Earnings Transcript for ETRGF - Q2 Fiscal Year 2022

Operator: Good morning, everyone. And welcome to the Entourage Health Corp. Second Quarter 2022 Results Conference Call. At this time, participants are in 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 Marianella delaBarrera, Senior Vice President, Communication and Corporate Affairs with Entourage Health. Please go ahead, Ms. delaBarrera.

Marianella delaBarrera: Thank you, Cha, 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 on 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 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 statement 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: 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 you're all having a wonderful summer. Before I get into our performance during the period, I want to share a high-level mid-year 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. Like more pressing, we all noted increased competition, price compression and oversupply as new products flooded the market. Added to this, many companies were challenges 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 beginning up my Entourage recap. First off, as a reminder, our strategy continues to revolve around three levers in 2022. Firstly, driving revenue; secondly, growing margin 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. All this allowed us to settle the repayment of our unsecured convertible debentures. It also provided us with the extension on our two secured credit facilities maturity dates, or increased financial flexibility, essentially extending our loan repayment and financial obligations to 2024 or 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 our 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 at premium and pre-roll market segments are the two fastest growing segments with the highest margins. In fact, the overall pre market -- 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 flour 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 up 5% of the pre-roll market segment according to

Vaani Maharaj : 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 four 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 that nearly 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 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 one 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 re-enroll 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 work with retailers to protect our market share through higher scales of other skews largely pre-rolls. There were no bulk sales during the quarter. For the six 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% both, whereas the mix for the same period in 2021 was 42%, 56% and 2%, respectively. For the six months ended June 30 2022, our average selling price per gram after excise duty was flat at 233 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 three 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 six months ended June 30 was flat the 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 six 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 six 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 six 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 six months ended June 30. This reduction was largely due to lower salaries, office expenses and consulting costs. Visiting 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 finance 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 two senior secured credit facilities to extend the maturity date of the debt. These facilities are now due as follows

George Scorsis: Thank you, Vaani. In summary, we have to some point of 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 flour at 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 sell 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: Thank you, George and Vaani. This concludes our opening remarks. And we're now ready for the question-and-answer period. Cha, please proceed with instructions to call in.

Operator: Certainly. [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 CEO for closing remarks.

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End of Q&A:

George Scorsis: 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.