Emerald Health Therapeutics, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Aug 2021

[Operator:]

Good morning, and welcome to the Emerald Health Therapeutics 2021 Second Quarter Financial Results Conference Call. Please note that this event is being recorded today, August 31, 2021 at 10.30 AM Eastern Time. An archive of this call will be available on Emerald’s website following the meeting. I’d like to turn the conference over to Mr. Bernie Hertel, who is responsible for IR and Communications. Please go ahead, Mr. Hertel.

[Bernie Hertel:]

Thank you, Chad. Good morning. We filed our Q2 financial results on SEDAR yesterday and issued a news release this morning, which can be accessed in the Investors section of our website at emeraldhealth.ca. Leading today's call will be Riaz Bandali, Emerald’s President and Chief Executive Officer; and Moe Jiwan, Chief Operating Officer; and Jenn Hepburn, Chief Financial Officer. Today's call may contain certain forward-looking statements. Certain material assumptions are applied in providing these statements, many of which are beyond our control. These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve several risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These and other risk factors are described in our periodic filings made with SEDAR. You're cautioned not to place undue reliance on these forward-looking statements and the company disclaims any obligation to update such statements. I will now pass the call to Riaz Bandali.

[Riaz Bandali:]

Good morning, everyone. I hope that everyone is well in this managing the fourth COVID wave. I would like to take this opportunity to thank the entire Emerald team for their efforts and resilience through the last 18 months. We noted in our last conference call, which covered the fourth quarter in the year of 2020 that we would not conduct the Q1 call since there were only three weeks between the two reporting events. So, today, I want to say that in the second quarter we started to see incremental progress in a renewed business strategy, which translated into an improvement in our results versus Q1. As with most business transitions, I don't expect results to be a perfectly linear progression, there will undoubtedly be additional bumpy quarters. But after the substantial restructuring that we undertook and the tight budgets that we held ourselves to, I'm proud of our team's commitment and effort, as well as the direction of our business. What were some of the outcomes? First, we achieved a 42% sequential quarterly increase in gross revenue to $3.8 million, with a concurrent significant increase in gross margin. While we still realized the small negative gross margin, it was good to see that our operational improvements are enhancing our potential for future gross profit gains. As per our objectives, we kept our G&A costs flat, while we increased our investment in sales and marketing by 33%. And we amplified our R&D investment by more than double. Our net operating loss and our cash flow utilization have also been controlled to manageable levels. Moreover, it is now very evident and easy for anyone to see the outstanding results achieved in cleaning up our balance sheet and eliminating all non-value added commitments coupled to the windup of all related party agreements. It should be noted that we are currently sitting with an enviable balance sheet with over $32 million in working capital. Our healthy balance sheet pairs nicely the acceleration this quarter in our revenue ramp. We also believe that we have the ability to further strengthen our cash position in the next few quarters through the divestment of other non-strategic, non-operational assets that do not fit with our go-forward strategy. These results are one step towards our longer internal targets that we have established, but we are starting to see some signs that the strategic and operational changes are taking effect. We've also been able to increase our investment in sales and marketing, as well as in R&D, two key areas that drive future growth. Furthermore, we can completed significant investments to further enhance our Quebec production facility as we look to strengthen our market share and our profile in Quebec. I've been clear and detailed in the past conference calls regarding a renewed business strategy, and I won't reiterate every detail of that. In fact, in our recent year-end financial call in May, we laid out our priorities very well. But to remind you of our focus at a level, at Emerald, we've made a very conscious and high conviction commitment to science-based innovation, with new product development initiatives intended to serve cannabis consumers seeking health, wellness, and medical outcomes. In particular, we're working to show leadership in delivering on our Emerald Defined Dose focus in which consumers are able to realize more precise and predictable dosing at a more controllable cannabis consumption experience. With respect to specific initiatives, we've recently we launched another new brand called FUSE and a new product line called Nano Shots into both the direct and the medical market segments. Using nanoemulsion technology they increased the speed of onset and to ensure a shorter duration of effects. Initial deliveries of this product were very well received by the consumers. We also launched our sublingual tablets in April. While we aim for modest initial sales volumes to test the water, based on our initial market success we are working to increase the sales of these product lines. Our SYNC medical product sales are robust and our Quebec Souvenir brand, which now includes the Souvenir branded strain specific oil is started to establish some sales momentum in Quebec, a province that continues to actively support its Quebec based LP, such as Emerald. Let me touch on what lies ahead. As I noted previously, we are increasing our targeted investment in sales and marketing. We have national distribution, mean intend to leverage that ability with the rollout of our own new products, as well as by actively considering opportunities to partner with other innovative brands and products. The strength in our team and our capability in this function, we are all also very pleased to have brought on Nick Mosgrove as our VP of Sales and Marketing three weeks ago. Nick is an experienced sales and marketing leader who joined us after spending three years with TerrAscend in a similar role and who also possesses 15 years of sales and marketing experience with large beverage alcohol companies. We've also doubled the size of our product development team in the first half of this year. Our priority is developing innovative cannabis 2.0 and 3.0 products that will take advantage of our science, as well as the synergies and marketing potential of new products combining natural health products and cannabinoids. We also intend to focus effort on the development of proprietary products that leverage our IP. We're continuing to progress towards the initiation of our first partnered clinical trial in early Q4, with a second one also plan to initiate in the next four to six months. Our intent with these studies is to provide clinical observations that may help to create greater knowledge and confidence for consumers using sets -- certain Emerald's cannabinoid products and proprietary formulations for specific medical conditions. With respect to our other partnerships, in Q2 we've seen modest, but increasing product demand in Europe via our partner Stenocare. We announced a small strategic investment in the brand focused total body CBD wellness company, Prima in late May. We are also anxiously looking forward to the launch of an exciting and novel new product line by FlowerPod in the U.S. prior to year-end, which is based on the intellectual property that they licensed from Emerald. And we are well on track to hopefully announce an additional new partnership shortly. We continue to take a very capital disciplined and measured approach to forming partnerships that expand Emerald's geographic reach, monetize our intellectual property and provide mutual opportunities to increase revenues and introduce products into new markets. These partnerships provide our shareholders with meaningful upside and optionality with very minimal downside risks. One of the critical steps we wanted to undertake to solidify our operating platform was to act with our senior team. While we have very capable team leads and staffing in each function, we wanted to strengthen our overall operating cohesiveness in productivity. In May, we hired Moe Jiwan as Chief Operating Officer. Moe brings considerable medical and recreational cannabis experience from his past roles, including leadership roles and other consumer product industries, as well as substantive health expertise. He's also passionate about process excellence, very results . You'll be hearing from Moe in a minute. Earlier this month, we announced that Dr. Avtar Dhillon had stepped down from his role as Executive Chairman and Director admits allegations of US Federal Security Law violations. As we previously noted, none of these allegations mentioned improper trading of Emerald securities. The company is not aware of any improper trading in Emerald securities and no allegations have been made against any other person associated with Emerald, including any of its officers or other directors. We continue to apply our exclusive focus to advancing Emerald business on behalf of the company, shareholders. On that note, I'm pleased to ask Moe to address a few important strategic initiatives that he's been working on since he joined the company.

[Moe Jiwan:]

Thank you, Riaz and good morning, everyone. It's been a great pleasure to join a very entrepreneurial team, one that is well versed in life sciences and product development, and working to carve paths towards new long-term market segment opportunities, but of course, still very aligned on the successful sale of traditional cannabis products, including dry flower and oils. But with that in mind, my skill set has been highly relevant to the key opportunities that Emerald has had to expend sales and increased product quality consistency. In effort to support the growing demand of our drug -- for our dry flower products in Quebec, we also recently completed a series of upgrades in our St. Eustache cultivation facility, making it we believe one of the most efficient cannabis production centers in Canada. Also spending conservative time and effort reviewing and refining various aspects of our supply chain and to ensure that with growth we're not eroding margin. From a holistic perspective, our leadership team continues to drive performance by instilling clear accountability across all business units, determining integrated priorities and emphasizing cross-functional coordination ensuring that our business units are aligned to drive forwards objectives and targets focus positive -- on positively impacting our sales, product productivity and profits. We have a cohesive focused team, and I look forward to seeing the results of our efforts over the next quarters. Over to you, Jenn.

[Jenn Hepburn:]

Thanks Moe and good morning, everyone. The figures that I'll be reviewing today are in Canadian dollars unless otherwise noted and can be found in our condensed and term consolidated financial statements and MD&A for the three and six months ended June 30th, 2021 filed yesterday, Monday, August 30th. Note that all financial information has been prepared under IFRF. We reported net revenue of $3 million, up $0.8 million from the previous quarter. Revenue in the current quarter benefited from a 63% increase in the sale of dried flower and a 9% increase in the sale of concentrates, extracts and edibles as compared to the prior quarter. Revenue for the period was comprised of 70% dried cannabis flower, and 30% concentrates, extracts and edibles versus 61% and 39%, respectively in the prior quarter. We realized 78% of our sales in the adult use market through the sale of dried cannabis flower in pre-roll and whole flower format, as well as extracts through our SYNC product lines. We shipped product to 11 provinces and territories with an especially strong presence in Quebec and Alberta, where we realized 63% of our gross sales versus 59% in the prior quarter. 91% of the dried cannabis flower that was sold in the adult use channel was grown in our Quebec facility where that improves quality, potency and consistency of growth contributed to the increased volumes in dried flower sales. Overall, we saw total cost of sales for the quarter exceed total revenues by $0.3 million, representing a $0.7 million improvement from the prior quarter. Cost of goods sold, which follows revenue increased by $0.2 million or 17%, while revenue grew by 35% as previously mentioned. Cost of sales mostly represents the cash cost of our in-house and outsource manufacturing activities that happen after the cultivation activities and include any purchase of dry cannabis from a third-party that is sold during the current period. Looking at the other components in cost of sales, production cost of $1.3 million for the current quarter represent direct and indirect cost of cultivation related to our fully owned facility in Quebec and a slightly lower by $0.1 million as compared to the previous quarter. These costs or expense as our current accounting policies do not account for the cash cost of production in the amounts of biological assets capitalized. Looking further at cost to sale, the realized fair volume amounts on inventory sold at $1 million was up $0.5 million from the prior quarter. The increase was a result of the sale of 1,582 kilograms of biological assets in dried flower or oil format in the adult use channel or in bulk format versus 396 kilograms in biological assets in dried flower or oil format in the adult use channel in the prior quarter. The cannabis sold in bulk form in the current quarter was mostly composed of previously impaired dried flower that do not meet our adult use channel sales specifications. These figures do not include any cash components and represent previously capitalized fair value amounts from biological assets to inventory. The unrealized gain on changes in the fair value of biological assets of $0.5 million increased $0.4 million from the prior quarter and represent fair value amounts capitalized to biological assets in the balance sheet in the current quarter. These amounts are recorded as plants grow through their lifestyle -- life cycle and our facility. Looking further at cost of sales, we had inventory write-downs of $0.2 million composed mostly of the impairment of non-cannabis inventory products held by Emerald Health Naturals, a subsidiary whose activities were discontinued late last year. SG&A expenses totaled $4.1 million, which was an increase of $0.6 million as compared to the prior quarter. This was led by a $0.4 million increase in R&D expenses and a $0.1 million increase in sales and marketing to support our strategy as Riaz described earlier. The other components of SG&A rather rise in line with prior quarter figures. The company's total net loss for the quarter was $14 million, which included $10.7 million on the impairment of assets during the quarter. Based on market conditions and additional third-party sales broker information, we adjusted the valuation of our held for sale assets and recognize the further fair value loss on the Metro Vancouver facility that is currently listed for sale. Looking at our balance sheet. We reported a net working capital of $32.3 million, which includes a cash position of $26.9 million and no significant debt. We believe this puts us in a favorable position to execute on the strategy Riaz detailed earlier. In the current quarter, we recorded $3.4 million net cash used in operating activities versus $4.9 million in the prior quarter. Increased revenues coupled with more current and managed accounts payable balances contributed to the $1.5 million improvement from the prior quarter. Overall for the six months ended June 30, we had a total increase in cash and cash equivalents of $0.9 million versus a decrease of $1.5 million in cash and cash equivalents for the same period of fiscal 2020. At the close of business on April 26th, we voluntarily delisted from the TSXV and commenced trading on the CSE as if the open of business on April 27th under the trading symbol EMH. This decision will result in lower filing compliance, legal and other fees, and provide us with increased flexibility to conduct business in the United States and other jurisdictions outside of Canada to further support the strategic plan we have for Emerald. In conclusion, with additional capital on hand and with the reliance on our own cultivation capabilities moving forward, the launch of new products both in dry and extracted forms and with overall efficiencies being realized at all levels of the organization, we continue to work towards positive impacts on our operating numbers. And with that, I'll turn it back over to Riaz.

[Riaz Bandali:]

It's exciting to see the initial traction we're getting with our product launches, and I look forward with anticipation to build -- planning to build out the best-in-class health and wellness product portfolio. We continue to strengthen every function in our business, and I'm very optimistic that the competency of our team members and the ever improving management processes and productivity that we've been realizing over the course of the last few quarters is now meshing and moving us towards our goal of continued revenue growth and profitable operations. Thank you for your attention and your support.

[End of Q&A:]

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Take care.