Newstrike Brands Ltd. Announces Third Quarter 2018 Results

Reports First Ever Revenue From Operations

TORONTO, Nov. 8, 2018 /CNW/ - Newstrike Brands Ltd. (TSXV:HIP) (the "Company" or "HIP") announced today the achievement of significant milestones and a strengthened financial position for the three and nine months ended September 30, 2018. The Company's wholly-owned subsidiary, UP Cannabis Inc. ("Up Cannabis"), is a licensed producer of cannabis and related products under the Access to Cannabis for Medical Purposes Regulations ("ACMPR"). The Company's interim financial statements and management's discussion and analysis for the three and nine months ended September 30, 2018 and its amended and restated interim financial statements and management's discussion and analysis for the three and nine months ended September 30, 2017 (the "Amended Statements") are available on SEDAR at www.sedar.com.

THIRD QUARTER ENDED SEPTEMBER 30, 2018 HIGHLIGHTS

• The Company recognized its first ever sales of cannabis to the adult-use and wholesale markets in excess of $3.4 million;
• The Company entered into a definitive supply agreement with the Alberta Gaming, Liquor & Cannabis Commission ("AGLC") that is expected to result in a variety of Up Cannabis product sold via AGLC approved strategic retail partners and locations, and through the AGLC;
• The Company entered into a Memorandum of Understanding with the British Columbia Liquor Distribution Branch ("BCLDB") that is expected to result in a variety of Up Cannabis product sold via BCLDB approved strategic retail partners and locations;
• The Company entered into a cannabis master agreement with the Ontario Cannabis Retail Corporation;
• The Company was selected by the Nova Scotia Liquor Corporation ("NSLC") as one of fourteen licensed producers who have received initial purchase orders for adult-use cannabis by the NSLC;
• The Company was cleared as a supplier of cannabis to Saskatchewan Retail and Wholesale Permit Holders; and
• The Company closed its previously announced investment agreement with Inner Spirit Holdings Ltd. ("Inner Spirit") pursuant to which the Company and Inner Spirit have agreed to acquire equity interests in each other and entered into a companion strategic alliance agreement providing for the retail distribution of Up Cannabis products and the creation and operation of Up Cannabis-branded customer lounges or "Experiential Hubs" in each of the Inner Spirit stores.

SELECTED SUMMARY OF QUARTERLY RESULTS

	Q3 2018 QTD ($)	Q3 2017 QTD ($)	$ change % change	Q3 2018 YTD ($)	Q3 2017 YTD ($)	$ change % change
Revenue	3,420,446	-	3,420,446 ^NM	3,420,446	-	3,420,446 ^NM
Inventory production costs expensed to cost of sales	(2,353,314)	-	(2,353,314) ^NM	(2,353,314)	-	(2,353,314) ^NM
Gross margin before the undernoted	1,067,132	-	1,067,132 ^NM	1,067,132	-	1,067,132 ^NM
Fair value changes in biological assets included in inventory sold	(1,056,084)	-	(1,056,084) ^NM	(1,056,084)	-	(1,056,084) ^NM
Unrealized (loss) / gain on change in fair value of biological assets	(1,070,337)	-	(1,070,337) ^NM	925,040	-	925,040 ^NM
Gross Margin	(1,059,289)	-	(1,059,289) ^NM	936,088	-	936,088 ^NM
Expenses	(7,450,780)	(3,828,411)	(3,622,369) 95%	(24,155,723)	(5,639,310)	(18,516,413) 328%
Other items	359,722	(113,771)	473,493 ^NM	9,530,079	(7,382,827)	16,912,906 ^NM
Net loss	(8,150,347)	(3,942,182)	(4,208,165) 107%	(13,689,556)	(13,022,137)	(667,419) 5%
Other comprehensive income	3,344,152	-	3,344,152 ^NM	3,236,652	-	3,236,652 ^NM
Net and comprehensive loss	(4,806,195)	(3,942,182)	(864,013) 22%	(10,452,904)	(13,022,137)	2,569,233 (20%)
Net loss per share (basic and diluted)	(0.01)	(0.01)	- -	(0.03)	(0.07)	0.04 (57%)

NM – Not meaningful

During the quarter, the Company generated revenue of $3,420,446. $600,583 of revenue was from our first shipments of dried cannabis to the provincial government wholesale distributors in Alberta, Ontario and Nova Scotia as these customers began preparation for initial sales commencing October 17, 2018. The Company continues to fulfill orders received for the adult-use cannabis market and expects to receive additional orders pursuant to executed supply agreements. $2,819,863 of revenue was from wholesale sales of cannabis for extraction purposes and the creation of cannabis oil and/or distillate.

For the three and nine months ended September 30, 2018, $2,353,314 of costs incurred during the production process and capitalized to inventory were expensed. This resulted in gross margin of $1,067,132 (31.2% of revenue) before the fair value adjustment on the sale of this inventory. The expense of $1,056,084 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 finished goods inventory.

For the three and nine months ended September 30, 2018, the Company recognized a loss of ($1,070,337) and gain of $925,040, respectively, related to the fair value adjustments of biological assets, being the Company's inventory of cannabis in the pre-harvest stage. The loss for the three months ended September 30, 2018 was primarily due to the inefficiencies related to the start-up and ramp-up costs of producing cannabis in the Niagara Facility along with lower than expected yields in the initial batch of plants cultivated at this facility.  Additionally, the yield realized for certain plants in the Brantford Facility were lower than originally projected as equipment trialed failed to meet expected production targets. The gain for the nine months ended September 30, 2018 was due to the production of cannabis, which is representative of nine months of production at the Brantford facility and approximately five months of production ramping up at the Niagara Facility.

The Company's major expenses incurred during the quarter relate to: branding and marketing efforts of $3,054,056; share-based compensation charges of $1,033,971; wages and benefits of $937,807; consulting and professional fees of $1,321,693; and other growth-related costs including travel, telecommunications and information technology. The Company's major expenses incurred during the year to date relate to: branding and marketing efforts of $6,320,516; share-based compensation charges of $8,228,820; wages and benefits of $3,328,255; consulting and professional fees of $3,526,411; and other growth-related costs including travel, telecommunications and information technology.

Included in other items for the quarter is the loss of $250,000 due to a provision recorded on the holdback receivable on the divestiture of Enderlein and net interest income of $609,722. Year-to-date, other items included a net loss on the divestiture of Enderlein of $110,679, net interest income of $140,758 and the termination fee paid to the Company related to the CanniMed Therapeutics Inc. transaction ("Termination Fee") of $9,500,000.

Other comprehensive income is comprised of the fair market value change recognized on strategic investments made in other Canadian cannabis businesses.

The Company recorded a net loss of $8,150,347 and $13,689,556 for the quarter and year-to-date. The comprehensive loss was $4,806,195 in the quarter and $10,452,904 year-to-date.

STRONG FINANCIAL POSITION

As at September 30, 2018 the Company had total assets of $162,771,457, including cash and cash equivalents of $107,642,357, up from total assets of $24,881,426, including cash and cash equivalents of $811,028, as at December 31, 2017. The increase is due to the net proceeds from the two bought deal equity offerings, the receipt of the Termination Fee, and the increase in fair market value of its strategic investments.

As at September 30, 2018, the Company's inventory of dried cannabis was $6,077,635 and the fair value of the biological assets was $2,011,369. It is expected that the biological assets will yield approximately 1,700 kilograms of cannabis.

SIGNIFICANT MILESTONES ACHIEVED

The Company has made its first historic sales of $3,420,446 during the quarter. Accumulated dried and finished goods cannabis inventory was valued at $6,077,635 as at September 30, 2018. The fulfilment and backlog of orders further demonstrates the Company's ability to capitalize on growing demand for its products.

The Company has continued the construction and expansion of its Niagara Facility, engaged in various marketing initiatives, and added experienced production and management personnel to build the Company's Up Cannabis brand and consumer awareness.

The Company currently operates cannabis production facilities of approximately 194,000 square feet of indoor and greenhouse production capacity, in the aggregate, of which approximately 7,600 square feet is currently operating at or near full production capacity at its Brantford Facility and approximately 186,400 square feet at its Niagara Facility that is currently being retrofitted. Management expects that the Niagara Facility will produce approximately 15,000 kg of dried cannabis annually upon completion of the greenhouse retrofit.  As at the date of this press release, the retrofit of the Niagara Facility is expected to be completed by the end of the financial year, being December 31, 2018 , assuming there are no unexpected interruptions to the schedule of retrofit activities.

The construction of the Company's second greenhouse for the Phase II Niagara expansion is underway and the steel structure is erected; the headhouse expansion has the foundation complete, structure erected, roof installed and is progressing with windows and walls being installed. The Phase II Niagara expansion includes 60,000 square feet of processing space and 160,000 square feet of additional greenhouse space dedicated to cannabis production. At full ramp up, completion of the retrofit and 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 capacity for all facilities will be approximately 37,000 kg of dried cannabis.  This estimate is subject to change based on realized plant yields experienced at the Niagara Facility. 

THE AMENDED STATEMENTS

The Amended Statements have been amended to correct errors in the original interim financial statements and management's discussion and analysis. Certain line items in the statements of financial position, comprehensive loss, cash flows, and changes in shareholders' equity have been reclassified according to the nature of the transactions. The net and comprehensive loss for the nine months ended September 30, 2017 was increased by $422,082 due to a change to the listing fee for the reverse takeover transaction involving Newstrike and HPI Holdings Ltd. ("HPI"), pursuant to which HPI amalgamated with 2559595 Ontario Inc., a wholly-owned subsidiary of Newstrike, to form 1977121 Ontario Inc., resulting in the indirect acquisition by Newstrike of all of the issued and outstanding securities of HPI (the "Transaction"). The reserve  in the condensed consolidated interim statement of changes in shareholder's equity was increased by $422,082 due to a change to the valuation of the warrants acquired through the Transaction. Corresponding amendments were also made to the Company's management's discussion and analysis.

OTHER MATTERS

Further to the Company's press release dated September 11, 2018 announcing Newstrike's graduation from Tier 2 to Tier 1 issuer status on the TSX Venture Exchange ("TSXV"), common shares previously deposited into escrow pursuant to the rules of the TSXV will now be governed by the release provisions of Tier 1 issuer escrow. The Company advises that 95,499,005 Newstrike common shares ("Common Shares") were released from escrow on September 12, 2018 following completion of the uplisting and 90,937,905 Common Shares remain in escrow and will be released on December 1, 2018.

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.

Forward-Looking Information

This news release contains forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Newstrike to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "estimates", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. These forward-looking statements include, but are not limited to, statements relating to Newstrike's expectations with respect to its performance and achievements including expected sales and construction timeline and completion. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this press release. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties.

Actual results could differ materially from those currently anticipated due to a number of factors and risks. Readers are cautioned that the foregoing list of factors is not exhaustive. The forward-looking statements contained in this news release are made as of the date of this release and, accordingly, are subject to change after such date.

Newstrike does not assume any obligation to update or revise any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf, except as required by applicable law.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Newstrike Brands Ltd.

Investor Relations, Telephone: [phone], Email: [email protected]; Jason Redman, Chief Financial Officer, Telephone: [phone]

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