Letter from the President
Vancouver, BC – May 7th, 2020
Dear Shareholders and Debenture Holders,
We sincerely hope that you and your family remain safe and healthy during these trying and uncertain times. As the global COVID-19 pandemic continues to disrupt all of our daily lives, the executive team at Hemptown USA (the “Company”or “we”) continues to push forward with operations and planning at all levels. Despite this unprecedented situation that our society is facing, Hemptown has been fortunate enough to be deemed an essential business by multiple levels of government. Despite remaining open and operating, the safety of our employees is still prime among our concerns, and we have taken all the necessary measures to ensure this.
Our wholly owned Kirkman ® Nutraceutical manufacturing unit is enjoying an impressive surge in sales as our trusted immune system support products continue to increase in popularity. Kirkman ® is functioning well and is trending to have a profitable, growth year. We exceeded sales targets for the month of April, ending with sales of $727K vs. a target of $640K (14% over target). This has allowed us to build up some cash, pay down payables and step forward on purchases of raw materials (for Q3 sales). We are also actively considering investments in new equipment to increase our capacity to produce high-demand liquids (e.g. tinctures).
On the B2B side of our business, the sale of both biomass and hemp flower has been slow, as a direct result of the pandemic. Buyers are unable to travel, and many processors have closed their doors temporarily. However, we are beginning to see an increase in domestic interest and growing interest in CBD and CBG overseas. Our CBG finished flower is also beginning to sell in the domestic market, on a steady basis and for a premium price.
In Q1 of 2020 we had USD$2.5m in revenue on an unaudited consolidated basis, primarily from the Kirkman unit. We recorded the bulk of our 2019 revenue during the second quarter of 2019 by selling 75% of our 2018 harvest. We are not expecting to match that Q2 revenue this year as a direct result of COVID-19 and the shutdown. However, we are confident that business will improve as the year progresses and expect to move most of our inventory through Q3 and Q4.
The Company received two loans, totaling US$900K, under the United States Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Under the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of such loans based on the use of such loan proceeds for payment of payroll costs, mortgage interest, rent and utilities. Based on our application of the proceeds, we intend to apply for forgiveness for all or a substantial portion of these loans.
This year we plan to farm in Oregon exclusively. Primary factors for this include an oversupply of industrial hemp product in the market from the 2019 harvest, Oregon’s superior growing conditions, and the quality controls we have in place in this region. However, looking forward, we are estimating only 30% of last year’s hemp producers will grow in 2020, suggesting a stronger commodity price later this year, and extending into 2021.
Our growing plans in Southern Oregon include a (CBG to CBD) blend. We expect to sell CBG to customers primarily as biomass, processed distillate or isolate, and utilize the processed product for our White Label business. We are also planning to capture the premium CBD flower market, with a terpene rich CBD flower product. The remainder of CBD biomass will be converted to distillate and isolate to be utilized for our finished products.
Management has recent been reviewing current, potential M&A opportunities, with specific respect to processing. Current discussions are progressing well, and we anticipate to be able to provide further updates in the near future.
The Company suffered a setback recently when one of our extractor partners filed for bankruptcy. At this time, we have been unable to retrieve our property, but are in legal discussions with the relevant parties to retrieve our products promptly. The amount of product in question is fortunately a small portion of our biological assets and we expect that this setback will be temporary and minimal.
We have however been receiving both CBG isolate and CBD distillate from multiple processing partners over the past few weeks with the objective of diversifying our processing capabilities and mitigating the reliance on external parties. These diversification efforts have enabled us to ship bulk ingredients to clients and distributors overseas, primarily the UK and Switzerland where demand and prices remain firm.
The CBG biomass market has compressed further, seeing prices as low as $35/lb. Even at this level we are achieving a 60% margin as our costs to grow in 2019 were approximately $14 per pound. 2020 per pound costs are expected to be below $10 per pound due to capital investments made in equipment and mechanization on the farm last year. The CBD market, which experienced rapid price compression, appears to have stabilized – we have profitably sold 12,000lbs to a Swiss processor and we believe that this processor plans to take approximately 20k pounds per month going forward. Demand and prices for CBG and CBD isolate remain strong in Europe and the UK.
GROWTH PLANS AND MOVING DOWN THE VALUE CHAIN
As the industry rapidly commoditizes, we recognize the need to build other aspects of our business, including further development of our white label and product manufacturing operation and the internal development and acquisition of established brands. We have established an internal committee to evaluate acquisitions and strategic opportunities in the current market, working with our banking team and other advisors.
President, Director and Founder
About Hemptown Organics Corp.
Hemptown is growing some of the finest hemp in the world to meet the global demand for cannabinoid-based products. Farmland spanning three states, product manufacturing capability and a strong leadership team are the pillars for Hemptown’s growth model as the Company pushes into the consumer-packaged goods sectors with top quality white label and branded product lines for the consumer market. Hemptown’s fully operational (FDA-licensed and cGMP certified) nutraceutical manufacturing facility in Oregon gives the company a strong leadership position in a global market that continues to grow exponentially. For more information, visit www.hemptownusa.com.
Disclaimer for Forward-Looking Statements
This news release contains forward-looking statements that involve various risks and uncertainties regarding future events. Such forward-looking statements are based on current expectations of management, involve a number of risks and uncertainties, and are not guarantees of future performance of the Elemental, Pragma, and Hemptown (the company). These statements generally can be identified by the use of forward-looking words such as “may”, “should”, “will”, “could”, “intend”, “estimate”, “plan”, “anticipate”, “expect”, “believe” or “continue”, or the negative thereof or similar variations. Forward-looking statements in this President’s letter include statements regarding the Company’s confidence that business will improve as the year progresses, its expectation that it can move most of its inventory in Q3 and Q4, its intent to apply for forgiveness of government loans, its plans to farm exclusively in Oregon this year and its anticipation that there will be less product grown this year and that this will lead to higher prices, its expectation that it will recover its product from a bankrupt processor partner, and its belief that a Swiss processor will take approximately 20,000 pounds of product a month going forward. Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable, are subject to known and unknown risks, uncertainties and other factors that may cause actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations include general market conditions, significant business, competitive, political and social risks and other factors beyond the control of the Company. The Company expressly 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 applicable law.