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Edited Transcript of SDV.H.V earnings conference call or presentation 25-Nov-19 3:00pm GMT

Q3 2019 MJardin Group Inc Earnings Call

TORONTO Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of MJardin Group Inc earnings conference call or presentation Monday, November 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ali Mahdavi

MJardin Group, Inc. - IR

* Pat Witcher

MJardin Group, Inc. - CEO

* Edward Jonasson

MJardin Group, Inc. - CFO

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Conference Call Participants

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* Bobby Burleson

Canaccord Genuity - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the MJardin Group third-quarter 2019 financial results conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ali Mahdavi. Please go ahead.

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Ali Mahdavi, MJardin Group, Inc. - IR [2]

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Good morning, everyone, and thank you for joining us for MJardin Group's third-quarter 2019 financial results conference call. Joining me this morning are MJardin's Chief Executive Officer, Pat Witcher; and Chief Financial Officer, Edward Jonasson. If you have not seen the news release which was issued earlier this morning, it is available on the Company's website at mjardin.com as well as on SEDAR along with our MD&A and financial statements.

I would also like to remind you that a replay of this call will be accessible until midnight on December 9.

Following management's presentation, we will conduct a question-and-answer session for analysts only. Instructions will be provided at that time for you to join the queue for questions. Should investors have any questions, please feel free to contact myself or Ben Powell directly following the call.

Before we begin, we are required to provide the following statements regarding forward-looking information which is made on behalf of MJardin Group and all of its representatives in this call. Remarks and answers to any questions today may contain forward-looking information about future events or the Company's future performance. This information is subject to risks and uncertainties and may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call, and the Company does not undertake to update any forward-looking statements.

Please read the forward-looking statements and risk factors in the management's discussion and analysis, as these outline the material factors which could cause or would cause actual results to differ. The Company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in the future quarterly or interim communications with investors.

I'll now turn the call over to Pat.

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Pat Witcher, MJardin Group, Inc. - CEO [3]

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Thanks, Ali, and good morning to everyone. Thank you for taking the time to meet with us today. I'd like to outline the agenda for today's call. Today we want to walk through our 2019 third-quarter results, our summary of revenues, review of milestones completed this past quarter, review of our continued work on streamlining our operations, discuss updated timelines for our portfolio of assets which come online over the next 12 to 18 months.

Now I want to welcome Ed as our new CFO and turn it over to him to discuss the Q3 2019 financials.

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Edward Jonasson, MJardin Group, Inc. - CFO [4]

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Thank you, Pat. Good morning, everyone. Start right into the third-quarter earnings review. Our 2019 Q3 revenue is made up largely from the Company's historical cultivation management services and cultivation operation. However, Canadian cannabis sales continued to contribute to revenue with 5% of the quarter's revenue attributable to Canadian operation. Revenues remain unchanged from the prior quarter at $7.6 million as the Company continues to await further licensing from Health Canada and the completion of construction at both Canadian and Nevada facilities.

As previously disclosed in July 2019, the licenses associated with the Cheyenne facility in Las Vegas officially transferred to MJardin. Post-transfer, the Company recognized approximately $800,000 in revenue. In Canada, the Company recognized approximately $300,000 in sales of wholesale cannabis to other licensed producers from the WILL cannabis facility. In addition, our joint venture partner, AMI, facility in Nova Scotia continued to increase revenues with sales during the quarter for approximately $1.3 million, an increase of 47% from the prior quarter.

With respect to our operations outlook for the fourth quarter of 2019, management expects the following. Managed service business will remain relatively stable quarter over quarter. Our cultivation facilities in Canada and the US come online, the managed services will decline as a percentage of overall revenue. Continued progress on licensing and construction of cultivation facilities with the construction of WILL -- completed at WILL, and AMI with the receipt of Health Canada cultivation licenses at GRO.

That Company is on target to exit Q4 2019 at a production rate of approximately 3,300 KGs. A revised exit rate is due to delays in licensing from Health Canada for certain facility expansions, as well as key vendor delays in delivering of capital equipment.

Our net loss for the quarter was $8.9 million or $0.11 per share compared to a net loss of $15.6 million in the second quarter of 2019. Key material non-cash and one-time items during the quarter were share-based compensation of $3.2 million and a loss on loan modification stemming from our senior debt amendment of $2.5 million. The share compensation expense relates to restricted share units which were issued during 2018 and are not representative of additional compensation issued by the Company.

The adjusted EBITDA for the quarter was a positive of $0.5 million compared to a loss of $4.1 million in the prior quarter. The EBITDA improvement is primarily driven by the full benefits of corporate cost-cutting being realized during the quarter.

Having been CFO for just under a month as of today, I'm still getting a handle on the operations of the business. I look forward to instilling financial discipline on not only corporate expenses but throughout MJardin's operations. Additionally, I will be striving to strengthen the Company's corporate governance. In our next conference call, after I gain a better understanding of the business, I will be able to provide updated guidance within a narrow range.

I will now turn the call back to Pat for an operational update.

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Pat Witcher, MJardin Group, Inc. - CEO [5]

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Thanks, Edward. I would now like to turn to our business update. As communicated by Adrian Montgomery during our quarter-two earnings call, the near-term focus of the business was to complete the construction and fully operationalize our facilities and create efficiencies within the business. We have stayed focused on those tasks, and, as you will hear, we've made significant strides towards achieving them. While we still have work to do, I truly believe that by the end of 2020, MJardin will be on an upward trajectory and on the path to restoring the faith of our shareholders.

I would now like to share some of our accomplishments since the Q2 call. One, delivery of our milestones. We've made considerable progress on the retrofit of remaining nine grow rooms at the WILL facility. Construction to be completed by the end of 2019 and generating full production revenue in the third quarter of 2020. We also announced the first EU supply of agreement from the AMI facility for 250 KGs a month, beginning the first quarter of 2020, or once we receive full GMP certification. We continued sales growth from our Nova Scotia facility, AMI, where revenues have increased sequentially 47% quarter over quarter.

We submitted an application to Health Canada for a cultivation license at the GRO facility in Dunnville, Ontario, and received a request for more information from Health Canada, which means that we are entering the final stages of receiving that license. MJardin expects full licensing at the facility by early quarter-one of 2020. We also completed the license transfer for our Cheyenne facility in Nevada and have made significant progress in construction.

Two, concentrate on core competencies. MJardin's core competency is the cultivation of high-yield, high-THC premium cannabis, and this remains the top priority of our business. In my previous role as COO, I worked with our senior management team over the last two quarters to implement programs, systems, and processes to make us more effective and efficient as a company.

To that end, here are a few of the things we've done. We developed a more robust training department and implemented a more efficient onboarding process for new hires in the US and in Canada. This program will ensure much better understanding of MJardin's standard operating procedures and methodology prior to being sent to a facility.

We developed systems and processes for real-time data collection from our facility. These enhancements will allow for the cultivation management team to do an analysis of the environmental conditions and identify plant health issues remotely before any significant crop damage can occur.

We have rewritten and updated many of our standard operating procedures to capture the specific requirements in the US and in Canada. We have created our mission, vision, and value statements to help align our employees in the US and Canada.

During this quarter, we also were able to reduce SG&A expenses by 45% compared to the prior quarter. Management will continue to focus on creating operating efficiencies as the business expands.

Three, reiteration of our refocused strategy. MJardin remains a timing story. Our assets, by design, are now coming online in Canada and Nevada and will continue over the next 12 to 18 months. All of the CapEx costs have been fully funded to complete construction and make the facilities operational. Upon completion of the construction and full operation of facilities, MJardin will pursue refinancing of existing term debt with a traditional lender.

MJardin remains committed to its First Nation partnerships and projects in Canada. The Company has been very excited to report progress on our previously announced partnerships with RAMA, Peguis, and the Mi'kmaq, and look forward to fully operationalize our facilities with them.

We recognize the trend of growing inventory due to the lack of retail stores across Canada, and Ontario specifically. To that end, we are strategically focusing on leveraging our core competencies to enter into supply agreements instead of fighting for limited shelf space. We will continue to monitor market trends and will adjust as needed.

Now I'd like to give you an outlook for our 2019 and 2020. I know that we had discussed on previous calls having earlier timelines for generating significant revenue out of WILL, GRO, and Cheyenne facilities. Unfortunately, we experienced delays beyond our control with construction, power upgrades, and licensing. We have made it through most, if not all, of the construction and power upgrade delays; and now our final hurdle will be the permitting and licensing of those facilities. Based on all the information we have, our new operational and full production timeline should be met, if not accelerated.

At our WILL facility, we should be fully operational by summer of 2020 with full production revenue by quarter three of 2020. At our GRO facility, depending on licensing, GRO should be fully operational in quarter one of 2020 and full production revenue in quarter-two 2020.

One of the exciting things that happened here in early November 2019 was MJardin signed a partnership agreement with Robes Inc. to cultivate and distribute Robes Cannabis or their BLLRDR brands. This agreement and effectively locks up approximately one-third of the production out of our Ontario facility.

Our Cheyenne facility, again depending on timing of licensing, our building B should be fully operational by the end of quarter-one 2020, followed by building A being fully operational by quarter-three 2020. So we should see a full production revenue in building B by the end of quarter two, and building A by the end of quarter-four 2020.

Our AMI facility remains on track to have construction of Phase 2 completed by the end of 2019, which includes an additional 20,000 square feet of flower benching. We are also purchasing the state-of-the-art hydrocarbon extraction equipment and a packaging line to be installed in quarter one of 2020. Depending on licensing and GMP certification, we hope to have Phase 2 fully operational by quarter-two 2020. This would result in both buildings being in full production revenue by quarter three of 2020.

Warman: during the quarter two of 2019, based on several factors, the decision was made to change our strategy for the Phase 2 buildout of the Warman facility. Instead of building out the full interior of this massive facility, we decided to move forward with a somewhat of a hybrid model where would build out four interior flower rooms to produce premium high-THC cannabis; a state-of-the-art, GMP-certified, hydrocarbon extraction lab; a greenhouse and hoop houses to supply the extraction lab.

We now project that Phase 2 will be fully operational by Q3 of 2020, and full production revenue by quarter one of 2021. This shift has caused a significant delay in meeting our original full production revenue timeline. However, we feel that it's the most prudent business decision as oversupply is becoming a major concern in the Canadian market. The good news is that Phase 1 is complete and just awaiting licensing by Health Canada. Phase 1 should produce a minimum of 10 kilograms a month of premium high-THC cannabis.

We are also looking at the feasibility of purchasing smaller state-of-the-art hydrocarbon extraction equipment to use in the already built extraction lab in Phase 1. This would allow us to run up to 35 pounds of biomass per day, and produce a wide variety of premium extraction product. Again, depending on licensing, Phase 1 should be fully operational by Q1 2020, and full production revenue by Q2 2020.

Our RAMA facility is our newest facility that we've entered into agreements with, and we've had the conceptual design on the facility is complete. A construction management company has been selected. The joint venture teams are working together to select architecture and engineering partners for the project. Construction is slated to begin during the first half of 2020, with construction completed and cultivation activity starting in 2021.

Cannabella: we purchased Cannabella in April of 2019. In Q3 2019, the State of Nevada issued a moratorium on all cannabis license transfers. Based on the feedback from counsel, we expect full possession of the Cannabella licenses in Q2 of 2020. In October 2019, MJardin secured a contract to provide full management service for Cannabella Kitchen. We have re-strategized our marketing approach in Nevada; and you can expect to see enhancements of our branding, distribution strategy, and product innovation once the license transfer is approved in 2020.

Currently, Cannabella products are available in over 80% of the dispensaries in Nevada, and products have been nominated for several awards over the years in Nevada. Most recently, their Cannabella Kitchen infused honey was nominated for 2019's best infused product of the year. That's for the Las Vegas Cannabis Business Awards.

In summary, I recognize and completely understand any concerns our shareholders may have regarding our Q3 financials and the delay in full production revenue. However, I truly believe that if we keep our heads down, continue working towards a graduated rollout of our assets over the fourth quarter of 2019 and into 2020 and 2021, while focusing on our core strength of growing high-yield premium cannabis, we will become a much stronger, more valuable company with a competitive advantage unmatched by our competitors.

In the end, the company who demonstrates the ability to consistently grow premium, high-THC, low-cost cannabis will be very successful. And I hope that today I've given you several reasons why I believe that MJardin can be one of those companies.

Now we will move on to the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Bobby Burleson, Canaccord.

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Bobby Burleson, Canaccord Genuity - Analyst [2]

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A couple questions. I think starting with Canada, obviously there's a lot of excess supply up there. And I understand there's some shifting timelines around production revenue at your facilities. But can you talk a little bit about what pricing looks like versus some of your assumptions from a few months ago? What's the change there in terms of what we should be thinking about for pricing, and how that flows through assumptions around these assets going forward?

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Pat Witcher, MJardin Group, Inc. - CEO [3]

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Bobby, right now we really haven't seen much of a change. And we were basing our projections on very similar numbers as to Q2, so right now we're not seeing any major change. The supply agreements, in fact, we've actually found in the Robes deal, we were able to secure that one at a little bit higher-than-average wholesale pricing right now.

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Bobby Burleson, Canaccord Genuity - Analyst [4]

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Okay. I mean, given the massive excess oversupply, at some point does that impact the value of these assets that you're ramping? I mean, it seemed like a market that requires a lot more capacity coming online. I understand you're in the premium segment, but how should we think about that? Because it's rapidly commoditizing, it sounds like, up there.

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Pat Witcher, MJardin Group, Inc. - CEO [5]

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One, I think that part of the deal with our premium or [craft] production, and locking up several of our -- having 1/3 of our volume -- really, we've already locked up basically 1/3 of that supply right now just in our Robes deal for our Ontario asset.

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Bobby Burleson, Canaccord Genuity - Analyst [6]

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Okay. And then I didn't hear much about Colorado. And I imagine with the new Interim CEO role, just a lot of expertise now in terms of management [as pop] and how Colorado were (inaudible) Buddy Boy background. And I'm wondering just (inaudible) 90 and changes there, you are seeing some roll-ups happening in that space that look pretty interesting. Can you just remind us what your thoughts are about the potentially increasing value of the Buddy Boy relationships and your role in Colorado, or what you could spin that into potentially in terms of what those assets might be worth?

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Pat Witcher, MJardin Group, Inc. - CEO [7]

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Well, as you know, we continue to be -- we're just a lender and the landlord for the Colorado assets at this point. And with the House Bill 1090 passing, there's going to be a lot of interesting opportunities throughout Colorado to probably pick up some either distressed licenses or -- there's going to be a lot of, I think, merging throughout Colorado. And we're definitely open to that in looking at it.

At this point, there's really nothing on schedule. We have remain focused on getting our assets in Canada and Nevada locked down right now. So Bobby, to be honest with you, we're still just keeping our head down and sticking with the plan to get our facilities operationalized. And if something were to come along in Colorado or Nevada or anywhere else in the US, that was just a -- one of those deals that would be worth picking up for us, we definitely would entertain that.

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Bobby Burleson, Canaccord Genuity - Analyst [8]

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Okay, great. Well, thanks, guys.

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Operator [9]

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It appears there are no other questions at this time. I would like to turn the call back to you.

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Ali Mahdavi, MJardin Group, Inc. - IR [10]

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Thank you, operator. On behalf of the MJardin team, we'd like to thank you all again for joining us today to review the Q3 financials. And we look forward to speaking with you again on our year-end results conference call. That concludes today's call. Operator, please go ahead and close the call.

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Operator [11]

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This concludes today's call. Thank you for your participation. You may now disconnect.