Earnings Transcript for ETRGF - Q1 Fiscal Year 2023

Operator: Good morning, everyone, and welcome to the Entourage Health Corp. First Quarter 2023 Results Conference Call. At this time, participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts and members of the media to ask questions. [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 Catherine Flaman, Director of Communications at Entourage Health. Please go ahead, Catherine.

Catherine Flaman : Thank you, Brenda, and good morning, everyone. Welcome to Entourage Health first quarter 2023 results conference call. Please note, this call is being recorded. For copies of our press release and supporting documents or to retrieve a recording of this call, please visit the Investor Relations page of our website at 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 review the business highlights and financial results for the first quarter 2023 as well discuss recent developments. Following formal remarks, we will open the floor for questions. I would also like to remind everyone that during today's call, we will discuss our business outlook and 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 law, the company does not assume any obligation to update or revise them to reflect new events or circumstances. At this time, it is my pleasure to introduce George, Entourage Health's CEO and Executive Chairman. George, please go ahead.

George Scorsis: Thank you, Catherine, and good morning, everyone. I'd like to welcome everyone to the Entourage's earnings conference call today. I am pleased to provide an overview of our first quarter financial results. Firstly, I'll briefly touch on 2022 and our business transformation, which has set the stage for our Q1 results. Throughout 2022, Entourage maintained our commercial and financial targets. Furthermore, our momentum has continued into Q1 2023, where we are not only sustaining our performance, but also surpassing expectations by achieving several noteworthy milestones. In 2022, we strategically invested in our processes, products, and production capabilities, positioning the company for long-term stability. These transformative initiatives are now yielding tangible financial gains, propelling the organization towards significant growth. Throughout our strategic partnership with HEXO, our trusted third-party supplier, we have secured processing, resulting in dependable and cost effective biomass, a threefold strategy drove by decision to outsource, leveraging their expertise, infrastructure and resources to efficiently scale production in line with demand to adapt to a dynamic market condition. By streamlining operations, we have effectively reduced overhead costs, minimizing cash burn and reallocating capital to key business areas. As we entered 2023, we did so from a position of strength. Through this streamlining of our supply chain, standardizing of operational procedures and strategic investments in automation, we have achieved enhancements across our business processes. Building on this statement, I want to address some notable financial highlights which Vaani will speak to in more detail shortly. In Q1, achieving growth with revenue reaching $15.1 million. This represents a 24% sequential increase, demonstrating our ability to generate consistent quarterly growth. Notably, our net medical revenue was $6 million, representing a 61% increase over Q4 2022. Additionally, as part of our business to become asset light, we have experienced increased profit margins of 25% in Q1 2023, compared to 86% for Q4 of 2022, resulting from increased automation in production process of finished and semi-finished goods, resulting in lower direct labor costs across the board. With the sale and closing of our Strathroy facility on May 18th, the net proceeds were paid to BMO, in partial repayment of our outstanding secured credit facility. The company is in the process of seeking additional financings from its other secured lender, LiUNA Pension Fund to pay off the remaining balance of the BMO credit facility. Considering these achievements, we believe that our team's collective efforts, coupled with successful execution of our strategic initiatives, will lead to a positive adjusted EBITDA in 2023. Now let's delve deeper into our objectives for 2023. We have set ambitious targets and outlined a clear roadmap to drive our business forward. Our key objectives for 2023 encompass several critical areas, including

Vaani Maharaj: Thank you, George. Good morning and thank you to everyone joining us on 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's start by diving into revenue. Our strong sales momentum continued into 2023, and as a result, we are pleased to report first quarter 2023 total revenue of $15.1 million. It represents about a 4% decline on a year-over-year basis, and an increase of 24% sequentially compared to the fourth quarter of 2022. On a year-over-year basis, the decrease in revenue is largely due to lower volume of sales as grams sold decreased by 1.2 million grams or 23%, including bulk sales. Sales are flat to prior year when bulk sales are excluded. The overall average selling price per gram grew by $0.61 or 24% further bolstering our sales growth. Discussing revenue on a channel basis. Medical continues to be stable with renewal rates exceeding 90% as well as growth in grams sold. The average selling price per gram decreased due to the product mix sold through. Our adult use business continues to recover from setbacks in 2022. Grams sold during this three months ended March 31, 2023 were lower by 244,000 or 11%, while the selling price grew by $0.25 or 9%. Overall, new SKUs, higher quality products and productive distribution relationships serve as important levers to enable sales growth. The good news story this quarter is around our core pillar of operational excellence. On a year-over-year basis, total cost of goods sold improved by 855,000 or 9% overall. Excluding provisions and freight, cost of goods sold decreased by 1.6 million or 20% year-over-year due to lower labor costs as automation of the pre-roll process continues and automation and other efficiency initiatives come into play. We leverage our systems to monitor costs closely and to support operations in timely decision-making. Finally, the finalization of the Strathroy facility sale has reduced overhead attributable to production. Our margin will continue to improve as older inventory is depleted and makes its way through our supply chain. Turning to SG&A, expenses increased by $1.3 million or 19% compared to the same period in 2022 and decreased sequentially by $1 million or 14% compared to Q4 2022. The year-over-year increase was primarily driven by increased investment in sales and marketing, a higher allocation of overhead as a result of the Strathroy facility wind down and other restructuring initiatives, and higher consulting or professional fees due to audit, system improvement initiatives, and regulatory reporting. Our net loss for the quarter ended March 31, 2023 was $9.5 million or $0.03 loss per share compared to a loss of $8.8 million or $0.03 per share for 2022. Adjusting EBITDA increased by $6 million to negative $3.4 million Q1 2023 compared with negative $9 million in Q4 2022, also primarily driven by strategic transformation initiatives to reduce operating costs and partly due to generating higher margin revenue. As we turn to our balance sheet, we ended the quarter with cash and cash equivalents of $15.6 million compared to $9.1 million at the end of 2022. Cash used in operating activities in Q1 was $7.6 million compared to $7.4 million for the same period last year. Although spend was slightly higher in Q1 2023 on a sequential basis, cash burn was flat due to restructuring costs associated with the Strathroy facility closure, as well as consulting fees associated with winding down the former CannTx facility. Improving our liquidity position continues to be a key strategic priority to ensure financial flexibility to continue executing on our growth plans and innovation initiatives. In his remarks, George mentioned that we are working with our strategic investor to yield supplemental funds to pay off the shortfall between the sales price of the Strathroy facility and the balance payable to our senior secured lender. During the quarter, we also received the final $15 million of the loan tranche announced in October 2022. In closing, our first quarter 2023 financial results demonstrate the results of our team's focus on driving shareholder value by delivering on consumer preferences and optimizing our operational processes. With that, I'll turn the call back over to George for his closing remarks.

George Scorsis: Thank you, Vaani. Before we open the floor for questions, I'd like to share some important insights. Firstly, we are on the cusp of reaching a significant milestone, achieving positive adjusted EBITDA in just one more quarter. Our cost saving initiatives are nearing completion, paving the way for a streamlined and adaptable business model. Secondly, our medical cannabis segment continues to thrive, establishing itself as a strong player in the industry. We have experienced substantial commercial growth, driven by market expansion, strategic partnerships, and the introduction of new products. Collectively, these accomplishments layoff solid foundation for Entourage as we continue our upward trajectory through 2023. I would like to sincerely express my gratitude to our investors, our employees, and our partners for their support. Their collective efforts have propelled us forward, and I am confident that together we'll continue to build on this success in the coming quarters. Now, I'll turn it over to you, Catherine.

Catherine Flaman : Thank you, George. This concludes our opening remark and we are now ready for the question-and- answer period. Brenda, please proceed with instructions to call in.

Operator:

Operator: There are no questions in the queue. So this concludes the question-and-answer session. I would like to turn the conference back over to Mr. George Scorsis, CEO of Entourage Health for closing remarks.

George Scorsis: Thank you all again for joining us on today's call, and for your continued interest in Entourage Health. We look forward to having follow-up conversations with many of you to updating you on our continued progress. Please note, we will be hosting our AGM on June 14th. Please visit our website Event page for details. If you have any further questions, contact Catherine and our Investor Relations teams. Thank you and have a great day.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.