MedReleaf Reports Second Quarter Fiscal 2018 Results

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

*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 ReleafDx^TM, 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:

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.

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)

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.