these were not really our challenges during the period, and this is where I'd like to begin my Entourage recap. First off, as a reminder, our strategy continues to evolve around 3 levers in 2022: firstly, driving revenue; secondly, growing margins sustainably; and thirdly, prudently managing our SG&A. Understanding our threefold plan, we've made it a priority in Q2 to revisit and improve our capital structure.

During the quarter, we took significant steps to upgrade our capital structure, debt and liquidity position. We added $8.9 million in additional funding capacity, thanks to the support provided by our valued partner, LiUNA Pension Fund. While this allowed us to settle the repayment of our unsecured convertible debentures, it also provided us with the extension on our 2 secured credit facilities' maturity dates for increased financial flexibility, essentially extending our loan repayment and financial applications to 2024 where we will have the ability to service all debt positions based on our current run rates.

This was an important development in our first half of the year. It has freed up our working capital, it gives us the flexibility and confidence to continue optimizing our cultivation operations platform to increase production of our in-demand products, drive revenue, grow margins and meet our positive EBITDA goals over the long run. In a few minutes, Vaani will walk us through the numbers and break down our next steps for achieving these goals.

For now, I want to address how we're continuing to produce quality products for adult-use and medicinal channels. First up, the adult-use market. While we have a diverse portfolio of products, we noted early in the year that premium and pre-rolled market segments are the 2 fastest-growing segments with the highest margins. In fact, the overall pre-roll markets alone increased 34% year-over-year in Q2 2022. Being opportunistic and capturing such markets with premium flowers was the impetus for acquiring the tissue culture business in late 2021.

Responding to the market's need for new high THC genetics will result in greater sales of higher-margin premium products. That's where we shifted our priorities towards, all rooted in high-quality flower or innovative products. While our top line market share remained relatively flat in the second quarter when compared to the prior year, we managed to take 6% of the premium market segment and close to 5% of the pre-roll market segment according to Hifyre and Buddi Data for this 3-month period ending June 20, 2022.

Now I want to take a pause to make something very clear. We pride ourselves on producing quality products. We are never going to sacrifice quality for market share. Same goes for revenue. We'll not pursue market share points at the expense of our revenue and profits. Now here's where our story for Q2 story takes a little bit of a turn. Transparently, those last few months in the quarter were a challenge for us as a company.

We experienced a temporary production pause while we performed structural enhancements to our cultivation rooms in our Strathroy facility this past spring. Added to that, we were already undergoing remediation of some of our prized cultivars, a standard practice when rejuvenating genetics, particularly since we house the capabilities with our tissue culture specialists. In doing so, we missed out on the complete -- on completing about a dozen harvests in Q2, which led to excess capacity. This explains in simple terms while revenue in Q2 2022 was flat over the prior year. It was not for the lack of demand, but rather was due to the lack of output.

The downstream impact is that we are now in a shortfall for some of our most popular cultivars and products, namely Pedro's Sweet Sativa. But I'm pleased to confirm the team worked hard to remedy this shortfall, and as of late June, we went back into full production with all 18 cultivation rooms upgraded and 100% online. Added to that, our Pedro has completed its year-long tissue culture rejuvenation and I'm really happy with the results we're seeing so far. Our proprietary genetics is coming back better than ever this fall. I'm really excited to see this hit the market.

Even so, the result was still a miss on our revenue targets in Q2. Total revenue of $13.2 million and net revenue of $9.7 million represented a total revenue decrease of 5% and net revenue decrease of 9% year-over-year from Q2 2021. So while we were on track, we did not anticipate that an upgrade performed in a couple of our grow rooms will result in all rooms needing to be remediated.

We recently introduced a new 24% high-THC cultivar, Space Cake to great fanfare. This speaks to our commitment to introduce new premium products and strains. In fact, even without our top-selling SKU available, we really didn't lose market share. Moving forward, we have some new genetics and great products coming over the next few months, which includes new high-THC cultivars, Live Sugar infused pre-rolls, Live Resin soft chews, new vapes and of course, increased production of our Boston Beer TeaPot cannabis-infused beverages which are now available out west and coming next to Ontario.

Moving now to our medical business. This has been the real success story for us in the first half of the year with the highest margins coming from our medical sales in Q2. Our medical revenue was up 24% from the previous year. This is due to our customer patient acquisition initiatives and digital marketing efforts, combined with over 45 products now available on our platform. A varietal mix has been a winning combination for our patients. We have seen a significant increase in our patient registrations and patient retention with a sequential patient growth of over 20% per quarter.

Additionally, as announced earlier this morning, we have over 10 union groups, 5 insurance providers and 24 clinics on our Starseed platform, the latest addition of 4 unions and their locals whose benefits are administered by union benefits. The union benefits team provides us with the potential to onboard an additional 12,000 patients plus their dependents with no out-of-pocket and access to a network of medical cannabis practitioners.

We also recently partnered with HelloMD, a well-known telehealth network provider with access to a large base of cannabis health care practitioners to assist and partnered with Pineapple Express to provide speedy, same-day delivery access to select regions of Ontario. In short, while we're expanding our patient base, we are also improving our platform's offerings with tailor-made solutions that brings forth a patient-first mandate.

A blast piece of the medical news I want to share with you is that based on the success of our patient registrations, both union and nonunion, we're launching a second complementary medical channel to our Starseed channel in the coming weeks. Our new channel will be a syndicate of Entourage and Starseed and will house a collection of craft cultivators, selling high cannabinoid cultivars and products to patients. The new channel will be aptly named Syndicate. This is in response to recent trends across the medical field, with patients looking for high-THC flower and products. It will cater primarily to nonunion patients who are looking for those craft products available in retail markets. It's our way of bringing patients back into the trusted medical side with health practitioners trained in cannabis medicine.

We're also looking forward to partnering and supporting many of the smaller micro-cultivators that need a medical platform to sell their products. More than 50 products will be showcased on our Syndicate website over the next few months. This will bring smaller licensed producers and micro-cultivators into the collective to promote their brands and cater to our discerning medical patients.

On that note, I now want to give an update on our ongoing optimization efforts. Earlier this year, we transitioned the majority of our cultivation activities to Strathroy, where we also implemented craft growing techniques into our individualized grow rooms. This was the best cost reduction move for the company over the long run despite the operations upgrades we undertook in that period as it did not make sense to have 2 grow operations across our business platforms.

Having introduced automation at our Aylmer facility in the first half of the year, we are definitely noting a boosted production rate to 4,000 pre-rolls an hour now that we have 2 machines running. This is incredible. The company is focusing on improving gross margins and cost savings to drive profitability while increasing efficiencies. Over the course of the year, we are focused on implementing our business transformation plan and making improvements to our business operations as outlined above. Our cultivation procedures, technology and processes have been evolving over the past few months.

We are also seeing positive improvements come from our greenhouse with maximum capacity utilization, resulting in increased productivity. We fully expect to see these results starting in Q3 and primarily in Q4. How will we meet our objectives for the remainder of 2022? As the market share changes -- as the market changes, excuse me, we are scaling production to respond to consumer trends, establishing additional revenue streams and building on partnerships that have been successful.

On that note, we recently announced a partnership with Irwin Naturals, a renowned nutraceutical and herbal supplement formulator of popular branded wellness products sold across North America. Entourage is the exclusive Canadian producer and distributor of its subsidiary, Irwin Naturals cannabis, a new line of CBD and THC products. The products will initially be available on Entourage's Starseed medicinal channel in Q4 2022, but also has a potential to expand into retail markets across Canada in the future. And more specifically, we're eyeing this partnership as an opportunity to get our CBD products on pharmacy shelves across the country for easing access to CBD products.

Before I hand it over to Vaani, let me recap. Entourage is experiencing consistent growth and our expanding product portfolio reflects our ongoing investment in enhancing our cultivation, scaling our operations, aligning the right partners and delivering on our consumers' changing needs while creating shareholder value. This concludes my opening remarks. I'll now hand the call over to Vaani, our CFO, who'll make a review of our financial results for the period. Thank you.

[Vaani Maharaj, executive]

Thank you, George, and thank you to everyone joining our call this morning. Please note that for the course of my financial discussion today, all financial information is prepared in accordance with international financial reporting standards and is in Canadian dollars unless otherwise stipulated.

Let me start by reflecting on my first 4 months as a newly-minted CFO in the cannabis industry. As George noted, the first half of the year was indeed a mixed bag of both milestone achievements and challenges. I've had the honor of visiting our production sites and working closely with our team members and peers in the industry, and I can say the daily passion on display has been energizing. Being a part of this team in this dynamic industry at this particular time, I'm confident in saying that we have a bright future, and I'm looking forward to contributing to our industry's success.

On that note and further to George's recap, our drive for success as we move into the final stretch of 2022 will hinge on our ability to produce premium products, to satisfy our pipeline of orders while prudently managing costs. To start, our second quarter revenue decreased slightly by $0.6 million or 5% to $13.2 million compared to the same quarter in 2021. Our top line revenue was impacted by an increased return allowance for 1 customer of $1.2 million. Excluding this return, revenue growth compared to the same quarter in 2021 was $0.6 million or 4%.

Our net revenue, which is calculated as revenue less excise duty, decreased by $0.9 million or 9% to $9.7 million compared to the same quarter in 2021. We experienced another quarter of growth in our medical channel, which is up 24%, driven by an effort to reenroll lapsed patients, as well as larger basket sizes. The adult-use channel was impacted by the shortage of our proprietary cultivars and decreased by 23%. Our proprietary cultivars such as Pedro's typically comprise 45% of our revenue, and in-market field sales teams worked with retailers to protect our market share through higher scales of other SKUs, largely pre-rolls. There were no bulk sales during the quarter.

For the 6 months ended June 30, 2022, our net revenue grew by $1.2 million or 6% to $22.1 million. Our channel mix year-to-date is comprised of 48% medical, 52% adult-use and 1% bulk, whereas the mix for the same period in 2021 was 42%, 56% and 2%, respectively. For the 6 months ended June 30, 2022, our average selling price per gram after excise duty was flat at $2.33 per gram, partly due to mix as well as lingering market factors related to pricing. We continue to expect our average selling price on an aggregate basis to remain stable as we introduce more premium formats.

Gross profit before changes in fair value was $0.5 million for the 3 months ended June 30, 2022 compared to gross profit of $3.1 million for the same period in 2021, which is a decrease of 85%, whereas the same metric for the 6 months ended June 30 was flat to prior year. Lower gross margin and gross profit were heavily influenced by the temporary closure of our cultivation rooms, which contributed $1.5 million of waste included in COGS for the quarter ended June 30, 2022, and $3.3 million for the 6 months ended June 30, 2022. These costs reflect the timing of the room closures while structural work took place. In total, the rooms were closed for 6 weeks during the first quarter, and 12 weeks during the second quarter such that we began reopening rooms early in June, with all fully reopened by the end of July.

The closures also impacted the kilograms harvested, which decreased by 46% for the quarter and 39% for the 6 months ended June 30, 2022. From an SG&A perspective, Q2 2022 total SG&A was lower than Q2 2021 by $2.5 million or 24% and $1.9 million or 12% for the 6 months ended June 30. This reduction was largely due to lower salaries, office expenses and consulting costs.

Pivoting to our balance sheet. We ended the second quarter with cash and cash equivalents of $14.2 million or an increase of $4.4 million compared to Q1 2022 due to financing received from LPF. As communicated in our prior earnings calls, the second quarter reflects a persistent and sustained effort to improve our capital structure. During the quarter, we entered into an amendment with our 2 senior secured credit facilities to extend the maturity date of the debt. These facilities are now due as follows: LPF, December 31, 2024; and BMO, June 30, 2024. This longer term provides management the runway needed to sustainably grow our business profitably. We also settled the unsecured convertible debt at 60% face value, as well as interest owed through funding of $8.9 million provided by LPF, of which $0.7 million represented transaction costs.

All in all, the financial results of the quarter are strong despite supply chain challenges and overall market compression. We will be introducing 10 new SKUs to market in October, which will help recover a portion of the lost revenue from our cultivars. Q3 and Q4 will be focused on recovering lost margin, and carefully managing spend. With that, I'll turn the call back over to George.

[George Scorsis, executive]

Thank you, Vaani. In summary, we captured some poignant sales milestones in the first half of the year, and we fully expect to see steadier growth moving into the remaining second half as we focus on scaling our facilities, increasing our premium flower quality output, processing, packaging and distributing, Color, Saturday, Royal City, Starseed and our newest Syndicate products at scale and within a low-cost structure and continuing to meet our proven record fill rate and delivery targets. We believe all of this will provide Entourage with a firm foundation to continue our growth trajectory in the remainder of 2022. Now I'll turn it over to you, Marianella.

[Marianella delaBarrera, executive]

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

[Operator]

[Operator Instructions]

I show no questions in the queue. At this time, I'd like to turn the call over to Mr. George Scorsis, Entourage Health's CEO, for closing remarks.

[George Scorsis, executive]

Thank you, all, again for joining us on today's call and for your continued support and confidence. We look forward to sharing our progress with you in Q3 as we grow and evolve further in 2022. If you have further questions, please reach out to Marianella and our Investment Relations team. Stay healthy, safe and continue enjoying the last few days of summer. Thank you, and have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating, and have a good day.