Continuing our strong adjusted product
contribution margin
MARKHAM, ON, Nov. 13, 2017 /CNW/ - MedReleaf Corp. (TSX:
LEAF) ("MedReleaf" or the "Company"), Canada's first and only ISO 9001 and ICH-GMP
certified cannabis producer, today announced financial and
operating results for the second quarter fiscal 2018 ending
September 30, 2017. All amounts
expressed are in Canadian dollars unless otherwise noted.
"In the second quarter, we increased average selling price and
lowered cash costs per gram sold, and this drove improvement from
the first quarter to adjusted product contribution margin per
gram," said Neil Closner, CEO of
MedReleaf. "This margin provides us with greater flexibility in our
business model to adapt to changes and operate profitably as the
industry evolves, and we are ideally positioned for growth now that
the full impact of the Veterans Affairs Policy ("VAC") changes on
capping price and volume are behind us."
Second Quarter Fiscal 2018 Financial Summary
|
Three
months
|
|
September
30,
|
CAD$ (in 000s,
except grams sold)
|
2017
|
2016
|
|
Dried
Cannabis
|
7,693
|
10,475
|
|
Extracts
|
1,760
|
-
|
|
Other
|
368
|
274
|
Total
Sales
|
9,821
|
10,749
|
Gross
Profit
|
11,747
|
9,634
|
Adjusted Product
Contribution Margin*
|
7,091
|
8,373
|
Adjusted
EBITDA*
|
685
|
4,650
|
Net Income
(loss)
|
(2,126)
|
3,740
|
Net Income (loss) per
share – diluted
|
$(0.02)
|
$0.05
|
Total grams
sold*
|
1,051,151
|
852,245
|
|
Average selling price
per gram – Dried Cannabis
|
$8.31
|
$12.29
|
|
Average selling price
per gram – Extracts
|
$13.97
|
-
|
Total average selling
price per gram
|
$9.34
|
$12.61
|
Adjusted product
contribution per gram sold*
|
$6.75
|
$9.82
|
Cash cost per gram
sold*
|
$1.46
|
$1.49
|
*Non-IFRS Measures
For the second quarter of fiscal 2018, MedReleaf increased
production and sales of cannabis-based extracts and increased
adjusted contribution per gram sold when compared to the first
quarter of fiscal 2018, while continuing to invest towards future
growth in recreational and international medical markets.
Second Quarter Fiscal 2018 Financial Highlights
- Sales of $9.8 million, a decrease
of 9% year-over-year due to the impact of volume and price
restrictions imposed by the VAC policy in November 2016 and May
2017 respectively
- Sales of cannabis-based extract products were $1.8 million, or 18% of total revenue compared to
14% of total revenue for the first quarter of fiscal 2018; sales of
cannabis-based extracts began in the third quarter of fiscal
2017
- Adjusted EBITDA of $0.7 million,
a decrease of $4.0 million from the
prior year period due to the impact of the VAC policy change,
overhead costs associated with the Bradford facility construction
and operating investments towards future growth
- Sold 1,051 kilograms of cannabis products an increase of 23%
year-over-year
- Average selling price per gram of $9.34, an increase from $9.04 for the first quarter of fiscal 2018 and a
decrease from $12.61 for the prior
year period due to the reduction in VAC reimbursement pricing
- Adjusted product contribution margin per gram sold of
$6.75, an increase from $6.53 for the first quarter of fiscal 2018 and a
decrease from $9.82 for the prior
year period
- Cash cost per gram sold of $1.46,
down from $1.49 for the first quarter
of fiscal 2018 and the prior year period representing the lowest
cash cost per gram in the Company's operating history
- Total yield produced across the Markham Facility and first
harvest at the Bradford Facility for the quarter was approximately
2,500 kilograms, equivalent to approximately 300 grams per square
foot per year
Subsequent to the quarter end, MedReleaf continued to advance
several initiatives including:
- On October 4, 2017 MedReleaf
became the first Licensed Producer in Canada to launch a topical cream.
- On October 20, 2017, MedReleaf
received its amended licence for two additional cultivation rooms
increasing annual production capacity to an estimated 5,600
kilograms at the Bradford Facility. When added to the 7,000
kilograms of production capacity currently at the Markham Facility,
MedReleaf has increased its production capacity by 80% since
April 2017.
- On November 3, 2017 the Company
received an additional amended licence which permits the activity
of sale to clients from the Bradford Facility. The expiration of
the amended licence is April 10,
2020.
- On November 8, 2017 MedReleaf
announced the January 2018 launch of
ReleafDxTM, the first pharmacogenetics based cannabis
compatibility test to be available from a Canadian licensed
producer. The patent-pending test is administered by a simple cheek
swab, and analyzes biomarkers within known metabolic pathways to
provide physicians with guidance on dose and product selection for
individual patients.
Financial Review
Sales
Sales were $9.8 million for the
second quarter of fiscal 2018, a decrease of 9% from $10.7 million for the prior year period.
Sales of dried cannabis for the second quarter of fiscal 2018
were $7.7 million, a decrease of 27%
from the prior year period due to the impact of volume and price
restrictions imposed by VAC.
Sales of extracts were $1.8
million for the first quarter of fiscal 2018, or 18% of
sales, and increased by 17% from $1.5
million for the first quarter of fiscal 2018. With the
recent launch of topical creams, future product development
initiatives, and growth in industry demand, MedReleaf expects sales
of extract products to grow to account for an increasing percentage
of the Company's overall revenue.
Total average selling price for the second quarter of fiscal
2018 was $9.34 per gram compared to
$12.61 for the prior year period. The
reduction in average selling price per gram from the prior year
period is a result of discounts offered to qualifying Veterans due
to the VAC Policy change that provides for a maximum reimbursement
rate of $8.50 per gram effective
November 22, 2016.
Average selling price for the second quarter of fiscal 2018
improved from $9.04 for the first
quarter of fiscal 2018, and represents the second consecutive
quarter of price appreciation since the full impact of the VAC
price policy change. The higher average selling price per gram has
been driven by growth in extract sales at $13.97 per gram for the second quarter of fiscal
2018 compared to $11.29 per gram for
the first quarter of fiscal 2018.
During the second quarter of fiscal 2018, a total of 1,051.1
kilograms of cannabis products were sold, an increase of 23% from
the prior year period. Equivalent grams sold decreased by 9% from
the first quarter of fiscal 2018 due to a full quarter's impact of
the VAC Policy coverage limitation of three grams per day effective
May 21, 2017.
Veterans may apply for an exemption request to the volume
coverage limitation through an application submitted by a medical
specialist. The Company has started to see an increase in the
number of approved exemption requests during the second quarter and
continues to add new Veteran patients. Volume sold to Veteran
patients grew sequentially each month from June 2017 to September
2017. In addition, volume sold to non-Veteran patients for
the second quarter of fiscal 2018 grew 11% from the first quarter
of fiscal 2018.
Cash Cost Per Gram Sold (Non-IFRS Measure)
The following are the Company's cash production costs, on a
total and per gram sold basis, for the three and months ended
September 30, 2017 and 2016, as
compared to reported production costs (excluding costs resulting
from the fair value of biological assets), which represents cost of
sales, in accordance with IFRS:
|
Three
Months
|
|
September
30,
|
CAD$ (in 000s,
except grams sold)
|
2017
|
2016
|
Production
costs
|
2,730
|
2,376
|
Amortization included
in production cost
|
(567)
|
(245)
|
Recovery of
production costs
|
-
|
(405)
|
Post production
costs
|
(633)
|
(459)
|
Cash production
costs
|
1,530
|
1,267
|
|
|
|
Equivalent grams
sold
|
1,051,151
|
852,245
|
Cash cost per gram
sold
|
$1.46
|
$1.49
|
The cash cost per gram sold for the second quarter of fiscal
2018 was $1.46 compared to cash cost
per gram sold of $1.49 for the prior
year period and the first quarter of fiscal 2018.
Over the past five quarters, increased production volumes and
higher yields resulting in improved efficiencies in labour
utilization and allocation of fixed costs have allowed MedReleaf to
produce premium, indoor-grown medical cannabis on a comparable cash
cost per gram basis to greenhouse peers.
Adjusted Product Contribution Margin (Non-IFRS
Measure)
The following is the Company's Adjusted Product Contribution
Margin as compared to the reported gross profit, which includes the
gain on changes in fair value of biological assets in accordance
with IFRS, for the three months ended September 30, 2017 and 2016.
|
Three
Months
|
|
September
30,
|
CAD$ (in 000s,
except grams sold)
|
2017
|
2016
|
Gross
profit
|
11,747
|
9,634
|
|
Cost of finished
harvest inventory sold
|
5,621
|
6,644
|
Gain on fair value
changes in biological assets
|
(10,277)
|
(7,905)
|
Net gain on fair
value measurement of biological assets
|
(4,656)
|
(1,261)
|
Adjusted Product
Contribution Margin
|
7,091
|
8,373
|
|
|
|
Grams sold
|
1,051,151
|
852,245
|
Adjusted product
contribution margin, per gram sold
|
$6.75
|
$9.82
|
Adjusted Product Contribution Margin for the second quarter of
fiscal 2018 was $7.1 million or
$6.75 per gram sold, compared to
$8.4 million or $9.82 per gram sold for the prior year period,
and $7.5 million or $6.53 per gram sold for the first quarter of
fiscal 2018.
The decrease in Adjusted Product Contribution Margin and
Adjusted Product Contribution Margin per gram sold from the prior
year period was the result the impact of the VAC Policy change
resulting in lower average selling price per gram.
Improvements in Adjusted Product Contribution Margin per gram
sold for the second quarter of fiscal 2018 compared to the first
quarter of fiscal 2018 was primarily driven by increased extract
sales, which generate a higher contribution margin per gram than
dried cannabis.
Adjusted EBITDA (Non-IFRS Measure)
|
Three
Months
|
|
September
30,
|
CAD$ (in
000s)
|
2017
|
2016
|
Income (loss) before
income taxes
|
53
|
5,437
|
Adjustments:
|
|
|
|
Amortization
|
926
|
354
|
|
Stock based
compensation
|
4,275
|
99
|
|
Interest
income
|
(124)
|
(2)
|
|
Finance
costs
|
109
|
23
|
|
Initial public
offering related fees
|
102
|
-
|
|
Fair value loss on
shareholder loans
|
-
|
-
|
|
Net impact, fair
value of Biological assets
|
(4,656)
|
(1,261)
|
Adjusted
EBITDA
|
685
|
4,650
|
Adjusted EBITDA for the second quarter of fiscal 2018 was
$0.7 million, a decrease of
$4.0 million from $4.7 million for the prior year period.
The decrease in Adjusted EBITDA for the first quarter of fiscal
2018 compared to the prior year period is the result of the sales
impact from the VAC Policy change and overhead costs incurred to
support the Bradford Facility; increased expenditures to support
our growth plans related to the domestic recreational market and
several international medical markets; and increased human resource
talent to support current and future growth.
Net Income
Net loss and comprehensive loss for the second quarter of fiscal
2018 was $2.1 million, a decrease of
$5.8 million compared to net income
and comprehensive income of $3.7
million for the prior year period. The decrease in net
income and comprehensive income was primarily due to increased
overhead expense partially offset by increased gross profit as the
Company expanded production capacity, specifically driven by fair
value gains experienced at Bradford Facility. The main drivers of
increased overhead expense for the second quarter of fiscal 2018
were stock option expenses, IPO related costs, and other G&A
expenses incurred to support the current and future growth of the
Company.
Balance Sheet
At the end of September 30, 2017,
the Company had cash and cash equivalents of $74.0 million and working capital of $89.3 million.
Inventories as at September 30,
2017 were $21.6 million, an
increase of $12.1 million from
March 31, 2017. Of the total increase
in inventories, $8.7 million was due
to changes in the fair value associated with the deemed cost of
inventory, the balance was due primarily to the production of
work-in-process dried cannabis leaf product produced for future
extraction. As at September 30, 2017,
the equivalent of approximately seven months of cost of sales are
included in inventory.
Biological assets as at September 30,
2017 were $2.9 million, an
increase of $0.1 million compared to
March 31, 2017 of $2.8 million. This increase was due to increased
fair value gains on biological assets resulting from increased
yields and the addition of biological assets at the Bradford
Facility.
Cash flow used in operating activities for the six months ended
September 30, 2017 was $5.3 million compared cash flow provided by
operating activities of $6.4 million
for the prior year period. The decrease in cash flow provided by
operating activities was mainly due to IPO related costs
($2.6 million) and increased
operating costs, that were partially offset by increased sales and
gross profit.
Capital expenditures for the six months ended September 30, 2017 were $13.0 million put towards production rooms,
building improvements, furniture and other equipment related to the
construction and development of the Bradford facility.
MedReleaf is fully funded to increase capacity to 35,000
kilograms in production annually with $40
million budgeted for the completion of the Bradford facility
and an additional $15 million
budgeted for the expansion of pharmaceutical manufacturing
capabilities.
Second Quarter Fiscal Year 2018 Conference Call &
Webcast
A conference call and webcast to discuss MedReleaf's second
quarter fiscal year 2018 results will be held on Monday, November 13, 2017 at 8:00 a.m. (ET). The call will be hosted by
Neil Closner, Chief Executive
Officer, and Igor Gimelshtein, Chief
Financial Officer, followed by a question and answer period.
To participate, interested parties are asked to dial (647)
427-7450 or (888) 231-8191 prior to the scheduled start of the
call. A replay of the conference call will be available by dialing
(855) 859-2056 and using the reference number 9796804. The
replay of this call will be available until November 20, 2017.
The Conference Call will also be webcast live at
http://bit.ly/2yKrLWE
Financial Statements and Management's Discussion and
Analysis
This news release, along with the unaudited condensed interim
consolidated financial statements for the three and six month
periods ended September 30, 2017 and
2016, including the notes thereto, and the Company's corresponding
management's discussion and analysis, are available on the
Company's website at www.medreleaf.com and on SEDAR at
www.sedar.com.
Non-IFRS Measures
This news release refers to certain non-IFRS financial measures.
These measures are not recognized measures under IFRS, do not have
a standardized meaning prescribed by IFRS and are therefore
unlikely to be comparable to similar measures presented by other
companies. Rather, these measures are provided as additional
information to complement those IFRS measures by providing
additional information regarding the Company's results of
operations from management's perspective. Accordingly, non-IFRS
measures should not be considered in isolation nor as a substitute
for analysis of the Company's financial information reported under
IFRS. All non-IFRS measures presented in this news release are
reconciled to their closest reported IFRS measure.
(a) Adjusted Product Contribution Margin
Management makes use of an "Adjusted Product Contribution
Margin" measure to provide a better representation of performance
in the period by excluding non-cash fair value measurements as
required by IFRS. Management believes this measure provides useful
information as it represents the gross margin for management
purposes based on the Company's complete cost to produce inventory
sold, exclusive of any fair value measurements as required by IFRS.
The metric is calculated by removing all amounts related to
biological asset fair value accounting under IFRS including gains
on transformation of biological assets and the cost of finished
harvest inventory sold, which represents the fair value measured
portion of inventory cost ("fair value cost adjustment") recognized
as cost of goods sold.
(b) Equivalent grams and kilograms
Equivalent gram or kilogram refers to the equivalent number of
dried grams or kilograms of cannabis required to produce extracted
cannabis in the form of cannabis oil. The Company estimates and
converts its cannabis oil inventory to equivalent grams using the
combined Tetrahydrocannabinol ("THC") and Cannabidiol ("CBD")
content in extracted cannabis products. Any reference to grams in
this news release includes the combined dried cannabis and
equivalent grams of extracted cannabis.
(c) Cash Cost Per Gram Sold
The cash cost per gram sold is used by management to measure the
estimated amount of direct production costs, on a per gram sold
basis, that are required to produce dried cannabis and cannabis
oil. Management uses this measure to track production cost trends
and assess the sensitivity and tolerance for pricing changes.
Management believes this measure provides useful information by
removing non-cash and post production costs and provides a
benchmark of the Company against its competitors. The metric is
calculated by: removing from production costs incurred during the
period, all non-cash based costs (including amortization and
inventory write-downs or impairments) and all post production
costs; and dividing such amount by the approximate number of grams
of cannabis sold during the period. Post production costs include
indirect overhead expenses such as: equipment rentals, payment
processing fees, indirect labour expenses, shipping expenses,
quality control, expenses, and other order fulfillment costs
included in production costs.
(d) Adjusted Earnings Before Interest,
Tax, Depreciation and Amortization ("Adjusted EBITDA")
Adjusted EBITDA is used by management as a supplemental measure
to review and assess operating performance and trends on a
comparable basis. The Company defines Adjusted EBITDA as EBITDA
adjusted for the impact of any unrealized expenses or gains, stock
based compensation, fair value gains or costs arising from
biological assets, expenses related to readying the Company for its
initial public offering and other non-recurring costs the Company
deems unrelated to current operations.
The Company believes that Adjusted EBITDA provides a useful tool
for assessing the comparability between periods of its ability to
generate cash from operations. Adjusted EBITDA is presented in
order to provide supplemental information to the Financial
Statements included elsewhere in this MD&A, and such
information is not meant to replace or supersede IFRS measures.
Cautionary Statement Regarding Forward-Looking
Information
This news release contains "forward-looking information" within
the meaning of applicable Canadian securities legislation which are
statements other than statements of historical fact and which can
be identified by the use of forward-looking terminology such as
"expect", "likely", "may", "will", "should", "intend",
"anticipate", "potential", "proposed", "estimate" and other similar
words, including negative and grammatical variations thereof, or
statements that certain events or conditions "may", "would",
"could" or "will" happen, or by discussions of strategy.
Statements in this news release containing forward-looking
information include statements with respect to the potential growth
of the Company and increasing production capacity at the Bradford
facility and expansion of pharmaceutical manufacturing capacities.
The forward-looking information contained in this news
release are based upon MedReleaf's current internal expectations,
estimates, projections, assumptions and beliefs and views of future
events which management believes to be reasonable in the
circumstances, including expectations and assumptions regarding:
general economic conditions, the expected timing and cost of
expanding the Company's production capacity, the expected timing of
cannabis legalization in Canada,
future growth of the Company's business and international
opportunities, the development of new products and product formats,
the Company's ability to retain key personnel, the Company's
ability to continue investing in its infrastructure to support
growth, the impact of competition, trends in the Canadian medical
cannabis industry and changes in laws, rules and regulations.
Statements containing forward-looking information should not be
read as guarantees of future events, performance or results, and
will not necessarily be accurate indications as to whether, or the
times at which, such events, performance or results will occur or
be achieved. The forward-looking information contained in
this news release is subject to known and unknown risks and
uncertainties, including but not limited to, adverse economic,
regulatory and/or legislative developments, delays with respect to
expected construction and expansion of production facilities and
those risks and uncertainties relating to described in the
Company's management's discussion and analysis under the heading
"Risks and Uncertainties" and in the Company's annual information
form under the heading "Risk Factors" (both of which are available
electronically at www.sedar.com), any of which could cause actual
results to differ materially from those expressed or implied by the
forward-looking information disclosed herein. Accordingly,
readers are cautioned not to place undue reliance on such
forward-looking information. Statements in this news release
containing forward-looking information speak only as of the date on
which they are made and MedReleaf does not undertake any obligation
to update or revise any forward‑looking information, whether as a
result of new information, future events or otherwise, except as
required by applicable securities laws.
About MedReleaf Corp.
MedReleaf sets The Medical Grade Standard™ for cannabis in
Canada and around the world.
The first and only ICH-GMP and ISO 9001 certified cannabis producer
in North America, MedReleaf is a
R&D-driven company dedicated to patient care, scientific
innovation, research and advancing the understanding of the
therapeutic benefits of cannabis. Sourced from around the
world and carefully cultivated in one of two state of the art
facilities in Ontario, MedReleaf
delivers a variety of premium products to patients seeking safe,
consistent and effective medical cannabis.
For more information on MedReleaf, its products, research and
how the company is helping patients #livefree, please visit
MedReleaf.com or follow @medreleaf
SOURCE MedReleaf Corp.