Mr. Riaz Bandali reports
EMERALD HEALTH THERAPEUTICS REPORTS SECOND QUARTER 2020 FINANCIAL RESULTS AND PROVIDES CORPORATE UPDATE
Emerald Health Therapeutics Inc. has released financial results for the three and six months ended June 30, 2020. Full versions of the company's unaudited condensed interim consolidated financial statements and MD&A (management's discussion and analysis) can be found on SEDAR.
"The second quarter was a very solid quarter in all aspects of our business. It marked a fundamental and notable shift in our financial performance; significant progress in all aspects of our operations; the launch of new brands and new products; and, importantly, substantial progress on delineating our go-forward strategy and vision," said Riaz Bandali, President & Chief Executive Officer of Emerald. "The fact that we were able to deliver so well on all of these objectives during these unprecedented times is a testament to the tremendous effort of our team and the systematic discipline that we have placed on improving every aspect of our operational and financial performance, which has been our focus since I joined the company 13 months ago.
"In the second quarter, we started to realize the impact of our considerable cost restructuring actions over the last three quarters, which when coupled to the significant efficiencies achieved in our operations, had a very positive impact on our operating results, gross margin and EBITDA. In addition, our 41.3% owned joint venture, Pure Sunfarms, continues to achieve leading market share in Ontario and strong growth in other provinces like Alberta. Pure Sunfarms recently made its first shipment of vapes and oil tinctures to the BC liquor board, and with the shipment of its Cannabis 2.0 products into other provinces, it continues to entrench its competitive position across Canada. We are very optimistic about the value of our assets going forward."
Emerald and Pure Sunfarms Joint Venture Summary
Emerald Q2 2020 Financials (compared to Q2 2019 and Q1 2020):
- Positive gross margin of $1.0M shows significant improvement over a gross margin of negative $1.3M in Q2 2019 and negative $0.9M in Q1 2020. Emerald achieved a positive 30% margin of cost of goods sold over net sales in the current quarter. The significant gross margin improvement is due to a larger proportion of higher margin product sold that has been cultivated at Emerald's own facilities, processing efficiencies, and a lower cost base of input material as compared to Q1 2020.
- All-in average growing cost of $0.99 (including depreciation; excluding trim) per gram from Emerald's two facilities in St. Eustache, Quebec and in Richmond, BC. Cash growing cost of $0.78 (excluding depreciation) per gram. The two Emerald facilities harvested over 3,000 kilograms of cannabis flower and trim during the quarter.
- Net sales of $2.5M decreased 46% compared to $4.6M in Q2 2019 and decreased 14% from $2.9M in Q1 2020. Emerald was able to maintain sales at a relatively flat level in Q2 2020 in comparison to Q1 despite the significant market and pricing pressure of dried flower in the retail sector and the delay of the launch of the Souvenir brand, which only happened in the last week of June 2020.
- Total SG&A expense of $3.5M, which includes $1.0 of non-cash expenses, decreased $9.0M from $12.4M in Q2 2019 and decreased $2.5M from $6.0M in Q1 2020.
- Net loss of $18.9M includes a $17.1M impairment of the Verdelite cash generating unit (a non-cash item). Details on the impairment are available in the condensed interim consolidated financial statements for the period ended June 30, 2020.
- Operating loss of $2.4M decreased 82% from $12.4M in Q2 2019 and decreased 64% from $6.9M in Q1 2020. Improvement in operating loss was driven by improvements in gross margin and lower SG&A expenses when compared to Q1 2020.
- EBITDA of negative $1.2M in Q2 2020 reflects a $6.1M improvement from negative $7.3M EBITDA in Q2 2019 and $2.7M improvement over Q1 2020. The EBITDA figure does not include any share of EBITDA from the Pure Sunfarms' joint venture and only reflects Emerald's operating results.
- Adjusted EBITDA of negative $0.1M reflects Emerald's proportionate share of Pure Sunfarms' Q2 2020 EBITDA.
- Net cash flow used in operating and investing activities of $2.4M in Q2 2020 decreased by $19.9M from $22.3M used in Q2 2019 and decreased $2.2M from $4.6M used in Q1 2020.
Key Initiatives and Accomplishments:
- Increased recreational dried flower sales by 16% and volume (kilograms) by 23% from Q1 2020. Revenue growth benefited from growing sales of Emerald-grown, Emerald-branded flower outside of Quebec and one week of sales, after a successful late-June launch of the new Souvenir brand, in Quebec. Initial shipments of Emerald-grown products to Alberta, Manitoba, Saskatchewan and Newfoundland and Labrador were made in April and May, and to Ontario in the last week of Q2 2020. Emerald made its first product shipments from its Richmond greenhouse to British Columbia in late Q1 2020.
- Successfully executed on our partnership with the Valens Company and shipped our first version of SYNC 25 CBD oil from our partner's facility in May 2020. Emerald also expanded its geographical market for SYNC 25 CBD from Alberta, British Columbia, Manitoba, Ontario, Newfound Land and Labrador, Saskatchewan and Nova Scotia with its first shipment to Quebec in June 2020.
Pure Sunfarms Joint Venture (41.3%-owned):
- Net sales, consisting entirely of dried cannabis, were $12.9M in Q2 2020 compared to $18.0M in Q1 2020. This quarter was marked by an 89% increase in volume sold of branded retail products compared to the prior quarter. The decrease in net sales was largely the result of a 29% lower net average selling price per gram of dried flower in Q2 2020 compared to Q1 2020 and a substantial decrease of sales in the wholesale market due to market conditions.
- Cost of goods sold of $0.83 per gram in Q2 2020 compared to $0.88 per gram in Q1 2020. The increase in large-format SKUs in Pure Sunfarms' product mix contributed to a lower overall cost per gram sold in Q2 2020.
- Net loss of $0.2M in Q2 2020 was negatively impacted by a $1.7M loss on fair value changes in biological assets.
- Seventh consecutive quarter of positive EBITDA.
- Emerald recognized $0.2M as its share of loss from Pure Sunfarms, as compared to $5.2M share of income recognized in Q1 2020.
- Pure Sunfarms prepared for the imminent launch of its cannabis oil products and new product forms under its Cannabis 2.0 product roll-out plan.
- Received from Health Canada its cannabis cultivation sales licence based on an initial production area within its second 1.1 million square foot greenhouse in Delta, British Columbia (Delta 2), allowing it to expand capacity as needed through license amendments.
- Expanded its credit facility with a lending syndicate led by Bank of Montreal and including Farm Credit Canada and the addition of CIBC to its full $59 million capacity with the completion of the Credit Facility's accordion feature.
Financials Results and Capital Resources
Selected quarterly financial information
The following table summarizes selected quarterly financial information for the Company, which was derived from the audited annual financial statements prepared in accordance with IFRS or the condensed interim consolidated financial statements prepared in accordance with IFRS applicable to the preparation of interim financial statements, IAS 34, Interim Financial Reporting:
The Company's unaudited condensed interim consolidated financial statements and MD&A for the three and six months ended June 30, 2020, together with other information related to the Company, including the Company's most recent Annual Information Form ("AIF"), can be found on SEDAR. Additional information related to the Company is available on its website.
Financing and Capital Resources
In Q2 2020 and subsequent to the quarter, Emerald raised capital and issued shares with the following transactions. Full details are available in prior press releases and in various filings on SEDAR.
- April 9, 2020: raised $1.1M in gross proceeds from the exercise of 6,250,000 warrants at $0.17 per warrant. The warrants were originally issued in 2019 with an exercise price of $2.00 per common share, in connection with a convertible debenture. The terms of the 6,250,000 warrants were amended in April 2020 and the exercise price of the warrants was changed to $0.17 per common share.
- June 2, 2020: raised $2.1M in gross proceeds through a prospectus offering, issuing 11,351,351 units at $0.185 per unit. Each unit consisted of one common share and one common share purchase warrant.
- August 13, 2020: established an at-the-market offering (A) to issue shares from treasury for up to $3.25M to the public, from time to time, at the discretion of Emerald. Emerald has not accessed any proceeds from the A at the date of this release. The A is effective until the earlier of April 13, 2021 or completion of the sale of the maximum amount of shares thereunder.
Other Corporate Updates
Souvenir brand successfully launched in Quebec with remarkable market receptivity
On June 22, 2020, Emerald introduced its new Souvenir cannabis brand to the Quebec adult-recreational cannabis market through the Societe Quebecoise du Cannabis (SQDC). The brand offers products grown in Quebec at Emerald's Verdelite facility. Consumer reaction to the Souvenir products has been very strong and the brand has contributed more than $1.5M in sales to date. The initial products included Chemdog and Grapefruit GG4, both high potency THC strains with distinct terpene profiles.
Signed a share purchase agreement for the sale of Verdelite Sciences and Verdelite Holdings, together, in consideration for a cash purchase price of $21.0 million
Emerald entered into a share purchase agreement with Quinto Resources Inc. on July 30, 2020, in respect of the sale of Emerald's wholly-owned subsidiaries, Verdelite Sciences and Verdelite Holdings. The subsidiaries own and operate the 88,000 square foot craft cannabis production indoor facility in St. Eustache, Quebec. Pursuant to the agreement, Quinto will purchase all issued and outstanding shares of the subsidiaries for a cash purchase price of $21.0M, subject to a 90-day working capital adjustment. Upon closing, Emerald will continue to sell its own products in Quebec, subject to certain restrictions over 75 days, and will retain exclusive rights to its Souvenir brand. Completion of the transaction is subject to various conditions, including obtaining applicable consents and approval of the purchaser's shareholders. The proceeds of this transaction will be used in a targeted and well-defined manner to improve the Company's working capital position, including eliminating the deferred payment in its entirety and reducing accounts payable, as well as reducing the long-term debt. Although, we expect this transaction to close in 4Q20, we cannot guarantee its closing.
Launched Emerald Fast Action SYNC Nano Cannabis 2.0 spray product line
On August 31, 2020, Emerald announced the launch of its Fast Action SYNC Nano cannabis spray products in the adult-recreational market. These products are based on nanoemulsion technology to provide rapid onset and shorter duration of effects to provide consumers with greater predictability and control of their cannabis experience. Saskatchewan and Alberta have received initial shipments of SYNC 15 Nano THC Fast Action Spray. SYNC 15 Nano CBD Fast Action Spray is planned for distribution in the coming months. Additionally, Emerald successfully launched its SYNCMED Nano CBD Fast Action Spray into the medical market in July.
Emerald Health Therapeutics will host a conference call on Tuesday, September 1, 2020 at 10:30 a.m. ET.
To access the audio broadcast, please dial 866-652-5200.
An archived version of the presentation will be available for 90 days at the company's website.
About Emerald Health Therapeutics Inc.
Emerald Health Therapeutics is committed to creating new consumer experiences with distinct recreational, medical and wellness-oriented cannabis and non-cannabis products, with an emphasis on life science-based innovation and production excellence. Emerald's three distinct operating assets are designed to uniquely serve the Canadian marketplace and international opportunities. These assets, all in full production, include: its Metro Vancouver, BC-based greenhouse operation (78,000 square feet) capable of producing organic-certified product; Verdelite, its premium craft cannabis production indoor facility in St. Eustache, Quebec (88,000 square feet); and Pure Sunfarms, its 41.3%-owned joint venture in Delta, BC, producing high quality, affordably priced products (1.1 M square feet).
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