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Edited Transcript of PDA.H.V earnings conference call or presentation 15-May-20 2:00pm GMT

Q1 2020 Vivo Cannabis Inc Earnings Call

OTTAWA Jun 28, 2020 (Thomson StreetEvents) -- Edited Transcript of VIVO Cannabis Inc earnings conference call or presentation Friday, May 15, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry Fishman

VIVO Cannabis Inc. - CEO & Director

* Michael Scott Bumby

VIVO Cannabis Inc. - CFO & Secretary

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Conference Call Participants

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* Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare

* Noel John Atkinson

Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, thank you for standing by. Welcome to the VIVO First Quarter 2020 Earnings Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

Today's presenter is Barry Fishman, VIVO's Chief Executive Officer. Accompanying Barry for the Q&A portion of the call will be Michael Bumby, VIVO's Chief Financial Officer.

Please note that the comments made on today's call may contain forward-looking information, and information, by its nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on VIVO's website at vivocannabis.com.

And now I'll pass the call over to Barry Fishman. Barry?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [2]

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Thanks, operator. Good morning, everyone, and I appreciate all of you joining VIVO's first quarter 2020 conference call.

After 4 consecutive quarters of revenue growth in 2019, we are pleased to report a further 24% sequential increase in Q1. Much of that increase was fueled by increased supply and the successful launch of our Cannabis 2.0 products. These products represent approximately 20% of our cannabis sales in the quarter, and we're extremely pleased with the feedback received so far from our customers.

Despite challenging market conditions, including COVID-19, I'm extremely proud of the VIVO team who is laser-focused on executing plans related to our 4 strategic priorities. At this point, I want to highlight a few of our key accomplishments.

Last year, we began planting in our airhouses in Napanee in late August. This year, we started planting approximately 3 months earlier and are expecting much higher levels of output. The Canna Farms expansion is now complete, and we're awaiting Health Canada approval. This new space will add much needed incremental processing capacity. We are very close to commissioning our high-volume ethanol extraction suite at our Napanee facility, which is expected to greatly enhance our production of Cannabis 2.0 products. As well, we received several -- we signed several third-party supply and processing agreements to supplement our internal capabilities. The products from these suppliers must meet VIVO's strict quality and potency requirements. We fully expect these partnerships to help accelerate speed-to-market for several exciting new products.

Before getting into our business performance, I wanted to discuss COVID-19 and outline some of the proactive measures we're taking to deal with this challenging situation. We are continuing to closely monitor developments. And as I mentioned on our last call, we've implemented several enhanced personal safety and sanitation protocols. Our leadership team and Board have always paid close attention to the risks and opportunities facing our business. The mindset of pivoting when necessary has served us well in the face of COVID-19 and allowed us to respond quickly and decisively.

Our Napanee and Hope facilities have extended hours and staggered shifts in order to optimize operations with physical distancing in mind. Ensuring a safe work environment for all of our team members is a top priority. Frontline staffing levels at our facilities over the last 2 months have ranged between 80% and 90%. We've also quickly and successfully transitioned the Harvest Medicine clinics to exclusively servicing patients remotely via our TeleHealth platform. Our HMED Connect app has been handling patient volumes that are more than double our pre-COVID levels. I'm very proud of the way our dedicated staff have gone above and beyond the expectations in the face of this pandemic. They all deserve recognition for their positive attitude and passion for what they do.

We're also pleased to have been able to donate a large number of surgical masks and gloves to the small local communities of Hope and Napanee. As I've said in the past, VIVO was born out of the goal of enhancing life naturally, and our team is embracing this purpose now more than ever.

Let's now turn to our business results. Gross revenue was $11.5 million for the quarter, and net revenue was $8.2 million, representing a 24% sequential increase and a strong 62% above the same quarter last year. The increase was driven largely by increased supply and the successful launch of our first group of Cannabis 2.0 products, including vape, kief, hash and chocolates. We were encouraged to see that our net average selling price for dry flower in the quarter was $6.67, a 2% increase over last quarter. Net average selling price is the key performance indicator for us because it reflects the demand for and recognition of the quality of our products.

Our adjusted EBITDA slightly improved quarter-over-quarter to negative $2.6 million. We now provide a view of adjusted EBITDA in 2 separate business segments. Our Q1 adjusted EBITDA from domestic cannabis operations was negative $1.7 million. The additional $0.9 million related to growth initiatives including our international operations and product development efforts were investments made to support future profitable sales beyond 2020.

SG&A expenses were $5.5 million compared to $5.1 million in Q4. We continue to maintain a healthy balance sheet with cash and equivalents of $35.2 million as of March 31. Roughly $8 million of cash was used in the quarter, with drivers, including funding our adjusted EBITDA loss of $2.6 million, a $3.6 million increase in working capital, primarily related to inventory, and roughly $1.5 million of capital expenditures.

Subsequent to quarter end, we repurchased some of our outstanding unsecured debentures, saving approximately $1.4 million in interest and principal. 2020 is a year where we're sharply focused on top line growth and operating leverage to drive positive cash flow. We continue to significantly grow our year-over-year revenue while reducing capital spend and leveling operating expenses.

Now let's turn to our 4 strategic priorities and cover the progress we've made with each one. Our first priority is enhancing supply and production capabilities. As I mentioned earlier, once approved by Health Canada, we will begin operations in the Phase 5 expansion at our Canna Farms facility. To drive increased output and reduce unit costs, we've invested in new equipment. Automated pre-roll equipment at Canna Farms will increase our packaging productivity. And the distillation system in high-volume ethanol extraction suite in Napanee will directly support growing demand for our Cannabis 2.0 products.

EU-GMP certification of our Vanluven facility continues to advance. We're planning to send our final written response to the German authorities this month. Barring regulatory delays, certification is expected to be awarded in the second half of 2020.

Our second priority is creating a broad and loyal customer network. As many of you know, we have a strong and growing portfolio of brands in both the medical and adult-use markets, anchored by our Canna Farms brand, which is one of the leading brands in the industry and the most reviewed Canadian LP on the Lift & Co. site.

It's very rewarding to the team to read the customer reviews which complement our premium products, wide selection and excellent service. Those reviews certainly are a big morale booster for our entire team, and help motivate everyone to do the essential work that they are so passionate about.

As everyone knows, the Canadian cannabis market continues to evolve and change. And strong organizations are the ones that can adapt. Based on changes in market demand, we've introduced a new brand called Canadian Bud Collection. It is a value brand targeted at the fastest-growing segment of the adult-use market. Our product line continues to build, and we now sell over 100 cannabis product SKUs.

As I mentioned earlier, we were pleased with the initial rollout of Cannabis 2.0 products by Canna Farms and Fireside, which shipped various provinces in Q1 and helped contribute to our top line growth. Our premium chocolates are also offered on our Canna Farms medical cannabis platform. As we scale up production, we expect to further expand our product line and distribution network.

Our third priority is building an innovation-driven branded organization. We continue to use robust data and insights as foundation for the development of novel products with a competitive edge and high gross margins. During Q1, we introduced our premium quality Fireside vape cartridges and kits to several provinces. Subsequent to the quarter, we signed an agreement with Vertosa, an infusion technology company based in California to license Canadian rights to their patent-pending emulsion systems. The benefit of their technology is that it produces products with high bioavailability, excellent clarity and great taste. Our plan is to install new equipment in our Napanee facility over the next few months, to produce unique formulations for use in future cannabis beverages and other formats.

We're also advancing our goal of expanding our offering of high-quality and precise dose products for medical patients through our partnerships with several pharmaceutical companies that are GMP-certified and licensed to develop cannabis products.

Our fourth priority is to accelerate the growth of our international medical business. As with every decision we make, we focus -- we have a focused and disciplined approach towards international expansion. We carefully select markets that have large populations and favorable legislation. We are confident that this measured approach will result in a strong future return on investment.

Our current focus is on the German and Australian markets, which combined have a population of over 100 million people. We're pleased to have received our narcotics license in Germany, we're now awaiting receipt of an import license, the final permit necessary to start importing from our Napanee facility.

We've partnered with Linneo Health, a Spanish based EU-GMP producer of medical-grade cannabis, who will act as one of our European supply partners. We anticipate products produced by Linneo under the Beacon Medical brand, will be launched into the German market during the second half of 2020.

In summary, our talented team and focus on business fundamentals is serving us well, especially given the unique challenges we and the world are facing today. We look forward to continuing to update our shareholders as we dedicate our efforts to driving long-term shareholder value.

With that, Mike and I are now pleased to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Noel Atkinson with Clarus Securities.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [2]

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I just have a few questions here. So you mentioned about the 2.0 products and being a meaningful portion of total revenues in Q1. So can you give us a little bit of sort of insight about momentum of your products? What you're seeing as being particularly strong in sort of areas that you see that you're going to be launching in sort of the next couple of months?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [3]

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Yes. Thanks, Noel. Thanks for joining the call. Yes. So as I think I mentioned in the prepared remarks, 2.0 products made up about 20% of our overall sales in the first quarter. I guess there's different categories of 2.0 products. Let me start with extracts. Extracts got off to a really great start. The competition in that particular segment is a lot less than it is, for example, in the chocolate or vape segment, which is also areas where we participate.

So we have seen actually strong momentum in all of our Cannabis 2.0 products. And as a matter of fact, I just want to reemphasize that we don't have complete national distribution in Canada. There are certain provinces like Québec and Nova Scotia, that we haven't opened up yet. And as our supply expands and we continue to build our stock of Cannabis 2.0 products, what we will do is just simply expand our distribution network to fulfill demand in those other provinces. But suffice it to say, we are very excited about the potential of our Cannabis 2.0 line. We believe that it will continue to expand with products like shatter in the future. And it's a big part of our business.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [4]

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Okay. Great. In terms of the airhouses in Napanee, can you give us a sense of what you're targeting for output there? And what the primary use of that output will be?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [5]

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Yes, I'm actually going to shift the question over to Mike to answer. Mike, are you there?

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Michael Scott Bumby, VIVO Cannabis Inc. - CFO & Secretary [6]

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Yes. Thanks, Noel. So we've always communicated a certain production capacity that comes out of those airhouses. And I think that we've mentioned in previous press releases that it's about 3 tonnes of capacity. So we are cautiously aiming for that. We tend to be conservative with everything that we do. But I think we're looking at that sort of production potential this year, we'll see. It will be our first full year in the tent, and we're pretty confident that they will produce well for us. But again, sort of cautious optimism.

And again, on the same sort of cautious optimism side, our current plan is for all of the product that comes out of the tents to be used for extraction to make the concentrates and to make the inputs to edibles and vape cartridges, oils, et cetera. That we've heard from everybody that knows things about growing cannabis plants in greenhouses, for example, that you can get some very, very high-quality products, and there's quite a difference between those and products that are grown in indoor facilities. So thinking of taking the top colas, for example, as being potentially really high quality. And if that's the case, then that's for us. It's a bit of an upside to what our expectations are. But like I said, we're conservative, and we're just, at this stage, assuming it will all be used just for extraction.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [7]

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Okay. Great. That's good. How about -- to the extent that you can talk about this sort of what you're seeing so far in terms of whether there's any impact, positive or negative, from COVID on ordering patterns across the provinces in which you operate?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [8]

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Yes. So I'll start off. And I would say that the initial part, the last part of March, we did see a reasonable uptake in demand on both medical and adult-use sales. And then medical sales are still very strong. As a matter of fact, on 4/20, we had a record day where we shipped product to well over 1,000 patients. Now subsequent to 4/20, we've been trying to monitor the market very closely. And obviously, the limited access to certain stores and curbside delivery and the fact that premium products are very -- are accepted when people walk into a store and they're able to have a conversation with the bud tender about products that are right for them, that certainly helps boost premium cannabis sales. So I think that one of the things that has happened is there's been a little bit of a shift towards the value market. And that's one of the reasons why we decided to introduce a value brand called Canadian Bud Collection. But I guess to answer your question specifically, we're monitoring it very closely. We've seen a little bit of a softening in some of the adult-use demand versus our pre-COVID forecasts, and we're adjusting our business and production plans accordingly.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [9]

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Okay. And just one quick follow-up on that. So the Canadian Bud Collection, in what provinces have you launched that product line?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [10]

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Yes. It's at the early stages, and it's primarily available in some of the western provinces. But we're just starting up production, and we're getting a feel for price levels and demand in the marketplace and ramping up production to sort of meet what we believe will be the expected demand for that product line.

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Operator [11]

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(Operator Instructions) Your next question comes from the line of Kimberly Hedlin with Canaccord.

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Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare, [12]

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Nice quarter. Just maybe following up on the Canadian Bud Collection. I guess in terms of what that does to your average pricing going forward, do you have any expectations, I guess, how that changes your sales mix and impacts pricing?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [13]

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Yes. So obviously, we launched to sort of tap into the fast-growing segment of the market. And we're sort of fine-tuning our price structure. But roughly if you had to sort of estimate what the difference in price between our premium Fireside and Canna Farms products and the Canadian Bud Collection products, I would sort of estimate somewhere between a 30 -- 20% to 30% lower price for the value product.

Now as you probably know, Kimberly, there's 3 categories that are generally used across the board, which is good, better and best. Our premium products are solidly classified in the best category across Canada. And we believe that the Canadian Bud Collection will be kind of categorized as a mid-level value brand.

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Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare, [14]

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Somewhere in the good category?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [15]

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Well, good/better.

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Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare, [16]

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Better. Okay. Okay. Got it. Okay. That's helpful. Maybe just looking at the gross margins, they were a little bit under our expectations. Was this partially third-party purchases? Or maybe as you kind of ramp up the 2.0 products, was that an impact? If you can provide any color there, that would certainly be helpful. And then just kind of how that changes over the coming quarters?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [17]

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Great. Mike, do you want to take a shot at that?

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Michael Scott Bumby, VIVO Cannabis Inc. - CFO & Secretary [18]

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Yes. So good question. Thanks, Kimberly. So what you'll see in our first quarter is you'll see that -- how we run our cultivation costs through the P&L as we incur them, so we do -- right, so we do run through, for example, set-up costs for our airhouses. So there's -- in the first quarter, we do have some significant expenses setting up the airhouses that have gone through Q1 that really don't result in any net revenue, but they are captured in the cost of goods line. So you'll see that. But to your assertion that, is there a third-party, is there -- are there third-party products being sold as well? Yes, there are. And that did have a relatively large impact on us in the first quarter as well.

And then just in terms of going forward. So for example, our extraction unit in Napanee is just starting now. We're basically on the verge of saying that is now in production. When that happens, we won't have to depend on third parties to provide us the inputs, for example, the vape cartridges, et cetera. So that will break down our production cost. But in the first quarter, we didn't have that advantage, so our costs are higher than ideal.

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Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare, [19]

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Okay. That makes sense and it's really helpful. Maybe just on the beverages. Obviously, that's an exciting area. I guess, what's the timing looking like? And how much capital do you think that, that would run you?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [20]

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Yes. So good question, Kim. At the beginning, prior to the introduction of Cannabis 2.0 products, we made a strategic decision to actually -- we had a choice between focusing on beverages and focusing on edibles and extracts, and we made the strategic choice to initially focus on extracts, vape, pens, hash, chocolates, et cetera. And not pay too much attention to beverages in Phase 1 of our Cannabis 2.0 launches. Subsequent to that, I think we mentioned in a press release as well as on the prepared remarks, we have a relationship with a California-based company that will help us develop very competitive beverage products in the future that tastes good, have good strong clarity, high bioavailability. We're excited about that partnership. We haven't yet formulated plans on specific products or timing associated with the launch of those products. But what this relationship has done is it provided us with an added incentive to move a little bit quicker to get some additional Cannabis 2.0 formats on the market. We just didn't want to launch the typical me-too products. We wanted to have some competitive edge, and we think we found it in our Vertosa partnership.

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Kimberly Hedlin;Canaccord Genuity-Global Capital Markets;VP Equity Research,Healthcare, [21]

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Great. And do you think that you would put out beverages for all of the brands? Or be more select?

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [22]

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Yes. I think we will probably not put out beverages with all of the brands. I mean, one of the brands that we have, which probably is underutilized at this point in time, is our wellness brand called Lumina, which we really -- it's very early stage in development. We sort of set aside that brand as a noncombustible product brand. We knew that eventually we'd have topical products, and maybe beverages in that line of product. So we may strategically decide to use the Lumina brand as a sort of foundation brand for some of our beverage products going forward.

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Operator [23]

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And there are no further questions in queue at this time. I turn the call back over to our presenters.

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Barry Fishman, VIVO Cannabis Inc. - CEO & Director [24]

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Thanks, operator. I appreciate everyone listening in. Please stay safe, and I hope you all have an enjoyable weekend. Thanks again.

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Operator [25]

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With that, this concludes today's conference call. We thank you for joining. You may now disconnect.