Emerald Health Therapeutics, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Good morning, and welcome to the Emerald Health Therapeutics 2020 Year-End and Fourth Quarter Financial Results Conference Call. Please note that this event is being recorded today, May 3, 2021 at 10.30 AM Eastern Time. An archive of this call will be available on Emerald’s Web site 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. Good morning. We filed our Q4 and year-end financial results on SEDAR and issued a news release this morning, which can be accessed in the Investors section of our Web site at emeraldhealth.ca. Leading today's call will be Riaz Bandali, Emerald’s Chief Executive Officer; and Jenn Hepburn, Chief Financial Officer.
- Riaz Bandali:
- Good morning, everyone. I hope that COVID has left you relatively unaffected health wise during this long past year. It's encouraging to see the initial beneficial effects of vaccination, and we hope for positive health and economic outcomes over the next year and beyond. I don't need to tell you about the challenging year that 2020 represented for the entire cannabis industry in Canada, and for Emerald. That, of course, had very little to do with COVID and everything to do with the ongoing dynamics of a completely new industry. And this is an industry focused, at least initially, on a commodity which layers on its own dynamics. The implication is that with many industry forces in motion, individual companies are moving rapidly, taking steps forward and backwards and adjusting to compete in the long term. Emerald is similarly sharing in all of these experiences. But I will emphasize that throughout all of this, we took the necessary and thoughtful steps to position Emerald for success. Today, I will reiterate certain restructuring steps we took to emerge from 2020 in a much stronger position than when we entered the year. I will focus on elements of the market that we are targeting and why as well as the product and business development strategy we are advancing to serve our intended customers, all with the goal of exiting 2021 with measurable accomplishment of our plans. I want to first reiterate our business rationale and focus. In this dynamic emerging market with all of its challenges of regulations, branding, product quality, supply and demand, what is Emerald’s reason for existing? What does it aim to accomplish? And how can it do that? First, the good news. The Canadian legal marketplace is consistently growing and surpassed sales in the illegal market for the first time in the third quarter of last year. In the fourth quarter, it exceeded 1 billion in sales. Any follower of the cannabis industry also knows of the tremendous growth in sales in the U.S. state with legalization of cannabis use.
- 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 annual financial statements and MD&A filed Monday, May 3. Note that all financial information has been prepared under IFRS. We reported net revenue of $11.8 million, down $8.6 million from the previous fiscal year. In 2019, we recognized over $8 million in sales during the third and fourth quarters related to wholesale revenue, where we saw an opportunity to sell bulk product into the wholesale channel market before prices compressed. On May 2019, wholesale market targeted bulk sales were not part of our 2020 strategy nor were they readily feasible in the heavily oversupplied bulk cannabis market last year. Our 2020 revenue was comprised of 68% dried cannabis flower and 31% oil, and was driven by increased volumes in the adult use market, while we experienced decreases in the medical sales channel overall. We realized 87% of our sales in the adult use market versus 54% in the prior fiscal year through the sale of dried cannabis flower in pre-roll and whole flower format, as well as in oil for a safe product line in 10 provinces and territories with an especially strong presence in Quebec and Alberta where we realized 55% of our gross sales. Sales were significantly impacted throughout the year by the compression of prices in the retail market, both in flower and in oil. While the average selling price per gram of dried cannabis and dried cannabis equivalent decreased to $3.75 from $5.61 in 2019, our total kilogram fold increased from 1,807 kilograms to 2,730 kilograms, a 51% improvement. Overall, our revenue in the adult use channel is slightly higher than the previous year. In fiscal 2021, we have experienced less pricing pressure in the flower category, with trending so far displaying that the pricing of flower is starting to stabilize. Last year was also marked by the launch of our Souvenir brand in Quebec at the end of the second quarter, positioned as a mainstream high quality product offering for the Quebec customer. Overall, we saw total cost of sales for the year exceed total revenues by $9.7 million. Cost of goods sold, which follows revenue, improved by $14.4 million, as the majority of the cannabis sold in 2020 was grown in our own facilities. In 2019, this cash cost figure was highly impacted by the sale of purchased cannabis at unfavorable prices. Looking at the other components in cost of sales, production costs represents direct and indirect cost of cultivation related to our two fully owned facilities. These costs are expensed as our current accounting policies do not account for the cash costs of production in the amount of biological assets capitalized. We intend to change our accounting policy in 2021 to align with industry standards, and we expect production costs to be significantly lower in 2021 also, as we have recently ceased cultivation activities at the Metro Vancouver greenhouse. Looking further at cost of sales, we had inventory write-downs of $8.1 million. This was the result of a significant change in estimates in the valuation of our biological assets and inventory, challenges in our growing operations, price compressions of retail prices, and the new cannabis regulations for packaging which resulted in obsolete inventory. In the third quarter of 2020, 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 dry flower cannabis market to the average net realizable value of bulk dry flower cannabis based on the comparable quality flower available in the wholesale market. The change was motivated by the intent of management to use estimates that are more reflective of the true value of the expected cannabis harvest. As a result, we have used $1 as an average fair value less cost to sell per gram of cannabis as at December 2020 as compared with $3.26 for the same figure in 2019. The change in biological asset estimates coupled with the challenges in some of our growing operations resulted in approximately $4 million of fair value write-down. The resulting shortage in dry flower led to a further $2.2 million write-down of unutilized capacity in manufacturing. An additional $1.9 million of inventory write-down was a result of significant price compression and oil bulk prices as well as product obsolescence. SG&A decreased $56.8 million year-over-year. This was led by a $37.6 million decrease in asset impairment and an $8.8 million decrease in share-based compensation. In 2020, we recognized $27.6 million in asset impairment as compared with $65.1 million in 2019. For the last quarter of 2020, management initiated a plan to close operations at the Metro Vancouver greenhouse which was an indicator of impairment. The fair value of this facility was determined based on an initial third party appraisal and resulted in the recognition of an $8.1 million impairment loss. In the same period, we terminated the letter of intent with Sigma and initiated a plan to cease active operations with the Adelaide facility. This adversely impacted the intended use of the related licenses, and an impairment of $2.19 million was recorded against the licenses as well as the associated . The facility is now purely used for research purposes and is expected to drive most of our new product development activities. Earlier in Q3 of 2020, we entered in a share purchase agreement relating to the sale of the Verdélite assets, which combined with the continued decline in our stock price were also indicators of impairment. Management assessed the value of the Verdélite assets that consisted mainly at the net disposal proceeds of 21 million, which led to $17 million impairment. In December of 2020, we terminated the sale agreement for the Verdélite assets. The cash components of SG&A, namely general and administrative expenses, sales and marketing expenses and research and development expenses of $12.5 million decreased $10.4 million from the previous fiscal year as a result of the company's efforts to reduce costs and refocus its activities. Our net loss of $43.3 million recorded from the year improved $69.7 million from that prior period and benefits from a $13.4 million gain on the disposal of our joint venture as a result of the sale of the Pure Sunfarms interest for consideration of $79.9 million. Like Riaz mentioned, 2020 was a decisive year for us in terms of financial health. While we started the year with $2.6 million in cash and cash equivalents, we ended the year with $26 million and subsequently received early payment of the $20.5 million from Village Farms related to the disposal of Pure Sunfarms. We also demonstrated discipline in our cash management and investment decisions throughout the year. In 2020, we recorded $10.5 million in net cash used in operating activities versus 24.8 million in fiscal 2019. We invested $4.5 million in targeted asset investments versus $28.9 million in fiscal 2019. As Riaz mentioned, we are currently equipped with the right asset group and size to work towards efficient and profitable operations. Subsequent to December 31, 2020, we further cleaned up our balance sheet with the repayment of the $9 million owed for the acquisition of the Verdélite assets and are now free from any significant debt in our balance sheet. Last week, we voluntarily delisted from the TSXV and commenced trading on the CSE at the open of business on April 27 under the trading symbol EMH. This decision will result in lower filing, compliance, legal and other fees and provides 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 presented. 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:
- Thank you, Jenn. With an enterprise value of about $25 million, our valuation is nominal relative to many more visible Canadian cannabis companies. Our goal is to have 26 products in 11 distinct product categories at year end versus only 12 products in three product categories in February. With this many shots on goal, we aim to increase our prospect of striking a chord with our target customers and driving sales upwards. We're enthused about the product profile of these new entries, the attributes they offer consumers and their potential for sales growth, which we expect in the third and the fourth quarters. So I think this is an opportune inflection point. I want to inform you that since the timing of our year end and Q1 financial reports are so close together with our next report coming at the end of May, we will not conduct a conference call for Q1 but will for Q2 around the end of August. Thank you for your support and for attending this call.
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- Operator:
- We don’t have any analysts on today’s call. This now concludes Emerald's 2020 year-end conference call. Thank you for attending today’s presentation. You may now disconnect.