December 2, 2019
Dear Valued Shareholder,
In light of the announcements that were issued on Friday, November 29th, about our third quarter results, our inaugural outdoor harvest yields, the Starseed Holdings Inc. (“Starseed”) acquisition and its connected $25 million strategic investment from the Labourers’ Pension Fund of Central and Eastern Canada (“LPF”), I want to provide you with some additional background. This should help you digest all of the information and learn more about the exciting new developments at WeedMD.
First, I want to discuss our outdoor harvest results. As one of the first in this country to commercially plant and harvest over 20,000 cannabis plants outdoors on a large scale, we were thrilled when our results confirmed that our cannabis was compliant with Health Canada’s strict requirements for pesticides and heavy metals count. Initial yields came in at more than 17 tons (17,000 kgs) of harvested biomass, and our team, including Derek Pedro, Chief Cannabis Officer, did a great job designing every aspect of our outdoor grow. But when we strip away what was not to our standards from a salability or extraction standpoint (cannabinoid content >8%), we reported a yield of eight tons (8,000 kgs) of cannabinoid-rich, saleable cannabis.
More than 35 strains were planted, including eight of WeedMD’s legacy strains. Many other experimental strains were cultivated, and this was our first outdoor season and opportunity to figure out what works best – everything from proper nutrients, watering requirements, irrigation needs, air flow, etc. As a result, Derek and the WeedMD team strongly believe we have found the appropriate mix of outdoor and greenhouse cannabis for the 2020 season and beyond.
Here is a complete breakdown of our Outdoor Harvest:
- Total dry weight: Over 17 tons (17,000 kgs)
- Biomass net of stems, above minimum cannabinoid count: Over 12 tons (12,000 kgs)
- Biomass of saleable cannabinoid-rich cannabis: 8 tons (8,000 kgs)
- THC-rich strains include: Pedro’s Sweet Sativa, Ghost Train Haze, Blueberry Segal and Ultra Sour
With the encouraging cannabinoid test results coming in from certain high-demand strains, combined with our low-costs to produce of approximately $0.16 per gram, we feel that our first outdoor harvest was a success.
Finally, it’s worth noting that like many other cannabis industry metrics, there are no standardized reporting standards when comparing outdoor results across the industry. As a result, it’s not always apples-to-apples when making comparisons, and we implore investors to dig deeper around the difference between harvested biomass and saleable biomass, as reported by WeedMD.
Starseed Transaction and $25 Million Strategic Investment
Moving on to the Starseed transaction, this deal brings together two like-minded organizations that are both deeply committed to quality cannabis and to our respective medical roots. It also includes a $25 million strategic investment from LPF. As part of discussing this transaction, I think it’s worthwhile to review the genesis and why we ultimately decided to move forward with the acquisition of Starseed.
First off, who is Starseed?
Starseed first entered the industry in late 2017 with the acquisition of Mettrum’s (now Canopy Growth) Bowmanville facility. Since then, Starseed has worked hard on launching an industry-first partnership with Canada’s largest construction union, the Laborers’ International Union of North America (“LiUNA”), to provide medical cannabis as a fully-covered drug benefit for its members on a preferred basis. Since launching its program with LiUNA a year ago, Starseed has secured several more partnerships with other payor groups and unions with more to come in 2020.
Although Starseed is fully-licensed to cultivate, extract and sell dried flower and cannabis oil products, they chose not to cultivate their own cannabis, but instead to purchase wholesale cannabis from other licensed producers. This allowed them to focus on building their unique medical sales model. WeedMD is one of those suppliers and our products have been extremely well-received by Starseed’s medical clients. Starseed’s facility is an extraction, production, packaging and medical fulfilment center, which in the near-term will alleviate bottlenecks within WeedMD’s current supply chain and accelerate our ability to get product to market.
Next, who is LiUNA and LPF?
As described above, LiUNA is Canada’s largest construction union, with over 100,000 members across Canada, and over 300,000 beneficiaries when including dependents and retirees. In the US, LiUNA has over 400,000 members in 45 states, with 85% of those members in states with some form of medical or adult-use cannabis laws. LiUNA took a progressive view on the potential of medical cannabis given that construction workers tend to suffer disproportionately from chronic pain and opioid use. The introduction of new cannabis 2.0 formats and wellness-oriented products are expected to accelerate usage and adoption from other beneficiaries, such as spouses and adult-age dependents.
The LPF is a Multi-Employer Pension Plan (MEPP), established in 1972 to provide retirement benefits for employees and members of LiUNA. With more than $7 billion in assets under management, LPF is growing rapidly and is both a majority shareholder in Starseed as well as a business partner. Learn more about LPF here.
Why this transaction, and why now?
It’s clear to us at WeedMD that the industry is facing headwinds. Capital has become scarce and expensive, and the adult-use market has been slower to ramp and at thinner margins for licensed producers than many originally anticipated. These market pressures have forced us, like many others, to reevaluate our business. As such, we have siloed the key factors to success into three core functional areas:
- Quality and Cost-Effective Production Platform;
- High Margin and Differentiated Distribution Channels; and
- Strong Balance Sheet.
At WeedMD, we have accomplished the “Quality and Cost-Effective Production Platform” in spades. Strathroy was built under budget, on time, and is now a leading production platform in the country. Our results in terms of yield, cost of production, and customer product feedback speak for themselves. Our challenge has been in solidifying these two remaining keys to success and identifying solutions that would be accretive to our business and shareholders. In Starseed, we found a company and team that solves these issues, while also bringing a deep-pocketed and fully aligned investor to the table.
- High Margin Distribution Channels. As seen in our most recent quarter, WeedMD has historically relied on the B2B wholesale market as a source of revenues. This has come at the cost of lower margins. Many of our peers face similar pressures, with limited alternatives for higher margin channels. Starseed’s captive and covered patient base offers something different, selling cannabis at over $9.00 per gram and at usage rates twice the industry average. This exclusive channel allows us to drawdown our quality inventory at materially higher margins.
- Strong Balance Sheet. Following our convertible debenture raise in September, WeedMD was fully-funded for its near-term plans. But with valuations under pressure and challenging business conditions, we wanted to ensure that we were fortified for the periods to come. To achieve this, we wanted more than just capital, we wanted a long-term investor. Through the combination of cash on Starseed’s balance sheet and the new investment from LPF, WeedMD has secured $42 million of fresh capital. In addition, Starseed shareholders representing 68% of Starseed’s shares are subject to an 18-month lock-up and leak-out schedule, including the LPF, which when combined with its new $25 million investment will own 29% of WeedMD. Lastly, it’s worth noting that Starseed brings no additional debt or liabilities to WeedMD’s balance sheet, and a non-material amount of dilutive securities, something few, if any, other transactions offered.
Why does this make sense for Starseed?
Over the past year, Starseed has not been able to secure stable, quality and consistent supply. This has limited its ability to launch its unique medical sales programs aggressively. Historically this came at a great cost, with Starseed paying in excess of $6.00 per gram for bulk product earlier in the year, without factoring in the cost of packaging and ultimately getting it to patients. This is where our core synergy lies. Starseed is able to move off expensive and unreliable third-party supply, and instead draw down on WeedMD’s reliable, low cost and quality product.
What are the post-transaction synergies?
As guided in our transaction press release, we anticipate savings, predominantly at Starseed, of $10 million per year by the end of 2020. This is without factoring in the improvements in gross margin described above. With a target of 20,000 patients by the end of 2020, spending on average approximately $1,500 per year, and now moving to targeted gross margin of 75%, we believe the Starseed channel has an incredibly exciting runway in the years to come.
Finally, trust and transparency are paramount for WeedMD. While we recognize that the timing of our announcements last Friday November 29th was not ideal, it was necessary in order to cascade all of our material news together. On behalf of the WeedMD team, I would like to express our regret that we were not in a position to announce our quarterly results earlier and thank you for your patience and understanding on that day. We can and will do better going forward.
We are preparing to take WeedMD into the future with new products, new brands, sustainable and growing profitability, and a message that we’re here for the long run.
I humbly thank every shareholder, partner and employee for your support and for believing in WeedMD and in our team.
Chief Executive Officer