Emerald Health Therapeutics' (EMHTF) Management on Q4 2018 Results - Earnings Call Transcript

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About: Emerald Health Therapeutics, Inc. (EMHTF)
by: SA Transcripts
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Earning Call Audio

Emerald Health Therapeutics, Inc. (OTCQX:EMHTF) Q4 2018 Earnings Conference Call May 1, 2019 8:30 AM ET

Company Participants

Allan Rewak – Vice President-Communications and Stakeholder Relations

Avtar Dhillon – Executive Chairman and President

Rob Hill – Chief Financial Officer

Conference Call Participants

Martin Landry – GMP

Owen Bennett – Jefferies

William Haynes – Eight Capital

Operator

Good morning and welcome to the Emerald Health Therapeutics’ Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. All participants will be in listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts. [Operator Instructions] Please note this event is being recorded today, May 1, 2019 at 8:30 AM Eastern Time. An archive of this call will be available on Emerald’s website following the meeting.

And now, let’s turn the conference over to Allan Rewak, VP, Communications and Stakeholder Relations. Please go ahead, Mr. Rewak.

Allan Rewak

Good morning. I welcome all call participants to the Emerald Health Therapeutics 2018 fourth quarter and fiscal 2018 financial results conference call. We filed our results yesterday on SEDAR after the market closed and issued a press release with highlights this morning, which can be accessed in the Investor section of our website at www.emeraldhealth.ca.

Leading today’s call will be Dr. Avtar Dhillon, our President and Executive Chairman will review recent corporate developments; Rob Hill, Chief Financial Officer will discuss Emerald’s financial highlights. There will be concluding remarks before we open up the call for questions.

Now, today’s call may contain forward-looking statements. Certain material assumptions are applied in providing these statements, many of which are beyond our control. These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of risks and uncertainties that may cause actual results to differ materially from those contained in these forward-looking statements. These and other risk factors are described in our periodic filings made with SEDAR. If you are cautioned not to place undue reliance on these forward-looking statements and the company disclaims any obligation to update such statement.

I will now turn the call over to Dr. Avtar Dhillon.

Avtar Dhillon

Thank you, Allan, and thank you to all, who have joined Emerald Health Therapeutics first ever financial call. We appreciate your interest and time. 2018 was a year of building literally. We have been building our facilities, building our strategic partnerships, and building our business strategy. And while we continue to build on many fronts, we also continue to execute on one of the most fundamental aspects of our strategy. That is to look for opportunities, to leverage the infrastructure and expertise through partners in a matter that best complements our internal expertise.

Is the Canadian government declared its vision a plan for legalizing cannabis in April, 2017? We formed a joint venture with Village Farms to combine our cannabis and other expertise with their large scale greenhouse growing expertise to focus on creating one of the single largest and we believe most valuable cannabis growing facilities in Canada, if not the world. We formed a relationship with the largest natural health products company in Canada, the Factors Group, to access large scale attraction and gel cap encapsulation capacity.

We’ve done a deal with the largest extraction company in the world, Indina to access proprietary extraction and formulation technology. So, across the full spectrum from growing to processing, to product innovation, we are identifying and securing unique intellectual property and capabilities.

What has that resulted in? This June 6, 2017, when we announced our 50/50 joint venture with Village Farms, we moved hard and fast to create one of the single largest cannabis growing facilities in the world, a Pure Sunfarms joint venture is now fully licensed for cultivation and 1.03 million square feet. It is growing high-quality cannabis. The conservative yields used to calculate the 75,000 kilogram production target are 25% to 35% less than the average of many other greenhouse growers and only a third of some of the most aggressive projections we see.

We know that the individuals that put the Delta 3 facility together, our guiding large scale cannabis production at this operation are among the elites and respective fields, and we have every confidence that we will generate the yield that will at least match if not exceed the averages and therefore, drive overall production well beyond 75,000 kilograms. But the teams are conservative and until we have completed additional growing cycles across multiple seasons, we will continue to provide conservative guidance.

The important point, however, is that this is no longer a future. Delta 3 is fully plant in it, and while we are constantly aware that cannabis is a living, breathing organism and is a plant that can sometimes be tickled hence our ongoing and caution we expect to be able to report full production by mid-year.

Looking back, I can’t imagine a better combination of expertise to pull this venture. Village Farms’ tremendous experience in large scale growing and their systems for brining this meticulously is impressive. Well, this project off the ground, Emerald brought design and construction expertise. We leverage our relationship with Health Canada and our licensing knowledge. We applied our decades of cannabis specific crop science knowledge and our production in QA and QC experience.

And starting right at the basics are genetics. This has never been done before yet. Here, we are today with a facility that was already scaling production as the facility conversion was still in motion. PSF continues to advance on the next steps of the facility with further additions in terms of post-harvest processing including drying, packaging and extraction. It is now rapidly scaling production and sales, and we are pleased about the capabilities of this excellent facility is cash flow potential and the value of this asset.

Equally exciting is that Pure Sunfarms recently exercises the option to acquire Delta 2, a newer, but similar facility to Delta 3. Planning and procurement are in motion. It is expected to have as first harvest and by the middle of 2020 and hit its full production run rate by the end of that year.

Speaking conservatively again, this facility is also expected to produce over 75,000 kilograms when in full production. With finalized thing to facilitate the sale to the province is expected to be just around the corner, we are looking forward to having Emerald continued to be a customer of Pure Sunfarms as well as for PSF to expand its customer base beyond LPs and to include provincial distributors. In Quebec, we have almost completed the conversion of Verdélite facility in Saint-Eustache and we expect it to be fully planted in Q3.

This 88,000 square foot operation is designed to grow very high-quality cannabis. It is designed to package more dry flour then what is grown there, and we are adding extraction and lab facilities. We value the community and regional role that Verdélite plays in Saint-Eustache and Quebec, and the role it will play in expanding our business outside of Quebec as well.

As pioneers and securing hemp harvest for CBD extraction 2018, we are scaling up our operations with the additions of the Factors Group and Indina strategic alliances. We are expecting Health Canada approval for the Factors Group extraction and capsulation facility, which can process up to a million kilograms to plant material and produce 600 million soft gels per year.

We are also planning to harvest hemp from 1000 acres this year in order to further expand this business. Apart from the tremendous supply and processing to add value to cannabis, Emerald is well positioned with distribution agreements. We expect to have our final agreements to cover most of Canada by mid-year. We have already been shipping to multiple provinces with close to a 100% rate of fulfillment of our commitments.

Our team does look at the cannabis plant through a life science of lens. We are conventional and naturopathic doctors were from the pharmaceutical and biotech companies. We’re in natural health products. That being said, we are ultimately focused on its giving consumer, the ability to consume with confidence whether for pleasure or wellness with legalized recreational cannabis use, still fresh phenomenon in Canada. We are of course, producing and selling dried flower to help meet that demand.

We are also developing a differentiated product for cannabis 2.0 in Canada starting by the end of this year. And we are looking to the mid to long-term to bring the knowledge, process and tools of life sciences world to this plant. Innovation is at the core of our makeup and we continued to advance and value-add products over time. We expect to have patented intellectual property development internally and licensed, and we will continue human studies that will be perspective and observational and design with unique attributes to generate valuable data to support marketing. We will focus on products then can improve bioavailability of cannabinoids, develop new dosage formats and target core disease states including sleep, anxiety, pain and mood.

Emerald is planning the launch of its natural health product line through its joint venture Emerald Health Naturals with its non-cannabinoid Phytocann ingredients that support the endocannabinoid system. The marketing initiative is going to give us tremendous – the marketing initiative is going to give us nationwide brand exposure and natural health food stores and eventually pharmacies and grocery stores across the country. This is truly unique opportunity to expose the Emerald name as well as to offer consumers a product line that supports endocannabinoid system.

Without using ingredients from the cannabis or hemp, but ultimately if a regulatory system embraces at least non-cycle cannabinoids into less regulated channels, we would potentially be able to add CBD, for example, to the product line and already have the benefit of name and shelf presence in these channels.

I will add that we are actively evaluating international opportunities to grow and process cannabis as well as to conduct research. Ultimately, our goal is to focus on creating unique intellectual property that we can leverage globally. We will provide updates on this front once appropriate.

Rob Hill, our CFO will provide some comments on our financials.

Rob Hill

Thank you, Avtar, and good morning everyone. The figures I’m reviewing today can be found in our financial statements, which are available on SEDAR as well as our website as Avtar mentioned earlier.

In Q4 of 2018, we saw our first notable step-up in revenue growth in recent quarters. Q4 sales of $1.1 million were more than triple the prior quarter and the fourth quarter of 2017. For the full year of 2018, Emerald reported net revenue of $2.1 million versus $938,000 in fiscal 2017, representing an almost 125% increase.

We also have an initial sales report for Q1 that can provide guidance that Emerald sales in the quarter were approximately $2.6 million, an increase of about 130% over the prior quarter and almost 600% year-over-year. This increase in revenue is due to sales of cannabis purchased from our joint venture, Pure Sunfarms as well as from our Quebec-based Verdélite subsidiary.

We believe that in the near-term, the revenues are going to continue to increase significantly, because our production and supply of cannabis continue to arrive. We’re also building up our capacity to process and get our products to market. So, in terms of cannabis supply, as mentioned, we have our original agreement with Pure Sunfarms, whereby the company agreed to purchase 40% of Pure Sunfarms’ production from the Delta 3 location. That agreement runs through the end of 2019. We’re not disclosing price on that Pure Sunfarms supply, but we can say that all-in-all, the arrangement is beneficial to both parties.

I also want to point out that with the Pure Sunfarms decision to auction Delta 2 last month, we amended the supply agreement to provide us with 25% of total production from both Delta 3 and Delta 2 starting in 2020 and running through 2022. At Avtar noted, Delta 2 is now also being retrofitted to produce cannabis. As far as exactly how much cannabis, we can expect under the supply agreement that depends naturally on how well Delta 3 continues to develop its ability to produce as well as how quickly the Delta 2 retrofit can be done. We anticipate harvests out of Delta 2 in the latter part of 2020, but it’s still a little too early to provide any kind of real guidance on that.

I can add some color regarding Pure Sunfarms sales guidance for Q1 2019, which is approximately $14 million and that’s a notable increase from Q4 sales at Pure Sunfarms of $4.9 million. Pure Sunfarms is targeting 2019 production of between 46,000 and 52,000 kilograms, and it’s very close to an all-in production costs below a dollar a gram. Emerald recognized in Q4 a $1.4 million as its share of income from Pure Sunfarms and over $5 million for fiscal 2018.

Getting back to Emerald’s financial results, sales into the adult market – the adult-use market represented roughly 36% of net revenue for the year, while sales to medical consumers represented about 64%. Naturally, we see the relative proportion of sales to the adult-use market increasing substantially moving forward.

That said, we’ve been seeing a constant increase in our sale of the products to do the medical channel, which we are very happy to see fourth quarter’s sales to medical consumers increased to 55% year-over-year. Because emerald has always been known for its medical cannabis – sorry, known in the medical cannabis circles, rich quality oils, I can ask a lot about our sales mix between flour and oil, and I can tell you that during Q4, dried flower represented 63% and oils 37% of sales.

That’s mainly a function of a relatively high proportion of medical sales, which in our experience, tends to be roughly 50-50 oil to flour, where sales today in the adult-use market had been 100% dried flower. We do anticipate, however, increasing demand from the provinces for oils, particularly CBD oil, and we’re preparing to meet that demand.

At the end of 2018, Emerald’s inventory was $6.8 million, up from 728,000 in the prior year and representing a growing asset that we expect to be converted into sales. The inventory level is particularly high as a result of timing in the year of products coming available from Pure Sunfarms and Pure Sunfarms began to get its legs under as a producing organization. And so it’s all to the late delivery, we didn’t have time to package and process, and ship to the product. The vast majority of the inventory was bulk dried flower.

In 2018, the company completed financings that resulted in gross proceeds from unit issuances and warrant exercises of $82 million. And if you’d net – sorry, that’s figures net approximately $440,000 in transaction costs. Lastly, as of December 31, Emerald’s total cash position was $36 million.

Avtar, back to you.

Avtar Dhillon

Thanks, Rob. Emerald is at an inflection point. Sales are positioned to grow significantly in Canada in 2019 and beyond. We believe that our business and cash flow potential have the ability to drive greater valuation for the company and we will continue to work to realize its potential.

Finally, I would like to thank our shareholders for their support as well as the call participants for their time and attention.

Operator, we will now take questions from analysts participating in this call.

Question-and-Answer Session

Operator

Yes, thank you. [Operator Instructions] And the first question comes from Martin Landry with GMP.

Martin Landry

Hi, good morning everyone. My first question is on Pure Sunfarms. You’re – it’s very helpful to get a guidance for Q1 sales. I think you said that you expect them to – you expect sales to exceed $14 million. is it fair to see that all these sales are bulk, dried, sales to other LPs? Because I believe, you don’t – you still don’t have your packaging license to sell the provinces. Is that the case?

Rob Hill

that’s correct, Martin. We may still have not received the license to sell to provinces directly.

Martin Landry

And just – and then you – after you alluded to that in your opening remarks, saying that you expect Pure Sunfarms to get its packaging license shortly. Can you give us a bit of more color on that and what’s been to hold up and what gives you confidence that it’s coming shortly?

Avtar Dhillon

We continue to work with Health Canada and have ongoing dialogue through the PSF team. So, as you know, emerald has its own relationship and a vertical integration and then PSF has its infrastructure to be able to deal with Health Canada as well as the vertical integration that’s undertaking. the PSF management team is confident that they will be able to get the packaging license in new term. but that’s about as far as; I can speak for them on their behalf. We are projecting our own numbers and other items based on the Emerald Lens looking forward, with our internal production as well as production and so forth, coming from our partnerships.

Martin Landry

Okay. And Avtar, in your opening remarks, you also said that you’re evaluating international opportunities. Wondering if you can give us a bit more color as to which regions you find attractive at this point in time, and what assets are you looking at? Are you looking at cultivation? Are you looking at extraction brands that would be helpful?

Avtar Dhillon

We’re following kind of a similar path to the LPs that have global aspirations. We now have the bulk of our infrastructure underneath us for Canada in terms of production and processing. extraction is coming online in a big way. Our product development is well underway. as such, we look for to launch our products internationally. So, export is a top of mind at the same time, like other LPs looking for potentially influx of product that may be produced even lower cost basis and we continue to evaluate that. So, there isn’t any part of the world that is off limits at this particular point. As we sort of get a little closer to inking deals, then we’ll come back and provide further insights.

Martin Landry

Okay. All right. That’s it for me. Thank you.

Operator

Thank you. And the next question comes from Owen Bennett with Jefferies.

Owen Bennett

Yes. Morning guys. And first of all, it’s a couple of financial ones. I was hoping you could give me the adjusted net income figure and your shadow thought from the joint venture. And then secondly, I was just wondering if you could give some sort of perspective on how much are you paying for production from the JV versus what they’re selling that on, into the open market? And sort of first two questions please.

Rob Hill

Yes. good morning. So, just to clarify your first question, it would be adjusted net income for...

Owen Bennett

Yes. I’m assuming – I’m assuming that $1.4 million, how some exceptional then, so what’s on the line adjusting that and configure?

Rob Hill

Yes. So what we adjust that figure for either company profits on the bulk material purchase from Pure Sunfarms. it’s the main adjustments there, so that what you’re seeing is the adjusted net figure in our – in the notes to our financials.

Owen Bennett

Okay. So then what – what does that imply for net income margin in the JV?

Rob Hill

Well, I’m not sure I know how to answer your question, because the JV reports its number is based on a slightly different method of accounting for biological assets. We have to make an adjustment to that number to bring it in line. And that’s the – you’ll see an adjustment in that note that articulates that, that figure that’s that adjustment, that particular adjustment.

Owen Bennett

Okay. I mean, my question is, I’m assuming that, I mean the margin implied by that $1.4 million there. I mean we should not – we should not assume that continues at that percentage, because there’s some one-offs arguably in that.

Rob Hill

Yes. it’ll change quite a bit over time as the volume of planting at Pure Sunfarms grows and the operation matures is that fair value pickup on the biological assets. but they reported and the one that we would adjust it to changes over time. So, it’s hard to give. It’s going to be hard for you to get a real look forward based on the numbers that you’ve seen in the Q4.

Owen Bennett

Yes. I mean, which is basic [ph], I mean stripping out the fair value adjustment for biological assets, what is the net income margin?

Rob Hill

I don’t have the – I’m just bringing up, sorry, just bear with me, it’s $6.2 million.

Owen Bennett

$6.2 million.

Rob Hill

Yes, Pure Sunfarms.

Owen Bennett

So, it goes from $1.4 million to $6.2 million.

Rob Hill

Yes. It’s a $5 million adjustment as a result of the accounting for fair value of the bio assets.

Owen Bennett

All right. Okay. I’ll show you. I said at $1.4 million included the adjustment. Okay, clear. And then you’re just moving away from that. I was just wondering when did – which has come online later this year? I mean are you specific talk to any specific area and that was the focus now just to really on the oil part of the market?

Avtar Dhillon

Owen, we definitely are looking at derivatives and multiple products and we have a number of initiatives, just from basic products like soft gel, and products to edibles and consumables and the product. as I mentioned earlier, we try to incorporate science, in addition to quality into whatever and product, we’re looking at making sure the desired effect is supported by science, whether it’s preclinical, clinical or some sort of screening methods et cetera.

Rob Hill

In terms of course, it sounds pretty whack. In terms of core timing, the legislative window begins in October and the regulations should be gazetted again, this summer, which will allow the framework to come in. There’s very little threat of that being disrupted in terms of the timeline.

Owen Bennett

All right, cool. Thank you.

Operator

Thank you. And the next question comes from Graeme Kreindler with Eight Capital.

William Haynes

Hey guys, it’s William here for Graham. Thanks for taking my question. first off, just in regards to the facility in Richmond, can you just talk a little bit about where that facility is at in terms of completion and capacity, and when you expect to receive a cultivation license there?

Avtar Dhillon

we are rapidly bleeding the first 150,000 square feet number now production there. We’re expecting that to be fully operational, drawing perspective by the middle of this year. in parallel, we are expecting our health Canada cultivation license eminently. So, we can always predict exactly when Health Canada is going to do things. Then we’d be better off than most people, but we appreciate that Health Canada is busy, and they will get back to us in due course, but to – but we are expecting it eminently [ph].

William Haynes

Awesome. Thank you.

Rob Hill

William, I’ll just add that the capacity ultimately when that facility is up and fully running, we conservatively estimate to be about 8,200 kilograms annually.

William Haynes

Okay, great. Awesome. And then just the last one here for me, just of the product sold in the quarter. How much of that was acquired through the supply doing with Pure Sunfarms and how do you expect this to trend 2019 like well you – do you expect to reach the 40% level from the supply agreement?

Rob Hill

As far as the vast majority of that was from Pure Sunfarms, there was some third-party material acquired and sold, and a little bit from our Verdélite facility. But Verdélite is still – well it’s getting close to, as Avtar mentioned, being fully operational. during the fourth quarter, there wasn’t a large amount of production coming out of it.

William Haynes

Okay. Awesome. The reason I asked you is just because I saw you guys provided the guidance of 46,000 to 52,000. I was just kind of wondering if we can expect like essentially 40% of that to trickle through to emerald.

Rob Hill

Yes. There is no reason why we wouldn’t think that’s the case. And other sort of additional guidance I want to give you William is, we think that moving forward that the split of our product, it’ll be 75% coming from Pure Sunfarms and about 25% coming from Richmond and Verdélite.

William Haynes

Awesome, that’s it from me. Thanks guys.

Rob Hill

Okay. Thanks, William.

Operator

thank you. And as there are no more questions, I would like to return the floor to management for any closing comments.

Avtar Dhillon

I think I’d just like to thank everyone for their time. 2019 looks to be a very exciting year and we’re looking forward to more of these calls with you.

Operator

Thank you. This concludes our question-and-answer session as well as the conference. Thank you for attending today’s presentation. You may now disconnect your lines.