Emerald Health Therapeutics, Inc.
Q3 2020 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to the Emerald Health Therapeutics 2020 Third Quarter Financial Results Conference Call. Please note this event is being recorded today, December 1, 2020, at 10
- Bernie Hertel:
- Thank you, Grant. Good morning. We filed our third quarter financial results on SEDAR yesterday after the market closed, and issued a news release this morning which can be accessed in the Investors section of our website at www.emeraldhealth.ca. Leading today's call will be Riaz Bandali, Emerald’s Chief Executive 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 that involves several risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
- Riaz Bandali:
- Good morning, everyone. In the same way I've started these calls in the most recent quarters, I will start by saying that we continue to operate without significant detrimental impacts caused by COVID. We have our non-operation staff working at home, and we have tried to provide a safe environment as possible for our employees that work in an operating facility. We appreciate the diligence of our staff to ensure their co-workers safety. We hope that our listeners and shareholders are staying healthy and resilient through the currently growing wave of new COVID cases. The big event since our last quarterly update, of course, is that we not only announced the sale of our Pure Sunfarms Holdings, but we've already closed the transaction. We've been paid $60 million in cash. We have another $19.9 million amount receivable within six months, and are receiving a 12% interest rate on this remaining amount. We were also forgiven on $1 million of debt. Since the receipt of this first payment amount, we have purposely eliminated the single largest liability on our balance sheet, through the early payback of the $25 million convertible debenture that was due to be paid back in September 2021, and we have brought down our accounts payable balance significantly. Over the next few months, we are very confident that our strong balance sheet will put us in an enviable position to capitalize significant additional growth opportunities for Emerald. As a reminder, the closing of our Pure Sunfarm's equity disposition and the early repayment in the entirety of the $25 million plus interest owing on the convertible debenture, as well as the significant pay down on our accounts payable balances, occurred subsequent to the end of the third quarter. Consequently, the impact of these three events will not be reflected in our Q4 and year-end financial statements, and not in the statements we are reviewing today and had provided as part of our Q3 financial disclosure. In contrast to the PSF transaction, one item that is taking longer to complete is the closing of the sale of our Quebec operation. On July 31, 2020, we entered into an agreement to sell our Verdélite business and St. Eustache, Quebec, to Quinto Resources. Under this agreement the closing was required to occur on or before August 31, 2020, subject to satisfaction of closing conditions.
- Jenn Hepburn:
- Thanks, Riaz, 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 interim consolidated financial statements and MD&A for the three and nine months, ended September 30, 2020, filed yesterday Monday, November 30. Note that all financial information has been prepared under IFRS. As Riaz mentioned earlier, we reported net revenue of CAD3.4 million, CAD0.9 million higher than the revenue generated in the three months ended June 30, 2020. The increase in the quarter was largely driven by increased sales of dried flower in the adult use market with sales and volume by kilograms up by 57% and 58%, respectively, over Q2, 2020. The average net selling price per gram of dried flower of CAD3.54 per gram in the current quarter was comparable to CAD3.59 per gram in the previous quarter. Revenue from our oil SKUs was down CAD0.1 million from the previous quarter, and was considerably impacted by the change in the cannabis packaging regulations. The new regulations restrained our ability to ship products to market throughout a majority of September, and had other inventory impacts that I will cover later. However, we were able to counteract this revenue gap in October, where we sold more units from our SYNC line than any other month during 2020. This increase in revenue from SYNC products was supported by the launch of two new SKUs, a THC mango flavored tincture and a CBD mint and chocolate tincture, both SKUs include added terpenes for enhanced consumer experience. Overall, our revenue was comprised of approximately 83% dried products and 16% oil, versus 73% flower and 26% oils in Q2, 2020. It is clear that flower still constitutes our main source of revenue, and we intend to maintain and grow our position in this segment with a continued focus on smaller size, high quality SKUs. However, as a result of a segment in our consumer base looking for larger formats and the current trend in the industry, we are launching our first large SKU in the coming weeks, with a single high potency strain 15 gram format into the Alberta market. With regards to our oils and cannabis 2.0 products, we intend to increase the proportion of these categories within our product mix, as illustrated by the launch of our Nano SYNC line and the addition of three new SKUs to our SYNC oil line as Riaz explained earlier. During the quarter, we realized 92% of our sales from the adult use market, with a strong presence in Ontario, Quebec and Alberta which accounted for close to 79% of our volume. Ontario plays an important role in our growth strategy, and we increased our revenue in this province by 82% as compared to Q2, 2020. In the last quarter of 2020, we'll see Emeralds continue to push growth in not only Ontario but also Quebec, Alberta and BC. The current quarter's gross margin shows a significant decrease from the previous quarter, as we reported a CAD5.5 million negative margin. This is the result of a significant change in estimates in the valuation of our biological assets and inventory, challenges in our growing operations as explained by Riaz earlier, and the new cannabis regulations for packaging which resulted in obsolete inventory. In the current quarter, we changed the estimates used for fair value less cost to sell used as an input in the valuation of biological assets, from the average net realizable value of packaged finished goods for sale in the recreational dried flower cannabis market to the average net realizable value of bulk dry flower cannabis, based on comparable quality flower available in the wholesale market. The change was motivated by the intent of upper management to use estimates that were more reflective of the true value of expected cannabis harvested. As a result, we have used CAD1.14 as the average fair value less cost to sell per gram of cannabis flower in Q3, 2020, as compared to CAD2.68 per gram for the same figure in Q2, 2020. Of the CAD2.3 million recognized as the fair value loss in biological assets, CAD1.2 million is due to the impact of a change in estimates on cannabis plants that were growing at the end of the previous quarter, that had been harvested and moved to bulk inventory during Q3. The challenges in our growing operations during the third quarter resulted in an additional CAD1.8 million loss in the fair value of biological assets, as plants recalled during the quarter. We recorded CAD0.6 million fair value gain in biological assets which offsets some of these losses. So CAD1.8 million inventory write-down in the current quarter includes CAD0.8 million for extraction grade cannabis flower and trim. During the three months ended September 30, we revalued all trim held in inventory to CAD0.01 per gram. We also wrote down CAD0.6 million of finished goods and consumables as a result of the new packaging requirements for Health Canada. Looking more closely at gross margin on a cash basis, when we removed the effect of non-cash items from cost of sales, such as amortization of CAD0.7 million, loss on changes in the fair value of biological assets of CAD2.3 million, and inventory write-down of CAD1.8 million, we report a negative gross margin of CAD0.6 million. This CAD1.3 million negative trend from the previous quarter was significantly impacted by the changes encountered in our growing operations, as Riaz mentioned earlier. We reported SG&A expenses of CAD4.4 million this quarter, a CAD0.9 million, or 26% increase from the previous quarter. The cash component of SG&A represented in the general and administrative, sales and marketing, and research and development line items of our P&L statement increased by CAD0.9 million, or 35% as compared to the previous quarter. This CAD0.9 million increase in the current quarter was most significantly owing to the extraordinary professional expenses, related to both the sale of Verdélite and the Pure Sunfarms asset. Sales and marketing and research and development expenses were in line with the Q2 figures. However, as Riaz mentioned these are areas where we expect to invest in the coming quarters in order to support our strategy on a go forward basis. We've recorded a net loss of CAD11.7 million for the period and an EBITDA of negative CAD3.9 million. We continue to show discipline in our cash management and investment decisions. In the current quarter, we saw CAD0.3 million net cash used in operating activities, versus CAD1.7 million in the previous quarter and CAD3.2 million in the first quarter of 2020. We reported CAD0.3 million cash used in our investing activities in the current quarter as well, as compared to CAD0.7 million in the previous quarter, and CAD1.4 million in Q1, 2020. Despite some challenges encountered in the third quarter of 2020, we continue to work toward efficient and cash generating operations. In the current fiscal year, we've raised CAD9.5 million from private placement offering, share for debt financing, and the exercise of warrants. We've also established an asset market equity program that allows us to raise up to CAD3.25 million in gross proceeds. To-date we have raised CAD0.5 million through this ATM. Subsequent to the quarter end, we completed the sale of our 41.28% interest in the Pure Sunfarms asset to Village Farms for consideration of CAD79.9 million. With the closing of the sale on November 2, we recorded our investment in Pure Sunfarms as held for sale at the end of the Q3 period, resulting in a working capital of CAD53.1 million. With the influx of cash and positive working capital, we intend to enable growth in very specific areas of our business and extinguish some of the liabilities in our balance sheet. 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 form and with overall efficiencies being realized at all levels of our 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:
- Thank you, Jenn. This is still a young industry. It is dynamic, competition is evolving, products are becoming better, consumers are becoming more knowledgeable. There are and there will be several ways to succeed in this business, and our intent is to continue to refine our strategy, our operations, and our product mix towards enhanced success and to execute well. We are very pleased with the progress that we've made with Emeralds in the last year. We fundamentally transformed every aspect of our operation, and have placed the company in an excellent position to establish long-term growth and sustainability in a very turbulent market and at a very precarious time for many companies in the cannabis industry. We realized we have more work to do to move our remaining cultivation and processing operations back into the block, and to capture the good opportunity we have to build additional revenue and profitability traction with the products that we have launched with those that we will soon have on deck. We are committed to both of these efforts. Very importantly, after more than a year of restructuring activities, it's a great pleasure to now have the ability to realign and then execute on a redefined strategic plan, assess new opportunities that we can take advantage of to accelerate growth, and to have the resources to act on attractive business opportunities in a self-reliant manner. We look forward to the next months and quarters and are absolutely committed to delivering value to you, our shareholders. Thank you for your support and for attending this call.
- Operator:
- We do not have sell side analysts on the call today. And this now concludes Emerald's third quarter conference call. You may now disconnect.
- End of Q&A: