Entourage Health June 30, 2021 “Quarter in Pictures”
As TheCannalysts were engaged by WeedMD to consult on preparation, format and content of Management Discussion and Analysis (although not for the previous seven Q’s) we will not be providing much in the way of narrative to the Quarter in Pictures, and we will stand down from preparing “Structure & Current State” until such time as they are no longer a client OR until we believe we have put enough distance between engagement and analysis so as not to impact analysis. The peer comparisons and tables kind of speak for themselves.
The following is data pulled from Weed MD financials and those of their peers. (Math not analysis.)
Income Statement Drivers & Breakeven: Trend

Until we purge that positive but very low GM%, the chart will look like it does above.
Table 1: Revenue by Segment

Sales increased $0.3 million or +3% QoQ to $10.6 million
Medical sales retreat -33% -$1.7 million QoQ. Reading the conference call transcripts… it seems this is timing driven to some extent.
- In general, the quarter-over-quarter decline in medical sales was largely attributable to health insurance benefit coverage seasonality, which was partly offset by overall patient population growth and new high THC flower product [indiscernible].
Both average selling price decreased (-13%) as did KGs sold (-22%). Medical sales are still up from two Q’s ago. It would be nice for this to find some solid footings.
Adult use increased 44% +$2.1 million to $6.9 million. This is a record surpassing the Sept 2020 $4.9 million. Price per gram decreased 23% but was offset by an 87% increase in KGs sold to 2,479 KGs.
Wholesale had a modest decrease to $0.2 million…. But it took 733 kgs at $0.14/gram to get there.
Income Statement Drivers & Breakeven: Peer

Peer group keeps getting smaller. North will be removed next.
Gross Margin: Peer & Trend

Gross Margin increased to 29% or $3.2 million, but it is still hampered by a $1.9 million impairment. Five Q’s in a row with impairments. Without the impairment GM would improve to 47%.
Gross Margin: Larger Peer Base

SGA & SBC as % of Sales: Trend

Note: I move interest expense to Other income to maintain peer comparability.
Selling expense $0.6 million versus $0.5 million last Q.
G&A expenses $9.8 million versus $5.6 million last Q. The bigger increases were in:
- Salaries +$1.9 million to $4.8 million attributable to a true up of performance based incentive metrics
- Office and administrative up $1.5 million to $2.2 million not quite the record, but close.
- Consulting and Professional fees up an aggregate of $0.7 million QoQ relating to annual financial statements, AGM and acquisition pending.
From CC:
- Moving to expenses, second quarter of our selling, general, and administrative expenses was CAD10.4 million, or CAD4.4 million higher than first quarter SG&A of CAD6 million, mainly driven by timing of expenses such as insurance, software licenses, and subscription, API-driven employee retention program, as well as expenses related to AGM or year-end 2020 and Q1 filings, all three events which occurred in Q2.
SBC $0.3 million versus $0.4 million last Q.
Depreciation $1.3 million versus $0.7 million last Q.
Total Opex $11.4 million versus $7.7 million last Q.
SGA & SBC as % of Sales: Peer

+Net Operating Profit Sales Breakeven divided by Current Quarterly Sales: Peer

WMD would need 267% increase in incremental sales at current GM% and OPEX$’s to reach breakeven. At 49% GM, backing out impairment, sales would need to be $11 million greater per quarter to reach breakeven.
NOP without IFRS voodoo was -$8.3 million versus -$7.8 million last Q. Largely OPEX increases outpacing GM generation.
Other Income (Expense): This Q +$0.6 million versus last Q $0.8 million
- Other Income last Q +$3.2 million $0.9 million this Q. This is inventory that was previously written off from an old prepaid supply contract being delivered. Sounds like Zena.
- Government covid grant of $2.1 million
- Finance expense this Q -$2.4 million versus last Q -$2.5 million.
Net income this Q -$10 million versus -$7 million last Q.
+EBITDA Sales Breakeven divided by Current Quarterly Sales: Peer

With existing GM and cash OPEX$’s, WMD would need 123% increase in incremental sales to get to +EBITDA. With the non-impaired GM of 49% a $8 million in incremental sales would be required.
EBITDA Trend and Peer

My adj EBITDA is -$3.8 million versus their $3.7 million. Tractor pull Q: GM generation increase, net of impairment, offset by cash Opex increase.
They indicated on CC that Adj EBITDA no later than 4Q next year F2022. That is a long time off and will likley put them offside with their banks.
“Gas in the Tank”- Trend

Inventory is $33 million +$3.3 million QoQ. Finished Goods inventory exceeds sales at $17 million versus $10 million in sales. Plenty of inventory on hand.
Bio Assets are $1.7 million -$2.7 million QoQ.
“Waterfall”: Trend

With outdoor no longer in play going forward inventory reduced QoQ by 230 KGs. They outsold their harvest. They did have another cost based impairment of $1.9 million.
Cash vs Debt

Cash decreased by $5 million to $15 million. With Current Portion of LTD increasing to $34 million, they are on the clock and have 12 months to do something about it.
Accounts Payable are $12 million a decrease of $3.4 million.
Current Portion of Loans increased $25 million while long term Portion decreased $26 million.
Balance sheet items, other than above, were not notably different QoQ.
In closing:
Last Quarter
Nice to see the medical sales increase, as that was the premise of acquiring Starseed.
They have halted outdoor growing except for a test crop. They are buying CannTX a craft grower.
But they need to stop impairing inventory to get any traction in operations. And even then, they need to continue to increase sales. Cash balance will dwindle quickly without staunching the bleeding.
This Quarter:
Nice adult use sales but most of the increase was taken away by medical decrease.
GM improving but a fifth impairment in a row.
SGA increases outstripped the GM improvement.
They are on the clock with lender.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in WMD and will not start one in the next five days.
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