Newstrike Brands Ltd. Announces Fourth Quarter and Year End 2018 Results
First Full Quarter of Revenue from Operations
TORONTO, March 26, 2019 /CNW/ – Newstrike Brands Ltd. (TSXV:HIP) (the “Company”) today announced financial results for the three months and year ended December 31, 2018. The Company’s wholly-owned subsidiary, UP Cannabis Inc. (“Up Cannabis”), is a licensed producer of cannabis and related products under the Cannabis Act, 2018 (the “Cannabis Act”). The Company’s interim financial statements and management’s discussion and analysis for the three months and year ended December 31, 2018 are available on SEDAR at www.sedar.com.
FOURTH QUARTER ENDED DECEMBER 31, 2018 HIGHLIGHTS
- The Company recognized sales of cannabis to the adult-use and wholesale markets in excess of $5.3 million;
Gross margins before the fair value adjustment on the sale of this inventory was $2.5 million, or 53.5% of net revenue; - Between October 9 to 11, 2018, Up Cannabis took over Toronto’s Yonge-Dundas Square for its official ‘Meet Up’ in anticipation of the of legalization of adult-use cannabis. At Yonge-Dundas Square, Up Cannabis educated members of the general public about the responsible use of cannabis through activities including free outdoor yoga classes, live visual art displays, breakdance battles, live recordings of the Into the Weeds Podcast, and free concerts by Canadian artists, including Meghan Patrick and members of The Tragically Hip;
- On November 12, 2018, Health Canada issued an amendment to the Company’s licence, allowing Up Cannabis to sell cannabis produced from its Niagara Facility in dried marihuana form to all authorized persons in accordance with the Cannabis Act;
- On December 11, 2018, the Company completed its acquisition of a minority interest in Neal Brothers Inc. and incorporated a joint venture entity in connection therewith for the development of specialty food products which will be infused, derived or otherwise include cannabis in advance of the contemplated regulatory regime for edibles; and
- On December 12, 2018, the Company received initial purchase orders from PEI Cannabis Management Corporation (“PEICMC”) for adult-use cannabis products.
SUBSEQUENT EVENTS
- On January 8, 2019, the Company announced that it was accepted by the Manitoba Liquor and Lotteries Corporation as an official supplier of adult-use cannabis to that province’s private sector retailers, making it the seventh Canadian province with which the Company has announced supply agreements;
- On February 7, 2019, the Company entered a definitive supply agreement with ZYUS Life Sciences Inc. for the purchase of dried bulk cannabis from Up Cannabis;
- On February 14, 2019, the Company announced that an Up Cannabis “Experiential Hub” would be featured prominently in Ontario’s first Spiritleaf store in Kingston, Ontario, with a targeted opening date of April 1, 2019, to coincide with the proposed launch of cannabis retail stores throughout Ontario; and
- On March 13, 2019, the Company announced its execution of a definitive arrangement agreement with HEXO Corp (TSX: HEXO; NYSE-A: HEXO) (“HEXO”), pursuant to which, subject to customary regulatory, court and shareholder approvals, HEXO will acquire all of the outstanding common shares of Newstrike ; and
- On March 25, 2019 the Company announced that it had entered into a supply agreement with Cannabis New Brunswick, marking Up Cannabis’ eighth retail cannabis provincial market.
SELECTED SUMMARY OF QUARTERLY RESULTS
NM – Not meaningful
During the three month period ended December 31, 2018, the Company generated net revenue of $4,652 (December 31, 2017 – $Nil). $2,611 of revenue was from shipments of dried cannabis to the provincial government wholesale distributors in Alberta, British Columbia, Nova Scotia, Ontario and Prince Edward Island for the adult-use market. $2,041 of revenue was from wholesale sales of cannabis.
During the three month period ended December 31, 2018, $2,160 of costs incurred during the production process and capitalized to inventory were expensed upon initial sale of inventory. This resulted in gross margin of $2,492 (53.5% of net revenue) before the fair value adjustment on the sale of this inventory. The expense of $2,219 for the fair value changes in biological assets included in inventory sold represents the amount of non-cash fair value adjustment being realized upon the sale of this inventory.
For the three month period ended December 31, 2018, the Company recognized a gain of $13 (December 31, 2017 – $3,020) related to the fair value adjustments of Biological Assets. This resulted in gross margin for the three month period ended December 31, 2018 of $285 (December 31, 2017 – $3,020). The unrealized gain on fair value changes in biological assets for the three month period ended December 31, 2018 was due to the production of cannabis at both production facilities, offset by the start-up and ramp-up costs in the Niagara Facility. During 2017, the Company valued its biological assets at cost until it received approval on its license amendment to allow for sales of cannabis. Revaluation of the biological assets resulted in an unrealized gain on fair value changes of $3,020 for the three month period ended December 31, 2017.
For the three month period ended December 31, 2018, total expenses were $7,479 (December 31, 2017 – $3,035). The Company’s major expenses incurred during the quarter relate to: selling, general, and admin expense of $2,138; sales, marketing and business development expense of $1,988; wages and benefits of $2,342; consulting and professional fees of $774; and other costs related to share-based compensation, rent and facilities and amortization.
Included in other items is net interest income of $708 offset by accretion and interest expenses of ($11). Other comprehensive loss is comprised of the fair market value change recognized on strategic investments made in other Canadian cannabis businesses in 2018.
The Company recorded a net loss of $6,497 and a net and comprehensive loss of $9,423, or a net loss per share of $0.01.
Adjusted EBITDA loss for the three month period ended December 31, 2018 was $4,367.
STRONG FINANCIAL POSITION
As at December 31, 2018 the Company had total assets of $152,808, including cash and cash equivalents of $96,640, up from total assets of $24,881, including cash and cash equivalents of $811 as at December 31, 2017. The increase is due to the net proceeds from the two bought deal equity offerings, the receipt of a termination fee comprising $9,500 in connection with the termination of an arrangement agreement with CanniMed Therapeutics Inc. on January 24, 2018, and the increase in fair market value of its strategic investments.
As at December 31, 2018, the Company’s inventory of dried cannabis was $2,944 and the fair value of the biological assets was $4,073. It is expected that the biological assets will yield approximately 2,300 kilograms of cannabis.
NIAGARA FACILTY UPDATE
As at the date of this press release, the retrofit of the Niagara Facility has been completed with infrastructure in place to support full run-rate production of 20,000 kg of dried cannabis annually. Cannabis is being cultivated in the new section of the retrofitted greenhouse with several harvests having already taken place. The current budget to complete the retrofit, construction of processing areas and the second greenhouse is $38.2 million, and costs incurred to date are $19.1 million.
As at the date of this press release, the construction of the second greenhouse and headhouse expansion is progressing as planned, with an occupancy permit having already been issued by the municipality for the new headhouse. The second greenhouse has its structure erected, walls and roof installed and is progressing with electrical, heating, ventilation and air conditioning work. Assuming no interruptions in the construction schedule, the completion of the construction of the entire Niagara Facility (including the new processing administration areas and new greenhouse) is expected towards the end of the second quarter of 2019.
Assuming the full ramp up, including the construction of the new greenhouse and processing areas at the Niagara Facility, which is currently in progress, and the continued operational efficacy of the Brantford Facility, the complete potential aggregate annual production for all facilities will be approximately 42,000 kg of dried cannabis. This estimate is subject to change based on realized plant yields experienced.
NON-IFRS FINANCIAL MEASURES
The Company’s “Adjusted EBITDA” is a Non-IFRS metric used by management that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Management defines the Adjusted EBITDA as the Income (loss) for the period, as reported, before accretion and interest, tax, and adjusted for removing the share-based compensation expense, depreciation and amortization, and the fair value effects of accounting for biological assets and inventories. Management believes “Adjusted EBITDA” is a useful financial metric to assess its operating performance on a cash basis before the impact of non-cash items. A reconciliation of net income to EBITDA is presented below:
About Newstrike and Up Cannabis
Newstrike is the parent company of Up Cannabis Inc., a licensed producer of cannabis that is licensed to both cultivate and sell cannabis in all acceptable forms. Newstrike, through Up Cannabis and together with select strategic partners, including Canada’s iconic musicians The Tragically Hip, is developing a diverse network of high quality cannabis brands. For more information visit www.up.ca or www.newstrike.ca.
