Vivo Cannabis Inc (fka VVCIF)

[FUNMAN]

Earnings Call Transcript - VIVO Cannabis Inc. (VVCIF) CEO Barry Fishman on Q2 2020 Results - Earnings Call Transcript

Aug. 17, 2020 3:10 PM ET

https://seekingalpha.com/article/4369287-vivo-cannabis-inc-vvcif-ceo-barry-fishman-on-q2-2020-results-earnings-call-transcript?part=single

VIVO Cannabis Inc. (OTCQB:VVCIF) Q2 2020 Results Conference Call August 17, 2020 11:00 AM ET

Company Participants

Barry Fishman - Chief Executive Officer

Daniel Laflamme - Chief Operations Officer and President of Canna Farms

Michael Bumby - Chief Financial Officer.

Conference Call Participants

Noel Atkinson - Clarus Securities

Chris Damas - BCMI Research

Operator

Hello, everyone, thank you for standing by. Welcome to the VIVO Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will hold a brief question-and-answer session for analysts and institutional investors. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded.

Today's presenters are Barry Fishman, VIVO's Chief Executive Officer; Daniel Laflamme, VIVO's Chief Operations Officer and President of Canna Farms; and Michael Bumby, VIVO's Chief Financial Officer.

Please note that comments made on today's call may contain forward-looking information, and this 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?

Barry Fishman

Thanks, operator. Good day, everyone, and welcome to VIVO's second quarter 2020 conference call. We continued our quarter-over-quarter sales growth with a 15% sequential increase, making the second quarter our fifth consecutive quarter that we've increased sales. We're proud of this achievement, knowing that most of our competitors cannot make a similar claim. We feel it reflects patience and consumer confidence in the quality of our products and services and our dedicated employees who work tirelessly to provide them. We are closely managing operating expenses and recorded a reduction of 15% in sales, general and administrative expenses compared with Q1 2020.

Much of our sales increase has been driven by the launch of our wide line of Cannabis 2.0 products. According to Ontario Cannabis Store retail store purchases, VIVO held a 68% market share in the cannabis concentrates category as of March 31, 2020, making us the dominant player in that segment by a significant margin. We also continue to benefit from a solid reputation and customer awareness of our brands. According to a recent independent survey by the Brightfield Group, our flagship Canna Farms brand was the fourth most recognized cannabis brand among Canadian consumers. We have effectively executed on our plan, advancing multiple initiatives. And we believe both our medical and adult use businesses are well-positioned for future growth and profitability.

On the medical cannabis side, we entered into two agreements with Medical Cannabis by Shoppers, a product supply agreement and a clinical services agreement. Under the terms of the supply agreement, Shoppers Drug Mart through their Medical Cannabis by Shoppers online sales platform will offer a broad portfolio of Canna Farms and Beacon Medical products to patients across Canada. This offering will include our latest 2.0 offerings such as chocolates and extracts. Under the terms of the clinic services agreement, our subsidiary Harvest Medicine will provide cannabis education services to patients and provide consulting services to the Shoppers Cannabis Care team. We value our partnership with Shoppers Drug Mart and expect these agreements will help to further expand the profile and recognition of our products, clinic services, and brands.

Last week, we launched Beacon Medical softgel capsules on the Canna Farms online medical platform. This is the eighth product format we've launched since adult use cannabis was legalized. The softgel capsules provide patients with a convenient format to ingest cannabis in a precisely dosed manner. We expect Beacon softgels to be well-received by our medical patients. We also achieved a number of key milestones on the adult use side of the business as well at our licensed facilities and Hope B.C. and Napanee, Ontario.

I'll now turn the call over to Dan Laflamme to discuss these achievements in more detail. Dan?

Daniel Laflamme

Thank you, Barry. Good morning, everyone. Before we begin, I want to touch upon something Barry mentioned in his earlier remarks. Specifically, Canna Farms bring the fourth most recognized Cannabis brand with 19% consumer awareness. Canna Farms prides ourselves in our ability to provide consistent high-quality artisan crafted products to consumers, since we became a licensed cannabis producer in 2014. But it takes the efforts of a team to provide a lasting experience for customers that makes them want to continue purchasing products. We're very fortunate to have a passionate and talented team in place. I want to thank everyone at the Canna Farms for their contributions in helping make our brand the success it is today, and I look forward to sharing many more successes with the Canna Farms team in the future.

When consumers think of premium cannabis, many think of Canna Farms. Why is that? What differentiates us from others? A lot of cannabis companies equate higher THC with a better product, but that is not the case. We know better. There are many more factors than play than THC in order to produce quality cannabis, and that is what has enabled Canna Farms to maintain its reputation for six years and counting. First, Canna Farms grows indoor BC bud directly in soil, and there are no pesticides in our process, and we do a 10 day flush cycle. And we grow our cannabis in small batches in order to maintain quality assurance and quality control over the process. But perhaps most important, our genetics are unique to the industry. We have never sold our genetics to another licensed producer. In fact, our Pink Kush is the original strain that has been sold in Vancouver for the last 20 years.

We constantly search for new genetics with desirable cannabinoid content, terpene, yields and pathogen resistance. Recently, we imported many new varieties from one of the longest standing seed suppliers in Holland. Our objective is to constantly have a new and exciting genetic that are unique and keep the consumer interested, while also maintaining a consistent supply of our already proven offerings.

During the second quarter, Canna Farms facility achieved a major milestone. We received all necessary Health Canada approvals to begin operations at our Phase 5 expansion. Operational rooms are being fully used for storage and processing. All planting activities in the cultivation area are expected to be completed in the next several weeks.

The Phase 5 expansion consists of 10,000 square feet of production space, customized to incorporate our two tiered growing system, as well as vegetative rooms, mother rooms, storage vaults and processing rooms.

We began the two tier growing system product in early 2019 and underwent extensive research and development to ensure that we could maintain our yields, potency and product quality standards before a full rollout. This two-tiered approach will allow us to grow twice as many plants in the same footprint as most conventional cultivators, thereby allowing us to meet the growing demand for craft quality cannabis.

In addition to our two-tiered production, Phase 5 is equipped with three processing rooms to provide space for our automated pre-roll machine we expect to commission soon. We also began production of solvent-less extracts at the Canna Farms facility, which we market under the Canna Farms brand.

Solvent-less extracts are extracts produced by a process that does not involve the use of solvents. These include products in our Cannabis 2.0 lineup, including hash, bubble hash, rosin, kief and live rosin, for which as Barry mentioned, we have a market leading 68% share in Ontario retail stores. We have now launched these products in several provinces. We currently sell adult use products in eight provinces and expect to expand to additional provinces in the second half of 2020.

We have also made tremendous progress at our Vanluven facility in Napanee. In late June, we made an initial shipment of our Fireside X shatter product to several provincial wholesalers. Fireside X shatter is the second significant concentrate product that we've launched and is expected to make a significant contribution to our top-line. We are the first licensed producer to sell shatter in the Canadian adult use market. So far, our early shatter sales have exceeded our expectations. We have shipped to Alberta and Ontario markets, as well as to British Columbia, where the provincial wholesaler sold its entire inventory within the first week. This launch is aligned with the commissioning of the Vanluven facility’s ethanol extraction suite, which is now in commercial production. The extraction system has the capacity to process up to 200 kilograms of dry biomass per day.

Additionally, we are now producing distillate using a new distillate column. The resulting high quality, low production cost resin and distillate will be used as inputs for cannabis oil, vape cartridges and other 2.0 products and will complement Canna Farms solvent-less concentrates that I mentioned earlier.

At our Kimmetts facility, our seasonal airhouses now contain over 10,000 healthy plants and are significantly larger than the plants from our pilot harvest in 2019. We expect to use this high-quality low-cost input for our premium concentrate product line-up. We've also moved forward on the agreement with Vertosa, which we announced last quarter. Vertosa is a developer of a patent-pending infusion technology currently used in hemp and cannabis products across the U.S. and Europe. Vertosa's equipment has been installed and commissioned at the Vanluven facility. We expect to begin shipments of Vertosa active emulsions for the cannabis beverage market in the next few months.

In summary, we are very pleased with our performance of our Canna Farms and Napanee facilities and the advancements we have made in our adult-use business. We look forward to continuing to produce and provide our high quality products that our customers have come to expect and experience.

I'll now turn it over to Michael to provide a more in-depth review of our financial performance. Michael?

Michael Bumby

Thanks, Dan. Like many businesses in Canada, we have faced our share of challenges this year. But we've never wavered from our focus, caring about our customers and patients by providing them premium products and services they can trust, caring about our employees by ensuring they have safe work environments and challenging rewarding work and caring about our investors by building VIVO on a foundation of professional corporate governance, regulatory compliance and on the prudent allocation of our resources.

So, despite the headwinds that COVID-19 has created, I'm proud to say that we have continued to significantly grow our quarter-over-quarter revenue while reducing our operating expenses and limiting our capital expenditures. Our gross revenue in the second quarter was $12.7 million, and net revenue was $9.4 million, a 15% increase over the first quarter and a 79% increase over Q2 2019. Cannabis sales represent over 90% of VIVO's revenue, with the remainder coming from our Harvest Medicine clinics. Cannabis concentrates made-up over half of VIVO's cannabis sales during the quarter and represent much of our Q2 growth. Flower sales decreased quarter-over-quarter, reflecting decreased market demand in the wake of COVID-19.

Net average selling price is one of our key performance indicators because it reflects the market's demand for and recognition of the quality of our products. We were able to sustain a strong net average selling price in the quarter of $6.07 per gram of dry flower. Although there has been an increase in pricing pressure, we believe the market will continue to pay for premium quality products when they can find them. Our adjusted EBITDA losses reduced to $2.2 million for the quarter made up of $1.8 million of losses from our domestic cannabis operations, and $400,000 of losses related to growth initiatives, including our international operations and product development projects. Investments made in these growth initiatives will contribute to our sales growth beyond 2020.

In addition to growing our sales by 15% over last quarter, we've reduced our operating expenses by 15%, and continue to focus on profitability with SG&A expenses coming in at $4.7 million, compared to $5.5 million in the first quarter of 2020.

In addition to managing operating expenses closely, our goal is to maintain a healthy balance sheet and minimize our capital expenditures. Following the completion of our Canna Farms Phase 5 build out that Dan spoke of earlier, all of our major CapEx requirements are now behind us. When yields from the new planting rooms at Canna Farms come online and the Kimmetts airhouses are harvested later this year, we expect to further lower our unit production costs through economies of scale.

Our cash and cash equivalents were $22.2 million as of June 30th, and we hold an additional $2.8 million in strategic equity investments. During Q2, we repurchased $10.9 million of our outstanding convertible debentures at a 7% discount to their face value and we'll save over $1.3 million in interest expenses as a result.

In summary, our financial results demonstrate that our business strategy is working as expected. Going forward, we remain committed to sound financial stewardship and governance. Specifically, we are focused on maintaining a healthy balance sheet, prudently managing our operating expenses and continuing to apply a disciplined approach to capital allocation.

I'll now hand it back over to Barry for some closing remarks.

Barry Fishman

Thanks, Mike. Our financial and operating results discussed today are sharply aligned with our focus on four strategic priorities. Our first priority is enhancing supply and production capabilities, which we've done at both our Canna Farms and Napanee facility. Our second priority is creating and maintaining a broad and loyal customer network. Canna Farms is the fourth most recognized cannabis brand in Canada, and we're working hard to continue to strengthen all of our brands. The Canadian cannabis market is highly competitive and continues to evolve. It is critical to be nimble to meet and exceed patient and consumer demands. Our third priority is building an innovation-driven branded organization. Our early success and shared leadership in the concentrates category speaks to our ability to develop innovative products and effectively bring them to market fast. Since the legalization of Cannabis 2.0 products, we've launched kief, bubble hash, vape cartridges, live rosin, chocolates, and most recently softgels. We have more products in our pipeline and several of them are close to entering the market.

Finally, our fourth priority is to accelerate the growth of our international medical business with a clear focus on Germany and Australia. We shipped our largest order to-date to Australia in Q2 2020 and are excited about the upside potential in that market. Our German business is now licensed to import and sell cannabis in the German market, and we'll begin to do so as soon as we have approved product to sell. We are doing everything possible to expedite our GMP certification in Napanee, despite COVID-related challenges.

In summary, we're pleased with our financial and operating results and the advancements we've made on our four strategic priorities. Our team's intense focus on executing these strategic priorities is expected to generate long-term shareholder value and accelerate our path to profitability.

At this point, Dan, Mike and I are pleased to answer any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Noel Atkinson with Clarus Securities. Your line is open.

Noel Atkinson

Hi, good morning. Thanks very much for taking our call this morning as well. And well done in Q2. First off, so on the concentrate side, so were you guys basically selling everything you could make in Q2?

Barry Fishman

Yes. Hi, Noel. Thanks for the question. Yes, we are very proud of our first to market position in several of the concentrates segment. And for the most part, we couldn't keep things in inventory because they -- when we sold them, as Dan mentioned in his prepared remarks, they moved into the retailers and then beyond the retailers into the consumers quite quickly. So at the end of the day, we think that we have really made a mark in the concentrate sector. We've gained momentum. And our challenge now is to keep our high-quality product in supply to the marketplace. Dan, maybe you want to add something if you do have?

Daniel Laflamme

Yes, I think we have seen a strong demand for the products in the provincial and follow-through on the retail locations. So it's been a real positive launch for us.

Noel Atkinson

Okay. And then in terms -- so following that, now that you have the new extraction suite online in Napanee, and you'll have supply from the unit houses for inputs for extraction and then you also have the Phase 5 now complete at Canna Farms. Can you give us a sense of the magnitude of increased supply that has been brought online for the concentrates?

Barry Fishman

Yes. So, thanks, Noel. I'll start off. Really what we've done is we made a strategic decision to focus on the concentrates market. And with that strategic decision, comes a well-orchestrated plan to develop our supply chain so that we can supply the products to the market at a competitive cost.

And in addition to that, we've stepped up our promotional efforts so that we could ensure that the demand that we initially saw will continue into the future. And that when competitors or more competitors come in the market, we will have a well-established shelf presence and strong loyalty with customers. So, I think we've done a very good job at looking at both the supply of concentrates. And the way we will create demand and customer loyalty with our line of concentrated products.

Noel Atkinson

Do you think that what you're bringing online will allow you to do sort of multi-fold levels of -- have at least multi-fold levels of increased capacity versus where you were in Q2, for example?

Barry Fishman

Yes. As far as capacity, there are a number of work centers that go into creating concentrate products. We’ve certainly invested in extraction in a big way. And we don't believe that will be one of our bottlenecks. We've also invested in automated packaging equipment, so that our output from a packaging perspective has really significantly increased compared with last year. So, I think that we're trying to model out how we're going to sell and how much we're going to sell in the future and adjust our capabilities to match that. We've been one of the LPs that have actually carefully managed supply and demand and balanced our capital investments, so that they were in-sync with what we believed our market demand could be.

So, maybe I'll open it up for Mike or Dan to add anything that they have from their perspective.

Michael Bumby

I think from my side, I think you've captured it Barry.

Barry Fishman

Thanks, Mike.

Noel Atkinson

Okay. So, finally, on the SG&A side, so you -- Mike was talking about, you guys were able to materially lower your SG&A costs in Q2 versus Q1. I'd imagine part of that was just trying to ramp down unnecessary costs related to preparing for COVID impact. Do you expect costs to normalize to a higher level as a percentage of revenue as now that you start to ramp-up your revenue again in Q3 and Q4?

Barry Fishman

No, I think we're not expecting to sort of go back-up to pre-COVID levels. Some of the savings we could say those are related to COVID. But frankly, we are focused on profitability -- and when we set the strategy for the year that was one of our primary objectives. And so that was pre-COVID. And so we plan on continuing to manage our operating expenses as closely as we possibly can.

Operator

[Operator instructions] Your next question comes from Chris Damas with BCMI Research. Your line is open.

Chris Damas

A very good quarter on the concentrates and my questions revolve around that sector because there's not much in the MD&A to give us an idea of the parameters. I'm calculating about 4.8 million revs were from concentrates, or perhaps a little less than that, given the Harvest Clinic revs, is that correct?

Barry Fishman

Chris, thanks for the question. I would say, I think we disclosed that roughly half of our Q2 cannabis sales were related to the concentrates segment.

Chris Damas

Alright. So, roughly 4 million or 4.5 million?

Barry Fishman

I think you're in the ballpark. Mike?

Michael Bumby

Yes, that's in the ballpark.

Chris Damas

Yes. Now, my understanding is you're using a third-party to do to get the high THC concentrates like shatter, crumble and rosins right now, that you're going to -- are you going to migrate to Vanluven?

Barry Fishman

Well, it's certainly our plan over time to bring in all of the concentrates to do them internally. At the beginning to basically to accelerate our speed to market, we did engage some third parties to help us with certain aspects of the supply chain. But our overall goal is to continue to dominate market share and reduce costs by bringing those products internally, and we make some of the products in Ontario and we make other products in British Columbia.

Chris Damas

Thanks, Barry. One last one, do you have an estimate for the size of this concentrated market in the adult use and/or medical markets?

Barry Fishman

Yes. We do internal reviews and we try to forecast to the best of our ability. Maybe Dan -- I know we just had a review last week on sort of projections in the market. Dan, would you have an estimate of what we believe a concentrated portion of the overall adult use Canadian market will be?

Daniel Laflamme

Yes, sure. Thanks. Because there's not a lot of data in the Canadian market, we tend to look at our neighbors in the U.S. to see what their kind of sales mix is. And in the U.S., I believe, we're looking at about a 20% of the market share is related to concentrate. So, I'd answer that with roughly 20% to 30% would probably be the concentrated products.

Chris Damas

Of 2.0 or of the overall market?

Daniel Laflamme

Of the overall market.

Chris Damas

That's huge. We'd have to back out tobacco, of course, which would not allow those high THC percentage products.

Barry Fishman

Yes. So Chris, when we strategically selected the concentrate market as one of our areas to focus on, we did do a lot of homework and looked at the size of the beverage market, the edible market and the concentrate market, and we felt that, that was an opportunity that was there for a company like VIVO to actually get into the concentrate market, because it is a fair sized market, and there are barriers to entry. I mean, the competition in certain other market segments are a lot more intense than they are currently with the concentrates market. And in any market being first, first on the shelves is an advantage that we could hopefully leverage in the future.

Chris Damas

That's great, Barry. One last one, I mean, it seems to me hooking up with a partner with a large salesforce, a kindred or someone like that would be very beneficial to cover the many stores that are out there now, with the concentrate offering. I mean, I don't know how many people you have that are detailing the stores on these things.

Barry Fishman

Yes. We do have a adult use promotional partner, the organization is called Green Hedge, and we were their first company to partner. They have a lot of experience in alcohol beverages and wine, and they have -- I can't remember how many reps, but probably close to a 1,000 reps across Canada that see stores and promote Canna Farms products and Fireside products to retailers, and we work very closely with them. They're essentially part of our team. So, we think that's working very well and Green Hedge is ramping up as the number of stores, the count is ramping up. So, in Ontario, they started with one ramp and now that the Ontario market is getting a little bit bigger from a retail perspective, they are hiring more people to satisfy the needs of all their customers, us being the primary cannabis organization that they’ve partnered with. So, yes, great point. You have got to get into retail, you've got to talk to the bud tenders and you've got to make your mark that way as well.

Chris Damas

Anyway. Bang up job on the concentrates and buying back some of the convert. So all the best to you guys.

Barry Fishman

Well. Thanks, Chris. Appreciate it.

Operator

There are no further questions at this time. I will now turn the call back over to Barry Fishman for closing remarks.

Barry Fishman

Thank you, operator. Just want to say thank you to everybody listening in. Please stay safe and have a great day everybody. Bye for now.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.