Entourage Health Corp.

Thank you, Anastasia and good morning everyone. Welcome to WeedMD’s third quarter 2020 conference call.

Please note this call is being recorded. For copies of our press releases and supporting documents filed today or to retrieve a recording of this call, please visit the Investor Relations page on our website at www.weedmd.com.

The replay will be available later this afternoon. With us on today’s call are Angelo Tsebelis, Chief Executive Officer of WeedMD and Chief Financial Officer, Lincoln Greenidge.

Today, we will review the highlights and financial results for the third quarter of 2020 and provide a business and operational update. Following formal remarks, we will open the floor for analysts and media questions.

I would also like to remind everyone that during today’s call, we will discuss our business outlook and make forward-looking statements. Actual events or results could differ materially due to a number of 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 and 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’s my pleasure to introduce Angelo.

Go ahead.

Thanks, Marianella and thank you everyone for joining us today. I will briefly recap our progress and achievements during the third quarter as well as provide our subsequent highlights.

Following that, Lincoln will walk us through financial highlights for the period, after which we will be happy to take any questions. Before I get started, I want to just send a special thank you for our employees, patients and shareholders.

It’s been a tough year. And while we continue to forge ahead together, we remain optimistic about the future.

During the third quarter, we really began to see a turnaround from the previous months. We experienced an upswing as a result of our commercial efforts as we kicked off key initiatives to expand our adult use brands.

We continue to focus on our operational improvements and optimization and in the medical market we continue to improve the overall value proposition for our loyal patient base. We have the time and dedicated the resources to build the Color brand.

And with the reopening and re-launch of retail stores in Q3, we noticed that ramp up in the adult-use marketplace coupled with our investment start producing at scale Q3 was a bit of a turning point. Our focused retail engagement translated into increased revenue during third quarter.

We reported sequential quarter-over-quarter revenue growth of 8%. This demonstrates the increased momentum we are seeing in our business, particularly in our expanded adult-use segment as we expand our product portfolio and improve our speed to market.

In order to support our anticipated growth in the adult-use segment, we recently expanded our national sales team in an effort to drive more brand activations and vendor engagement. Building on our successes in Q3, we introduced a number of traditional and new products and formats to invigorate our portfolio.

Our new string black sugar rose will start shipping in Ontario this week. Our string specific pre-roll products under the Color and Saturday banner were launched, nitrogen infused packaging for already rolled and whole flower products and our Color branded 510 vape carts which landed in the top 5 status in the first week of availability of the iOS, OCS are just a few examples of some of the initiatives we have taken this quarter.

We also entered into a commercial arrangement with Fire & Flower to produce their Revity CBD product line which is now available in Saskatchewan. Finally, we signed key brand partnerships that will further enhance our portfolio by offering both products in the adult-use and medical channels.

Our agreements with PAX Labs and Mary’s Medicinals will produce market and sell a lineup of products for both Color brand as well as Starseed Medicinal platform. More specifically on the medical side, we recently finalized an integration of our two medical platforms under one framework.

This eliminated the need for two commercial platforms and streamlined our offering with improved access for all patients. This consolidated our patient base and provided expanded access to our full suite of medicinal products, assistance with direct billing and other insurance coverages, same day shipping and delivery in the GTA and access to North Star Wellness’ virtual clinic and network of healthcare professionals during this challenging time.

Our platform integration also included a renewed marketing effort to rationalize our medical pricing strategy as well as introduce WeedMD strains that our patients have been seeking. Finally, we announced our medical expansion to Atlantic Canada under the purview of Dr.

Julie Hildebrand, a real medical cannabis specialist and advocate. With her medical reach in one of the fastest growing medical markets in Canada, Dr.

Hildebrand will help drive our focused treatment plans around chronic pain and opioid cessation. This will also be an important resources we look to expand our union reach into other parts of Eastern Canada.

Turning to our ultra cultivation program, we recently completed our outdoor harvest and Strathroy. Our learnings and experiences from last year’s harvest continued to payoff as we instituted new methodologies and processes, having planted just over 19,000 plants on approximately 22 acres.

While still early, we are optimistic with the preliminary results to-date. Once again, big kudos to the team, they did an incredible job in what turned out to be one of the hottest dry summers on records, which unfortunately was followed by early frost, but the team responded and rallied.

Operationally, we continue to take actions to enhance our overall productivity by implementing more automation and optimizing our operations, particularly in our Aylmer facility. We are producing finished products at a much higher pace and scale and are already seeing improvements in our costs, which we expect will only get better.

Our third quarter also provide us with the opportunity to further stabilize our balance sheet and focus on key strategic opportunities. At the end of the third quarter, we entered into a $30 million credit facility with the LiUNA Pension Fund, which provides us with the financial flexibility to continue to drive the business toward profitability.

We further strengthened our company with some key additions to the leadership team. In October, Lu Cacioppo, a veteran finance executive was appointed for our Board of Directors.

Lu was assumed the Chair of Audit Committee and has been a great addition to the board. His experience and expertise will prove invaluable as we steadily move towards profitability and long-term growth.

We also announced the addition of our seasoned HR executive, Deborah Sikkema as Chief People Officer, bringing over 20 years of HR experience with some of Canada’s top tier organizations, such as Shoppers Drug Mart, Canadian Tire and Holt Renfrew. Deborah has been pivotal in finalizing our integration and cultural transformation.

This concludes my opening remarks. And I will now hand it over to Lincoln, our CFO who will review our financial results.

Thank you, Angelo and good morning to everyone. Today, I will briefly review our third quarter financial highlights, as Angela has already mentioned corporate highlights for the period.

Before we get started, I want to echo Angela’s acknowledgement from the top, again, a special thank you to all our employees, patients and shareholders and relationship partners for working out with us throughout 2020. Thank you.

Now on to the financials, we noted a number of key improvements in our cultivation processes, operations and distribution channels. This quarter, our team sharpened its focus to concentrate on capturing long-lasting opportunities and initiatives that will help achieve further cost improvements, margin expansion and drive organic growth across our adult-use and medical channels.

Our reported net revenue for the quarter ended September 30, 2020 was $6.3 million, which represents quarter-over-quarter growth of 8%. As a percentage of gross revenue, direct to patients accounted for 2.6 million or 33.5% and wholesale accounted for 5.1 million or 66.5%.

For the 9 months ended September 30, 2020, net revenue was $24.4 million compared to $18 million in the comparable 2019 period. The 9-month increase was mainly attributable to the full period contributions of Starseed growth in the adult-use markets and the sale of dried cannabis to a license holder in the first quarter of 2020.

The decrease in wholesale was due to lower sales of most products to federal license holders as we continue to focus on the distribution of our branded products. Gross profit before change in fair value was $69,000 for the third quarter of 2020.

After adjustments in fair value for the products sold in the quarter and for biological assets in production, gross profit for the third quarter increased by $20 million or 255%. The increased gross profit is mainly attributable to the unrealized gain on change in fair value of biological assets of $12.9 million for the quarter.

We expect to continue progress on significantly improving our operations’ effectiveness through optimization initiatives, which drive efficiencies and reduce our cost of sales. On a weighted average basis, cultivation costs during the third quarter and first 9 months of 2020 was $0.34 per gram and $0.53 per gram respectively compared to $0.72 and $0.84 per gram in Q3 2019.

Such reductions in costs are mainly due to achieving economies of scale with expanded capacity. In the third quarter of 2020, WeedMD’s weighted average cost per gram, inclusive of all costs, direct and indirect, produced and packaged was $2.11 compared to $1.42 in the third quarter of 2019 due to an increase in direct patient sales.

Compared to Q2, 2020 the weighted average cost per gram declined by 16%, again demonstrating cost efficiencies as we continue to focus on optimizing our operations. The increase in weighted average selling price, net of excise tax was due to a greater portion of direct patient sales in the quarter compared to the same period last year.

General and administrative expenses totaled $5.3 million for the quarter ended September 30, 2020, which is flat from the one-time costs incurred during a lengthy transition during COVID. Such costs are continuously improving quarter-over-quarter.

The year-over-year increase in comparison to the same period was primarily driven by the acquisition of Starseed in December 2019 and the company’s overall growth, resulting in increases in salaries and benefits, consulting fees and administrative expenses. The quarter-over-quarter increase in our sales and marketing costs over the previous two quarters resulting from our ramped up commercial retail and digital marketing initiatives that Angela alluded to earlier.

Professional fees during the period covered auditor and legal fees. Adjusted EBITDA loss totaled $5.3 million for the 3-month period ended September 30, 2020 compared to an adjusted EBITDA loss of $2 million, which is the same – for the same period in 2019 primarily a result of inventory write-off of $1.2 million and expenses incurred relating to increased production, selling and general and administrative expenses, prior to optimization initiatives continued to reduce these costs albeit at a relatively slower pace.

Please note, adjusted EBITDA is not a recognized measurement on the IFRS and this data will not be comparable to data presented by other companies. Management believes adjusted EBITDA to be an important measure in the company’s day-to-day operations by excluding interest, tax, depreciation and amortization, stock-based compensation, fair value changes and other non-cash items and non-recurring items.

This measurement is useful in assessing the results of operations and strategic decisions. Net profit and comprehensive profits for the quarter ended September 30, 2020 was $8.6 million, representing a decrease in loss of $2.2 million compared with net loss of [indiscernible] for the prior year.

The LPA decrease in net loss is primarily a result of the $12 million unrealized gain on change in fair value of biological assets for the quarter that I mentioned earlier. As for our balance sheet, we ended the quarter with cash and cash equivalents of $31.1 million.

Total assets as of September 30, 2020 reached approximately $242.4 million, including inventory and biological assets of $51.2 million compared to $38.9 million at the beginning of the year and $38.6 million at the end of June. Our assets increased as a result of growth of our biological assets and inventory harvests, facilitated by cultivation capacity at the greenhouse expansion as well as the outdoor growth.

In September, we entered into a $30 million credit facility with the LiUNA Pension Fund. This non-dilutive financing matures in August 2022 and has provided the company with increased financial flexibility as we continue to expand our distribution channels and brand awareness to drive further revenue growth.

To recap, we are moving in the right direction and we were encouraged by the positive upward trends in all our markets while continuing to strive to improve each one daily. In the midst of a second wave of COVID restrictions, we continue to focus on the initiatives, that was on the test of time and ensure that we meet the needs of all our customers.

Our goal remained the same as we are determined to progress flower to profitability and to sustain this momentum going forward. For further information on our financial and operating performance, I encourage you to review the company’s financial statements and management discussion and analysis for the quarter ended September 30, 2020, which has been filed and are available through SEDAR.

With that, I will turn the call back over to Angelo for closing remarks.

Thanks, Lincoln. In closing, we made significant progress during the third quarter of 2020.

As a result of our efforts, we are now producing and shipping more product than ever before. Our Color and Saturday labels are gaining greater traction resulting in increased sales and strong revenue performance for the quarter.

Moving ahead, we will continue to launch innovative cannabis products in the fourth quarter and into 2021 that will appeal to our long – our strong and growing base. At the same time, we will continue to leverage our Starseed additional platform to drive insured sales of medical cannabis as well as improve the overall access to our medical channels.

Looking ahead, we are well-positioned for continued revenue growth and improved margin performance during the remainder of this year and well into next. That concludes our prepared remarks.

I would be happy to take any questions.

Thank you, Angelo and Lincoln. This concludes our opening remarks.

We are now ready for the Q&A session, Anastasia.

Hey, folks. How are you today?

Angelo…

Doing well. Craig, how are you?

I’m doing well. I’m doing well other than the snow down in this part of the country.

Angelo, the Starseed acquisition…

[Indiscernible]

Hello.

Yes, sorry. Go ahead.

No problem. The Starseed acquisition was touted to improve the balance sheet and cash position of the combined companies at a dedicated medical channel with a sticky customer base, improving gross margin from Starseed no longer buying third-party cannabis and a reduction at our SG&A by $10 million across both companies.

We are 3 quarters in 11 months since the acquisition. Medical sales decreased 50% over two quarters, GM before IFRS hasn’t been higher than 11% granted, you have had some provisions that have impacted the last two quarters, but with $40 million in inventory on hand against your sales, those provisions might continue.

Your SG&A is a $1 million less than Q4 F19 for WeedMD as a standalone. How would you grade your performance against the expectations and what are your obstacles to improving these metrics?

I just want to clarify is your question regarding Starseed or the overall company?

The – well, Starseed – the acquisition of Starseed was to provide those synergies right, the medical stickiness of the clients, the improved gross margin, the reduction in combined SG&A. How would you grade A B C D F, the WeedMD performance since the acquisition across those metrics?

And what do you need to do to improve or remove obstacles to get on that path?

Yes. No, I think it’s a fair question.

I think it’s safe to say that, no, we have seen an overall decline overall in the Canadian medical market. The stickiness of the Starseed model definitely has been there.

We did see some minor blips during the middle months of the year when COVID was at its peak. We have now seen the rebound of those numbers.

And so I think we will see the year finished up fairly strong in terms of going back to sort of some of the pre-COVID numbers. But as an overall transaction, I still believe that the industry requires more consolidation.

I mean, it was a strategic deal, because it made sense on both sides in terms of what the companies represented, what they had as assets and how they were independently performing. As you said, Starseed was an organization that was not cultivating and was buying bulk product and WeedMD was in the midst of starting to launch more direct-to-consumer and direct to finished products, which this I believe helped accelerate.

I still believe that the deal was a good one. I think that the performances is probably taking longer than we would have anticipated as you can appreciate merging and integrating any two companies during any period takes time, takes a lot of energy.

I think we are on the right path. We are close to completion.

And it’s time for us to start ramping that. So, it’s at the end of the day, we have been really focused though on ramping our adult-use side as well.

The adult-use market, especially with the advent or with the recent increase and seeing that the retail stores are finally opening up in Ontario, we think this is where we have shifted a lot of our focus. And so we have been able to move a lot of the product that we had into that adult-use piece from creating finished product.

We have a consolidated medical platform now that positions us very differently than many other than medical players in Canada. So at the end of the day, again, I still believe that we are in good shape and I would – if forced to give a rating, I’d say we are at about B.

Could you speak to gross margin before IFRS, because I have – to me that’s sales are one thing, but unless you have gross margin, you are not covering your expenses. So when can we expect to see gross margin return to say the 40%, 50% mark as a low bar?

So, our gross margin is there. It’s at the around the 42% range this quarter, it was around 40% last quarter, there has been a lot of…

I am sorry, I have got it at 21% once I back out the impairments and like I said you have a lot of inventory and your sales aren’t there. Like when we used the gross margin before IFRS going to get back in the 40%, 50%, because right now, it’s at 21%.

I would have to go back and reconcile the 21%, so…

Okay, well, I took a stab at it. I was hoping for a little bit more detail.

I will let you get to the next questions. Thanks a lot.

I will let – I don’t know, okay.

I am sorry, I am still here. I am sorry I didn’t mean to cut you off.

I just didn’t want to take to.

No it’s Lincoln. You tried to back into a gross margin number.

Our gross – from a gross margin standpoint, I look at gross margin from a cash basis, which I am sure you do as well. And we have had certain accounting adjustments, right within our cost of sales, which happens as a nominal cost and that doesn’t give a true picture in my opinion of the true gross margin.

When you back out those items from our cost of sales, we get to a fair number and that number is in the neighborhood of 40%.

Are you including IFRS in that?

We were backing out the non-cash items. So, it’s all IFRS – it’s all based on that.

So the impairment on cost of goods sold isn’t a cash item?

I beg your pardon.

The measurement of cost of goods sold isn’t a cash item?

It depends on how you want to look at it.

Craig, can I offer that? We have a follow-up call.

I am happy to dig into the questions. I just want to be mindful of time.

Yes, no and that’s why I was back again. That was.

Okay, thank you.

Thanks, Craig.

Yes, good morning. Maybe it’s a little bit of follow-on to the first question, just sort of what your thoughts are on the medical side, it seemed to be your response to that question was you are starting to see some sort of turnaround in Q4.

So, should we walk away from this to expect that sort of Q3 was where they have been medical channel sort of plateaued at the bottom and moves back up from here? Just following the past two quarters, we have seen that decline just maybe a little bit more color on the medical side?

Hey, Neal. Yes, for sure.

And I think we alluded to this in the – during our Q2 reporting as well that we did see a significant softening of the medical market overall in Canada over the summer months and we weren’t immune to that. We are absolutely starting to see that some of that seasonality that we typically experienced in the summer months come back to some of our pre-COVID rates.

And again, if without necessarily providing guidance, I will say that the numbers are looking much stronger in the latter half of the year and I do believe we will finish off the year much stronger than previous quarters.

Okay. And then on the adult-use side, you did see some growth both in the kilograms again to the provinces, I think it was around 25% quarter-over-quarter.

What are you sort of seeing as sort of the trends right now? Are you seeing and I didn’t know you had mixed data from different provinces, but based on Ontario you are starting to see some that you are capturing more market share, is there any sort of color that you can see from some of the details that you guys might get as far as how you are seeing some of those acceptance of your brands into the adult-use market?

Yes, again, great question. And we have seen – we have put a lot of effort as I alluded to during our prepared statements around really creating a stronger presence in the rec market.

And we have really invested quite a bit on the sales and marketing side and everything from expanding a sales force, the national sales force covering off the major provinces as well as reinvigorating our portfolio. So, I mean if you think about it earlier this year, we are effectively a single format size, dry bud, dry cannabis company.

So with the added formats around pack sizes, launching of our 2.0, introducing other formats, like in the pre-roll, etcetera and really starting to ramp up that portfolio, we are seeing that that increase. I believe our quarter-over-quarter on the adult-use side was above 25% or so from Q2 to Q3, I think we will continue to see a much that same and/or around the same strong performance in Q4.

Some of it unfortunately is also timing, right, just meeting end of quarters and putting those sales out. So I am very confident in terms of the efforts that the sales and marketing team have created and we are getting really great response from not only from the provinces.

And as we said launching things like our string specific vapes hit the top five as soon as we launched in the OCS website. So, we expect to see more of that.

And I think we will start seeing some of the benefits of some of the bud tender and retail interactions we have been having.

Thanks for that. And then maybe the last one for me, so on wholesale to other LP in Q3 as you are going through and evaluating your outdoor crop, do you have any preliminary thoughts on whether we should be expecting something in Q1 somewhat either Q1 of last or this past year as far as like a bulk transaction or any preliminary thoughts on what we should be thinking about the wholesale to other LP?

Yes. We still have quite a bit of some demand in terms of bulk wholesale for being extremely opportunistic, obviously and strategic around a number of the ongoing discussions we are having.

As you can appreciate, there is quite a bit of product out there. I think what we offer is a unique opportunity like you said alluding to our outdoor and we are going to continue to have those conversations outgoing.

We are – we have seen a few more transactions, again, nothing of the magnitude that we were seeing last year-to-date. We have changed that business model.

But once we assess our final harvest and determine what we need from an allocation perspective for our own needs as well we will look to commercialize as much as we can with other LPs.

Okay. That’s it for me.

Thanks very much.

Thanks, Neil.

I will take this opportunity to thank everyone for joining us today on today’s call and for your continued interest in our company. We look forward to having follow-up conversations with many of you and to updating you on our continued progress.

Wishing you all the best as we move into the holiday season, stay healthy and safe everyone and thank you and have a great day.