Entourage Health Corp.

Thank you, Anastasia, and good morning, everyone. Welcome to Entourage Health's second quarter 2021 results conference call.

Please note this call is being recorded. For copies of our press releases and supporting documents filed on August 10th, 2021 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 Beth Carreon, our Chief Financial Officer.

Today, we will review the business highlights and financial results for the second quarter 2021 as well as discuss recent developments. Following formal remarks, we will open the floor for your 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 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, Entourage Health's CEO. George, please go ahead.

Thanks Marianella and thank you to everyone for joining us this morning. First off, let me start by acknowledging the positive reception following the announcement of our corporate rebrands to Entourage Health.

Our employees, partners, customers, patients, and shareholders continue to be supportive in our corporate evolution and I wanted to give a sincere thank you to all. Over the first half of 2021, we've seen a major transformation both inside our business practices and in the market, both of which have contributed to the expansion of our performance-driven business.

It's quite inspiring to see all that has been accomplished in such a short period of time. I can sincerely say that we have built a solid foundation for long-term success rooted in discipline and performance.

We continue to see substantial growth in our adult-use brands; Color cannabis and Saturday cannabis. Sales through expanded distribution with provincial boards and additional retail outlets resulting in key product milestones during the period.

Most notably, we captured a 55% sequential increase in retail market share from first quarter. This is a direct result of our robust sales strategy, increased distribution channels, and expanded product innovation portfolio, which added a number of SKUs to both our retail and medical markets.

With well over 1,000 distribution points and SKUs available across Canada, Entourage products are quickly gaining recognition as leaders in formats consistently ranked at the top of their categories. How has the significant progress impacted our growth initiatives?

This is the first item I want to address today. While the larger players in the industry in Canada are reporting sequential declines in cannabis sales and revenues, Entourage has in fact delivered three consecutive quarters of record growth and total revenue increase.

In Q2, we reported CAD13.8 million of total revenue, up over 92% year-over-year basis, driven mostly by adult-use channel and our medical channel. As I noted earlier this year, our key focus will be expanded distribution points in adult-use markets and activations in the medical channel as opposed to bulk sales as we've seen in the past.

Our team continues to focus on our strategic objectives with the goal of driving higher margins through effective cost cutting and expense reallocation. We are establishing cultivation and production efficiencies, building out our retail outreach to align with our distribution growth and expanding our brand awareness in a very competitive market.

These accomplishments represent our strategic pursuits in high margin channels and our growing direct-to-consumer and direct-to-patient revenues with unique offerings. For example, our newly introduced Saturday cannabis large format 28 gram flower is a top seller in some of our major growth markets such as Quebec and British Columbia.

This alone has resulted in a 500% increase of the format over this quarter. Also in June 2021, the company announced the expansion of Color cannabis products into the province of New Brunswick, making it accessible to over 95% of Canada's retail market.

Another impressive milestone, our pre-roll format saw an impressive 91% increase in market share over the first quarter. This further demonstrates that we are listening to our customers and retailers to gain better insights into what the market wants and through research and development, we have expanded our product offerings into the right product lines that include pre-rolls, vapes, live resin, with further products being released in Q3 such as edibles, hash, and other concentrates.

We continue to see steady growth and consumer demand for dried flower in our adult-use market with a revenue increase of over 148% year-over-year. Alongside our friends at Royal City Cannabis that are producing small batch premium cannabis that will allow us to participate in a new segment that will command a higher price point to focus on quality, we expect to further tap into the craft market giving us a stronger foothold in an increasingly competitive market.

As everyone saw, there's no secrets, and they are well aware, this new and exciting category is stealing market share from the larger LPs in the marketplace. We look forward and we are excited about the acquisition of CannTx and Royal City in the upcoming weeks.

And I'll update you on that shortly. On the medical side, our Starseed medicinal team continues to build on our patient base with activations steadily increasing quarter-over-quarter.

We are on track to meeting our target number of patients and with close to 40 SKUs now available, we have grown compared to just over 15 that were offered last year at the same point in time. This also speaks to our distribution and our growth.

It's an innovative portfolio that spans a wide range of offerings including the pending launch for Mary's transdermal patches and gel pens coming in Q3 of this year. As part of our ongoing transformation initiatives, we also further streamlined our production by centralizing our cultivation, processing, packaging, and distribution to our London area facilities.

Throughout the second quarter, we continued to divest from our Bowmanville facility as part of our cost-saving efforts that resulted in the asset and leasehold sale being finalized in June. Our optimization initiatives over the first half of the year ensured that our production is consolidated and highly efficient, enabling us to achieve further cost savings that we can ultimately pass on to the customers.

Lastly, an update on our acquisition of craft cultivator CannTx Lifesciences. We are on track to closing this transaction in the coming weeks.

As a business combined, we are proud to bring on CannTx's many lines of research and product lines including its B2B and adult-use businesses. The acquisition marks another natural progression in Entourage's growth, as well as our mission to work with the best talent and industry experts to develop and manufacture our products.

We really look forward to executing our shared vision to strengthen our business and focus on high margin activities. Before turning the call over to Beth, I'd like to reiterate our business transformation initiatives that have led us to record breaking growth this year.

We built this business on five key pillars of growth, optimization, efficiency, quality, and most important, the people. We are confident that our strategic transformation will continue to accelerate Entourage on the path to profitability.

We're prudent in our capital allocations and we are constantly evaluating our performance to support to support optimal operational excellence. We'll maintain our proactive stance on taking advantage of new opportunities in the growing cannabis market as we navigate through the rest of the year.

I want to thank everyone. This concludes my opening remarks and I'll now hand this over to Beth Carreon, on our CFO.

Thank you, George and thank you to everyone joining us on our call this morning. Today I will review the financial highlights for the three and six months ended and the June 30, 2021.

Please note that the financial information we discussed today is prepared in accordance with International Financial Reporting Standards or IFRS and is in Canadian dollars unless otherwise indicated. To start, our second quarter net revenue grew by CAD4.6 million or plus 81% to CAD10.6 million compared to the same quarter in 2020.

We experienced growth across all product channels with medical growing plus 21%, driven by increase in number of patients; adult-use growing plus 148%, driven by innovation such as 15 gram, and 28 gram flowers as well as increased distribution points; and finally, bulk which now made up only 2% of our total net revenue, which grew plus 6%. For the six months ended then June 30, 2021, our net revenue grew by CAD2.8 million or plus 15.7% to CAD20.9 million.

Excluding bulk sales, our net revenue grew by CAD7.6 million or plus 59.2%. To note, our channel mix year-to-date is comprised of 42% medical, 56% adult-use, and 2% bulk.

On a sequential basis, Q2 net revenue increased plus 3.2% compared to Q1. This was driven by plus 44% sequential growth in adult-use, partly offset by sequential decline in medical of minus 32.6% and minus 34.7% in bulk.

In general, the quarter-over-quarter decline in medical sales was largely attributable to health insurance benefit coverage seasonality, which was partly offset by overall patient population growth and new high THC flower product [indiscernible]. The strong quarter-over-quarter growth in adult-use was fueled by retail distribution gains across key markets of Ontario, BC, and Alberta, and increase in average items carried for retailer reach; flower, pre-roll, and vape format all delivered share gains in Q2, helping to drive 0.65 points share increase over Q1.

As previously mentioned, bulk comprised only 2% of our total net revenue and we will leverage bulk sales only to rebalance our biomass inventory. For the six months ended June 30, 2021, our average selling price per gram after excise taxes decreased to CAD2.48 per gram compared to CAD2.98 per gram for the same period last year, partly due to mixed higher adult-use sales compared to medical and partly due to lingering market factors related to pricing.

Generally, we expect our average selling price on an aggregate basis to remain stable or improve over time as we introduce more premium innovation and form factors. Gross profit before changes in fair value was CAD3.1 million for Q2 2021 compared to CAD0.25 million for Q1 2021 and gross loss of CAD0.9 million in Q2 2020.

Gross margin before changes in fair value for the second quarter was 29.4% of net revenue compared to 2.4% in Q1 2021 and minus 15.3% in Q2 2020. For the six months ended June 30th, 2021, gross margin before changes in fair value was 16.1% of net revenue compared to 2.6% for the same period in 2020.

Improvement quarter-over-quarter partly due to the year-to-date through of impact of traction costs and partly due to efficiency in cultivation, production, and manufacturing. Improvement versus prior year, mainly due to mix from higher margin channels, partly due to operational efficiencies as a small part impact of inventory write-down during year end 2020.

Weighted average cost per gram from clone to harvest of inventory on hand as of June 30, 2021 decreased by 29% to CAD0.46 from CAD0.65 in the same period last year. While weighted average cost per gram of inventory on hand decreased by 80% to CAD0.50 from CAD2.53 in 2020, partly due to the inventory write-down in the latter part of 2020 and partly due to operational efficiencies.

We expect continued year-over-year improvement in our gross profit before changes in fair value given the business transformation was initiated and the impact of mix from high margin products and channels. From an operations perspective, kilograms harvested for the six months ended June 30, 2021 decreased by over 2,000 kilograms or minus 21% to 7,519 kilograms during the same period in 2020, mainly due to a more disciplined approach of aligning supply and demand, which has contributed to operational efficiency and resulting in a lower cost per gram from harvest to clone.

Moving to expenses, second quarter of our selling, general, and administrative expenses was CAD10.4 million, or CAD4.4 million higher than first quarter SG&A of CAD6 million, mainly driven by timing of expenses such as insurance, software licenses, and subscription, API-driven employee retention program, as well as expenses related to AGM or year-end 2020 and Q1 filings, all three events which occurred in Q2. For the six months ended June 30, 2021, our SG&A increased by CAD5.1 million or 45% to CAD16.4 million versus CAD11.3 million in 2020.

Increase is partly due to higher sales and marketing spend to support our record sales and mainly due to non-repeat professional and consulting expenses incurred during the first half of this year. Given the comprehensive cost cutting measures implemented across our businesses and the non-repeat nature of majority of the professional and consulting expenses earlier in the year, we expect to see reduction in SG&A for the balance of 2021.

Net loss for the first six months of 2021 was CAD17 million or CAD0.08 loss per share compared to a loss of CAD17.9 million or CAD0.09 loss per share of 2020. Adjusted EBITDA improved by CAD0.8 million or 18% to minus CAD3.7 million or minus CAD4.5 million during the same period in 2020.

Improvement in both net loss and adjusted EBITDA was mainly driven by increase in gross profit, which was partly offset by above mentioned increase in selling, general, and administrative expenses. Turning to our balance sheet, we ended the second quarter with cash and cash equivalents of CAD15.5 million or a reduction of CAD5.5 million from CAD20.5 million at the end of the first quarter.

Cash flow from operations improved by CAD4.8 million to minus CAD19 million for the six months ended June 30, 2021 compared to minus CAD23.8 million during the same period in 2020. Related to cash flow from investing activities, majority of the proceeds from the divestiture have Starseed Medicinal Inc.

and it's related right-of-use assets and license for the Bowmanville facility was used to pay down our debt. As we head into the second half of 2021, we have already entered into discussions on various options that will give us more liquidity and greater financial flexibility to manage our operations and execute on our plans.

Current ratio for the second quarter was 1.4 compared to 3.5 in the first quarter and 3.1 at year end 2020. This change is mainly attributable to the reclassification of loans pertaining to facilities 1, 2 and 3, which will mature on March 31, 2022.

We are currently in discussion with all our lenders to amend payment terms. In summary, our second quarter results reflect our strong sales momentum and our transition into a performance-driven organization.

Our sales and production teams fulfilled record purchase orders from every province during the quarter, concentrating on top-performing products to drive sales and improve margins. Our forward strategy remains unchanged, that are focused on expanding our product margins and brand footprint in new markets.

Looking ahead, we continue to be committed on strengthening our balance sheet, driving sustainable, profitable growth in our key channels and products, and delivering long-term shareholder value. It's at this juncture that George and I are pleased to share that we expect to deliver positive adjusted EBITDA no later than fourth quarter of 2022.

Given the quarter-over-quarter growth in our net revenue, increase in our market share, and our diligence to manage costs, we have the levers to deliver on that commitment, and to demonstrate that Entourage is poised to have a meaningful and profitable presence in the Canadian cannabis market. With that, I'll turn the call back over to George for closing remarks.

Thank you, Beth. Our third consecutive quarter of sequential revenue growth is indicative of our strong sales momentum, our products, and the development of brands that are truly starting to resonate with the consumer base that we've built.

With our transformation initiatives fully implemented, Entourage has evolved into a performance-driven, quality-obsessed organization. We're thrilled with our turnaround over the past six months, all of which we expect to contribute to a standout year for all of our shareholders.

Thank you, everyone. Over to Marianella.

Thank you, George and Beth. This concludes our opening remarks and we're now ready for the question period.

Anastasia, please proceed with the instructions to call in.

Hey, good morning, everyone. Congrats on the quarter and thank you for taking my questions here.

I just wanted to start off with respect to the topline here looking at the quarter-over-quarter growth from Q1 into Q2, looks like the gross revenue is outpacing on a growth rate than the net revenue. So, just wanted to understand the delta there and the various moving parts as we look at the business accelerating over the past couple quarters here?

Thank you.

Thank you, Graham. That's a really good question.

The mix in terms of product as well as province is affecting the excise calculations. As you know the excise tax or excise duty rate varies by province as well as the cannabinoid content per product.

So, that affects the calculation of the excise duty. That is really the main -- the main reason is mix on both on product as well as province.

Okay, understood. Then just with respect to sticking with the topline here and in relation to the goal, the adjusted EBITDA positive in the fourth quarter here, I'm wondering if you could discuss a bit of the dynamics in terms of what we're seeing with the growth of the overall retail market in Canada.

But the sell-in into the provinces has been stilted for some and layering that on top of a decision by the OCS here to halt on new product calls over the next couple months. Just wondering if you could discuss some of the challenges and opportunities as it relates to Entourage share as it continues to look to grow the topline as well as its market share across the adult-use market there.

Thank you very much.

Thanks Graham. Good questions.

I think we're seeing that in the marketplace overall and we're seeing some of the pull through really impacting the larger LPs, I think I think what we need to get back to is reverse engineer really kind of the perspective of the consumer and how there's pull off the shelf. What the consumers are really commanding right now is because the marketing opportunities are somewhat limited, they're asking for quality and they're asking for quality at a reasonable price point.

And I think for many of the LPs, they're seeing a decreased uptake and repurchase, where I think you saw from ourselves that our market share continues to increase. So, we continue to see growth within our business across all the different segments and all the different quarters [ph].

So, we're not really seeing the same level of decrease within our business, we're actually seeing it the inverse, which is really attributed to our topline from our business. But I think it's really about again, coming down to the quality, which I think it also adds to the acquisition of CannTx, and about how it really helps us advance the quality of our products and enter into new areas such as the craft segment.

But for ourselves, I can speak candidly, we haven't really seen some of those reverse trends that have impacted the marketplace with many.

And then from me, somehow that would impact our adjusted EBITDA positive commitment for next year is that as we continue to look at the mix of premium, as we introduce and explore more premium offerings in our portfolio heading into next year, as well as looking at operationally what are the low hanging fruits for our entire value chain from cultivation to actually getting the product out our door and at the DC of our customers. Those are some of the areas we've already started looking at and as you can see, we're already getting some traction on that H1 year-to-date ear to date for this year.

So, those are the levers we're going to continue to lean on as we head into 2022 to deliver a commitment of adjusted positive EBITDA no later than Q4 of next year.

Okay, understood. Thank you for that.

And then just my last question here with respect to the SG&A, which had an uptick from Q1. How much of that was one-time in nature?

And looking forward, do you have -- is there a steady state SG&A number you have in mind and tying that back to the adjusted EBITDA positive goal as well? Thank you.

Yes, so Graeme. That's a very good question.

So, majority of our professional and consulting fees will be one-time in nature. And in terms of steady state, excluding any expenses associated to M&A, as you know, it's no secret, we are just about to close the deal in the next few weeks in CannTx.

So, excluding those one-time in nature expenses, we are anticipating significant reduction in our SG&A for the balance of year.

Okay. Thank you very much for that.

I'll get back in the queue.

Thank you.

Thank you.

Good morning. Thank you for taking my questions and congrats on the quarter.

My first one is just to stay on that topic of the SG&A lines, specifically as it relates to the salaries line. So, I think that was up about 40% in the quarter.

So, I was just wondering if you could flesh out some of the dynamics at play in in kind of that salaries line and what's causing that increase? I'd imagine it's related to headcount.

And if so, could you explain what functions you're currently hiring it? And maybe provide some of the rationale as to why you'd be hiring in those functions, especially when some of the peers are reducing their headcount.

So, that's the first question.

Shaan, thank you and thank you for that question. It's actually not related to headcount; the majority of the salaries increase is attributable to the KPI -- the year-to-date true-up of that KPI-driven employee retention program.

As you know, the organization has really focused on being performance-driven. But at the same time, we also know in the industry, that there are organizations that are really looking at talents and we want to make sure that we keep the talent that we have to continue to deliver the performance and the growth that you've been seeing so far.

And so that is really the biggest driver on that. It's a year-to-date true-up and so as we head into the balance of year, you will see that tapering off and when I say tapering off, it means it will just naturally be like the quarter-by-quarter true-up, but this year-to-date is a true-up for the entire H1 of 2021.

Okay. Thanks for that.

And then my second question, it's just on the gross margin line. So, that was up significantly in the quarter and congratulations on that.

I think gross margin has been a part of the story that's been in the works for a while here. I was just wondering if you could help flesh out some of the dynamics at play?

Was it related to higher cost inventory? And that came off the books in prior quarters.

And so the gross margin naturally increased. Was it due to some sort of automation, just anything you can provide on kind of the dynamics that drove that large gross margin increase in the quarter?

And then kind of the outlook on that, how sustainable is it at current levels? Or are you expecting to post similar increases in the second half of the year?

Thank you.

Thank you, Shaan. So, when we look at it from a year-to-date perspective, which is 16.1%, that is actually the number that we anticipated for H1, reason being Q2 incorporated a year-to-date true-up our extraction costs that we have to update and accommodate for the Q2 close.

So, the way we look at it as we look at it from a year-to-date perspective of 16.1%. So, it's a combination of -- and that 16.1% is a combination of operational efficiencies, the mix of our products, and also partly due to do what you're alluding to in terms of some of the inventory right when it was flushed out in year-end 2020.

So, all three are contributed to that year-to-date improvement compared to the year-to-date of prior year. So, the Q2 to 29.4% incorporated that year-to-date true-up of extraction process where you see that big, big jump.

Okay, that's everything for me. Again, congrats on the quarter and looking forward to talking soon.

Thanks Shaan. We appreciate it.

Thank you all again for joining us on today's call and for your continued interest in Entourage Health. We look forward to having follow-up conversations with many of you and to updating you on our continued progress.

Details are on the Investor Events page of our website. If you have further questions, please reach out to Marianella or our Investor Relations' team.

Stay healthy and safe everyone. Thank you and have a great day.