EastWest Reports Improved Financial Results For Second Quarter Of Fiscal 2020

PENTICTON, BC / GLOBAL NEWSWIRE / April 02, 2020 / EastWest Bioscience Inc. (the “Company” or “EastWest”) (TSX.V: EAST) has released its second quarter results for the three months ending January 31, 2020.

Financial results for the second quarter of 2020

The Company reported revenues for the three months ended January 31, 2020 (“Q2 2020”) were $370,017 compared to $528,199 in the three months ended January 31, 2019 (“Q2 2019”).

While revenues declined, the Company realized higher margins, lower expenditures, and a lower net and comprehensive loss in Q2 2020 compared to Q2 2019.

Gross margin for the second quarter increased by 19% from 25% in Q2 2019 to 44% in Q2 2020. The increase was primarily due to the realization of increased margins on self-manufactured products made by Orchard Vale Naturals Ltd. (“OVN”), a subsidiary of Eastwest, over the past year and sold by Sangster’s Head Franchise and Corporate Stores since Sangster’s was acquired on November 31, 2018. The Company also made changes to the product mix to focus on popular and profitable products and eliminate products with low margins and turnover.

Total expenses for the second quarter decreased by $597,327 from $1,152,913 in Q2 2019 to $555,586 in Q2 2020, a decrease of 52%. The Company realized significant expense reductions compared to Q2 2019 in consulting fees, business development and marketing, professional fees, stock-based compensation, rent and utilities, interest expense and finance fees, which were partially offset by increases in wages and benefits. The Company undertook cost cutting measures and achieved efficiencies through the sharing of mutually beneficial costs under its joint venture arrangement with Azema Sciences Inc. and the recovery of other costs for services provided in the course of developing and implementing the joint venture’s US CBD manufacturing, product development and product distribution model. The joint venture is now in production of CBD distillates and tinctures and is in the process of developing other CBD finished goods for sale.

The Company reported a loss before other income (expense) of $334,459 and a net and comprehensive loss of $42,147 compared to a loss before other income (expense) and net and comprehensive loss of $897,521 in Q2 2019. This represented a decrease in loss before other income (expense) of $563,062 or 63% and a decrease in net and comprehensive loss of $855,374 or 95%. In addition to increased margins and decreased expenditures, the decrease in net and comprehensive loss was also due to the negotiation of a reduction in amounts owed to the sellers of Sangster’s related to the acquisition, which resulted in a $293,319 gain on settlement of debt, discussed further below.

Financial Results for the Six-Month Period ended January 31, 2020

The Company increased total revenues by $260,375 or 42% to $876,228 in the six months ended January 31, 2020 (“2020 year to date” or “2020 YTD”) compared to $615,853 in the six months ended January 31, 2019 (“2019 YTD”).

Gross margin for the six months ended increased by 12% to 38% in the 2020 YTD results compared to 26% in the 2019 YTD results.

Total expenses for the period decreased by $632,971 or 33% to $1,259,747 in the 2020 YTD results compared to $1,892,718 in the 2019 YTD results.

The Company reported a net and comprehensive loss of $466,372 in the 2020 YTD results compared to a net and comprehensive loss of $1,602,158 in the 2019 YTD results, a decrease of $1,135,786 or 71%.

See the January 31, 2020 management discussion and analysis for further discussion of the 2020 YTD financial results.

Financial Position as at January 31, 2020

Current assets decreased by $461,559 to $768,959 as at the end of Q2 2020 compared to $1,230,518 as at July 31, 2019 (“2019 year end”).

Current liabilities decreased by $344,420 to $2,502,279 as at the end of Q2 2020 compared to $2,846,699 at 2019 year end. Trade payables increased by $73,634 while non-trade payables decreased by $418,054.

The Company reported a working capital deficiency of $1,733,320 as at the end of Q2 2020 compared to $1,616,181 at 2019 year end.

The decrease in current assets and increase in trade payables was primarily the result of ongoing working capital management within the cash constraints of the Company, with a 51% reduction in inventory, 37% reduction in amounts due from the Company’s customers, and a 12% increase in amounts due to the Company’s suppliers and other operational creditors. While the Company has been challenged by lack of equity financing to fund costs in excess of revenues and acquisition/debt outlays, it has optimized its inventory and is now focused on key products, it has been able to collect its receivables on a timely basis, and it has utilized credit terms and deferred payments on payables to maximize cash flow available for operations, while right-sizing the Company and targeting optimization of profitability.

The working capital deficiency in both periods included the mortgage payable of $1,600,000 as a current liability. In February 2020, the mortgage payable was extended for a year term, effective February 1, 2020 and repayable February 1, 2021, and will become long-term next quarter, reducing the working capital deficiency reported at January 31, 2020 to $902,279. The Company also received an additional $160,000 in proceeds from the mortgage, repayable February 1, 2021, assisting the Company with its working capital needs.

Total assets as at January 31, 2020 were $3,188,122 at January 31, 2020 compared to $3,767,008 as at July 31, 2019. Property, plant and equipment decreased by $113,833 due to $62,278 amortization and a decrease of $51,555 due to the disposal of machinery, equipment and leasehold improvements.

Total liabilities decreased by $138,211 to $3,029,388 as at January 31, 2020 compared to $3,167,599 at July 31, 2019. The decrease was primarily the result of a write-down of amounts owed to the sellers of Sangster’s and the payout of a loan payable related to machinery disposed.

Business and Corporate Development Highlights

The Company is aggressively taking measures to reduce its expenses.  The Company implemented the following general cost cuts in the quarter:

• Closure of the Sangsters Head Office in Saskatoon and integration into Penticton Facility
• Reduction in the use of outside consultants in Canada
• Optimization of employee staffing in Canada
• Conversion of paper-based document materials into a digital system for Sangsters
• Closure of Eastern-based distribution arrangement
• Reduction of legal expenditures through decreased transactions and settlement of legal matters

The Company also took additional measures to reduce its overall indebtedness and monthly cash outflow, some of which was settled by issuance of shares of the Company:

In January 2020, the Company and the Seller entered a forbearance and settlement agreement effective November 15, 2019.

• Under the forbearance and settlement agreement, the Company and the Seller settled for $430,000, payable in cash, a reduction in the net amount payable to the Seller and gain on settlement of debt of $244,238.
• As the $430,000 amount owing is non-interest bearing, the promissory note was accounted for using the amortized cost method and discounted at the previous effective interest rate of 8%. This accounting treatment resulted in a further gain on settlement of debt and reduction of the carrying value at settlement of $48,013, which will be amortized over the life of the promissory note.
• Share consideration of $125,000 is no longer payable under the terms of the forbearance and settlement agreement.
• Future cash consideration is payable on a monthly basis in installments of $10,000 per month (previously $25,000 per month) commencing January 22, 2020 for a period of two years, with remaining due in a balloon payment on December 15, 2021.
• The Company has committed to divesting of its Sangster’s corporate stores and paying the net proceeds as a lump sum payment to the Seller by August 15, 2020 to accelerate the payment of future cash consideration.
• The consideration payable of is secured by a promissory note of $430,000.
• The promissory note is secured by a first charge on the assets of Sangster’s and a $200,000 second mortgage on real property owned by 1123568 BC Ltd., a subsidiary of the Company.
• The debt forgiveness is conditional and in the event of default, the debt forgiven becomes repayable.

On December 18, 2019, the Company entered an agreement with Aquila and SRE to acquire their 50% shareholding of Valley and 573 in exchange for 2,769,000 common shares of the Company. Subsequent to Q2 2020, Eastwest issued 2,769,000 common shares of the Company to SRE as consideration and the shares of Valley and 573 were transferred to the Company. Eastwest acquired control of all manufacturing equipment used in its operations and all Natural Product Numbers used for Sangster’s products by undertaking this transaction. The net assets of Valley and 573 will be consolidated in the financial statements of Eastwest next quarter.

On November 29, 2019, a settlement agreement was entered with the creditor who had made a legal claim, whereby the claim was settled for a value of $24,750, of which $11,000 is to be settled by cash payments and $13,750 to be settled by the issuance of 275,000 common shares of the Company. As at January 31, 2019, $5,500 in cash had been paid. Subsequent to Q2 2020, $13,750 was settled by the issuance of 275,000 shares.

The Company paid out a loan payable with the proceeds of disposal of machinery, eliminating monthly payments of $1,480.

Outlook

The most significant challenge for the Company, in terms of its ability to execute its strategy, is its ability to secure financing. In spite of the Company’s stability in terms of revenues and improving expenses profile, the current context in the capital markets and the devaluation of the Company’s shares pose a serious challenge for management.

The Company remains focused on reduction of costs related to its human resources, given current world events. Additionally, the Company expects to utilize the current government incentive programs to reduce its net payroll cost and obtain financing where eligible.

Penticton, BC Facility: The Company will also be utilizing its Penticton Facility to open up new revenue streams.  In particular, the Company continues to experience success in acquiring 3^rd party clients for nutraceutical manufacturing in Canada in the wellness space.  This will continue to be a growth space for the Company.  Additionally, the Company will also seek out additional joint venture partners to utilize the approximately 25,000 square feet of space available in Penticton for additional revenue opportunities.

Sangsters: The Company has been rationalizing costs, moving from a paper based system to a digital system, and stabilizing the chain.  The Company will continue to seek out additional partnerships for the chain in Canada and USA in order to utilize its unique legacy and history.

USA: The Company recognizes that the environment for its initial vision of CBD products in Canada will be a long and unproductive road.  On that note, management has refocused its efforts to the USA and its joint venture with Azema Sciences Inc. in its Kentucky-based facility.  The market is large and open to immediate opportunities in the manufacturing and distribution of CBD nutraceuticals, pet treats and other products, along with extraction and processing of CBD.

Summary

The Company will continue to cut its costs, grow new revenue streams through joint ventures and business to business relationship, utilizing its assets and working towards profitability in the medium term.

About EastWest Bioscience Group

EastWest Bioscience is a vertically integrated wellness company with the infrastructure to become a global giant in the Hemp & CBD consumer health market. Since it was founded in 2016, EastWest continues to grow as a high-quality producer, manufacturer and distributor of multiple lines of premium health and hemp products. EastWest currently has more than 200+ NPN’s in its stable of products.

EastWest’s consumer product lines are divided into four distinct brands: 1) Natural Advancement – natural biopharmaceutical health supplements; 2) Earth’s Menu – all-natural hemp superfoods; 3) Natural Pet Science – pet food and pet supplements; and 4) ChanvreHemp – all-natural health and beauty products.

In Canada, EastWest has a 34,000 Sq. Ft, Health Canada-licensed, GMP (Good Manufacturing Practices) – certified manufacturing facility and produces premium nutraceutical brands, offering natural products for a preventive care lifestyle.

In the USA, EastWest Science USA Inc. (“Eastwest USA”) has a joint venture with Azema Sciences Inc. (“Azema”), a company related by common management and directors, securing for EastWest first rights on Azema’s output of bulk CBD and finished CBD products manufactured, and which are ready for sale in the USA and globally. EastWest USA, EastWest’s US operating division, will be the preferred distributor for Azema’s finished goods, which are products not currently in EastWest’s catalogue. Additionally, EastWest will have first right of refusal to all potential opportunities relating to Azema’s Kentucky-based CBD processing facility.  EastWest currently has TSX approval for sale of its consumer products in 21 US States.

The joint venture provides EastWest USA with continuous supply of premium CBD, as it is developing value added CBD consumer goods for the US market for the pet, skin care, functional food and supplement categories. The joint venture will also generate additional revenue streams: EastWest USA will retail CBD material manufactured by the joint venture and market the co-packing/bottling services provided by the joint venture.

Situated on a wholly owned 6-acre property, which is currently home to its 18,000 sf CBD processing facility, Azema Sciences is one of approximately 110 licensed Hemp processors in Kentucky. The joint venture specifies exclusive access for EastWest USA to 9,000 square feet of Azema’s facility, which will co-locate EastWest USA with Azema’s CBD processing, tincture bottling and logistics operations. Co-locating provides EastWest USA with the real estate and resources to build out its own nutraceutical manufacturing adjacent to Azema’s CBD operations, providing significant efficiencies to its logistics and warehousing of product.

With operations based in Lebanon, Kentucky, Azema Sciences is situated in the heart of Kentucky’s Hemp country, with an estimated 80% of the state’s CBD Hemp farming within 100 miles of the facility. Kentucky’s licensed Hemp production grew to more than 42,000 open air acres and around 66 greenhouse acres in 2019. This growth is due mainly to strong commercial support from the Kentucky Department of Agriculture, being one of the first states to embrace pilot hemp programs allowing tobacco farmers to transition to hemp, and the direct political support of state legislators, Senate Majority Leader Mitch McConnell, who introduced the hemp Farming Act of 2018 that was contained within the 2018 Farm Bill.

EastWest Bioscience has used its initial capital to acquire all of the necessary assets to capitalize on manufacturing aspects and focus on the finished products of the fully integrated model. The Company continues to focus on manufacturing consumer products for our end customers, manufacturing for private label customers in the US, as well as providing co-packing services to small and independent wholesalers and retailers.  The Company will continue to focus its energy on cost control and revenue generation.

ON BEHALF OF THE BOARD OF DIRECTORS

EASTWEST BIOSCIENCE GROUP

“Rodney Gelineau” 

Co-Founder, Chief Executive Officer and Director

TSXV – Symbol: EAST

Company Website: www.eastwestbioscience.com

Contact: Investor Relations on 1-800-409-1930 or investors@eastwestscience.com.

NEITHER THE 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION: This news release includes certain “forward-looking statements” under applicable Canadian securities legislation. Forward-looking statements include, but are not limited to, statements with respect to the terms and conditions of the Acquisition.  Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable, are subject to known and unknown risks, uncertainties, and other factors which may cause the actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to: general business, economic, competitive, political and social uncertainties; and delay or failure to receive board, shareholder or regulatory approvals.  There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.  The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by 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.