Creso Pharma leads the way in burgeoning cannabis market

By Trevor Hoey. Published at Jan 29, 2021, in ASX Biotechs

After an impressive performance in the December quarter of 2020, shares in Creso Pharma Limited (ASX:CPH; FRA:1X8) looks set to start the year on a strong note based on management’s commentary in its quarterly report released on Friday morning.

A key takeaway, and indeed a factor that sets Creso Pharma aside from many of its peers is the significant revenue that is already locked in for fiscal 2021, as well as the impressive pipeline of income that management has flagged.

In the December quarter, Creso received cash of more than $709,000 from its customers, representing a 740% increase compared with the prior quarter, and management expects further increases in the March quarter of 2021.

Commenting on Creso Pharma’s strong December quarter, non-executive chairman Adam Blumenthal said, “The quarter was a period of rapid growth for the company. Creso achieved a number of major milestones in international markets, which were underpinned by favorable regulatory shifts.”

“Pleasingly, Creso continued to expand its global footprint. Through the company’s animal health business, we entered the Latin American market and Mernova continued to gain traction in Canada, progressing agreements and purchase orders to unlock a number of new provinces.

''The company also furthered its presence in the Australian and New Zealand market, securing an agreement with Martin & Pleasance to drive growth.

“Strong sales were achieved over the period, stemming from a scale-up of Mernova’s operations and the receipt of a number of new orders.

''While the uptick in customer receipts is very pleasing, we are now focused on continuing this rapid growth.”

Mernova leads the way

The company’s wholly-owned subsidiary Mernova Medicinal Inc. (‘Mernova’) delivered several important milestones, witnessing strong demand for its industry-leading products and progressing new market entries.

Mernova entered Canada’s largest recreational cannabis market and received a Notice to Produce from the Province of Ontario, for its HPG13, Lemon Haze and Mimosa strains.

Shortly after this, Mernova secured a supply agreement with the Ontario Cannabis Retail Corporation (OCRC), operating as the Ontario Cannabis Store (OCS), which formally recognised Mernova as a supplier.

This was a major achievement, highlighting Mernova’s rapid progress towards entering Ontario, Canada’s largest recreational cannabis market.

One of the most significant recent developments was the negotiation of a supply agreement with Ontario Cannabis Retail Corporation, effectively marking the group’s entry into Canada’s largest recreational cannabis market.

Repeat purchase orders are consistently elevating Creso Pharma’s recurring revenue, providing investors with a strong level of revenue visibility and financial predictability.

Management noted that it is in advanced discussions with several world-leading distributors and resellers, and this is likely to translate into further sales growth throughout the year.

CannaQIX®, the company’s nutraceutical product line has also enjoyed considerable success in recent months with a second purchase order from Pharma Dynamics valued at $320,000 now delivered.

There was also a significant strategic development with a heads of agreement negotiated with Martin and Pleasance, effectively opening up markets in Australia and New Zealand.

Creso Pharma’s animal health product line, anibidiol® has become the first approved CBD hemp-based complementary feed for pets in Latin America, an important milestone in terms of penetrating a high-volume market.

Retail demand in Europe is also growing rapidly with four purchase orders already secured.

Management flagged an expansion in its product portfolio, paving the way for the group to increase its market share of this segment.

Creso Pharma also ended the December quarter in good shape financially.

Following a successful capital raising of approximately $9 million the company finished the quarter with cash of $6 million with a further $2.2 million received from the exercise of share options after December.

Creso Pharma poised to take advantage of buoyant industry conditions

The securing of a supply agreement with the Ontario Cannabis Retail Corporation, operating as the Ontario Cannabis Store formally recognised Mernova as a supplier, paving the way for entry into Ontario, Canada’s largest recreational cannabis market.

Under the agreement, Mernova will supply the OCS with a range of its high quality, indoor-grown, hand-trimmed, hang dried, cured, artisanal cannabis strains HPG13, Lemon Haze and Mimosa, which will be sold through established stores and through the OCS online sales platform under Mernova’s Ritual Green Brand.

Strong demand for Mernova’s products resulted in a robust sales pipeline and growing revenue profile, with a number of purchase orders received and delivered.

Mernova secured a purchase order valued at C$232,826 (A$243,841) from Truro Cannabis Company (Truro), for a bulk order for three of Mernova’s high-quality cannabis strains in dried flower form, specifically HPG13, Lemon Haze and Mimosa.

Truro is a licensed producer of medical and recreational cannabis products with an established presence across Canada and the group will now sell Mernova’s products through well-established distribution channels.

Creso Pharma also received a maiden purchase order from the Yukon Liquor Corporation, unlocking a new market.

The purchase order was valued at C$24,333 (A$25,436) and was for the HPG13, Lemon Haze and Mimosa strains, in dried flower form.

These products will be sold under the Ritual Green brand in 3.5 gram and 7 gram units, through leading retailer Triple J’s Canna Space.

Three additional purchase orders were also successfully delivered to the Nova Scotia Liquor Corporation during the period.

Two orders were delivered in October and the third in December, underlining the trend towards a recurring revenue model.

Management has decided to expand Mernova’s operations, targeting the Canadian hash market, another plank in the company’s growth strategy.

From a regulatory standpoint, Cannabis 2.0 legalised the production and sale of edible cannabis, cannabis extracts and cannabis topicals in October 2019, resulting in Hash now being legally produced and sold in Canada.

Legalised and increasingly popular

Hash has grown in popularity in the legal market across Canada, as part of the new wave of cannabis-derived products.

In the US, Hash use is increasing due to an overall rise in global interest in cannabis, increased availability due to legalisation in many states, and demand among older consumers familiar with the cannabis concentrate.

Mernova is working to capitalise on this growing demand and through further diversifying its product lines, and there has been considerable interest in its soon to be launched Hash products.

Opportunities to progress sales in various provinces and territories across Canada including its current markets of Nova Scotia and the Yukon have been identified, as well as the imminent and future markets of Ontario and New Brunswick.

The Canadian legal Hash market is currently emerging and it is anticipated to grow rapidly in the near term, providing Mernova with a large opportunity to emerge as a market leader.

Mernova will progress production of premium Hash from its state-of-the-art facility with the launch of new products expected to occur in the March quarter of 2021.

Discussing Creso Pharma’s growth strategy and expansion into new markets Blumenthal said, “The company has a number of purchase orders on and across all business divisions, which we expect to complete in the coming months allowing further sales to be recognised.

“Board and management will continue to monitor regulatory shifts in key markets. Recent developments in the US have the potential to positively impact Creso Pharma and we are very well placed and funded to capitalise on these opportunities.

“We remain in a strong position underpinned by growing sales revenue and burgeoning market opportunities, and we look forward to accelerating our strategic initiatives to deliver returns for our valued shareholders.”

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