Inner Spirit Holdings Announces First Quarter 2021 Financial Results

Inner Spirit Holdings Ltd. (“Inner Spirit” or the “Company“) (CSE: ISH) (OTCQB: INSHF), a Canadian company that has established a national network of Spiritleaf retail cannabis stores, today announced it has filed its consolidated financial statements for the quarter ended March 31, 2021 and corresponding management’s discussion and analysis, as well its amended and restated audited consolidated financial statements for the years ended December 31, 2020 and 2019 and corresponding management’s discussion and analysis. The filings are available for review on the Company’s SEDAR profile at www.sedar.com and the Company’s website at www.innerspiritholdings.com. Further information regarding the prior period restatement can be found under the “Prior Period Restatement” section of this news release.

“The Company’s financial results for the first quarter of the year were consistent with our expectations as we posted revenue of $8.8 million and recorded system-wide retail sales¹ of $35.9 million through the Spiritleaf store network. We again achieved positive Adjusted EBITDA¹ and positive cash flow from operations in the quarter. Our now-proven ability to manage costs and operate efficiently as we build out the Spiritleaf network of stores bodes well for future growth. The recent transaction announced with Sundial Growers will put us in a great position to expand our business and work with Sundial to develop synergies that benefit both organizations once we complete it early in the third quarter of 2021,” said Darren Bondar, President and CEO of Inner Spirit.

Financial Results

Inner Spirit reported the following financial highlights for the quarter ended March 31, 2021. A reconciliation of the non-IFRS financial measures can be found under the “Non-IFRS Financial Measures” section of this news release.

• Total revenue was $8.8 million, an increase of 113% compared with $4.1 million in the first quarter of 2020. 
• System-wide retail sales¹ was $35.9 million, an increase of 109% compared with $17.2 million in the first quarter of 2020. System-wide retail sales¹ represent the aggregate revenue earned by franchised Spiritleaf retail cannabis stores and corporate-owned Spiritleaf retail cannabis stores, and do not solely represent the Company’s revenue. The Company only receives royalties and advertising fees in respect of the franchised Spiritleaf retail cannabis store revenue forming part of the system-wide retail sales. 
• Gross profit was $4.1 million or a gross margin of 47.0%, compared with $2.0 million or a gross margin of 47.6% in the first quarter of 2020. 
• Operating loss before other expenses was $0.3 million, compared with $0.7 million in the first quarter of 2020. 
• Total net loss was $2.4 million, or $0.01 per share, compared with a total net loss of $1.6 million, or $0.01 per share, in the first quarter of 2020². 
• Adjusted EBITDA¹ was $0.5 million, an improvement of $0.6 million compared with an Adjusted EBITDA¹ loss of $0.1 million in the first quarter of 2020. 
• Cash flow provided by operations was $0.2 million, an improvement of $1.7 million compared with cash flow used in operations of $1.5 million in the first quarter of 2020. 
• Cash increased to $13.3 million as at March 31, 2021, compared with $2.6 million as at March 31, 2020. During the quarter, the Company completed a bought deal offering for proceeds of approximately $11.5 million.

Sundial Transaction

Subsequent to the quarter, on May 5, 2021, the Company announced it had entered into an arrangement agreement (the “Agreement“) with Sundial Growers Inc. (“Sundial“) (NASDAQ: SNDL) pursuant to which Sundial will acquire all of the issued and outstanding common shares of Inner Spirit for total consideration of approximately $131 million (the “Transaction“).

Under the terms of the Agreement, Inner Spirit’s shareholders will receive, for each Inner Spirit common share held, (i) $0.30 in cash and (ii) 0.0835 of a Sundial common share (representing $0.09 per Inner Spirit common share based on the 10-day volume-weighted average price (“VWAP“) of Sundial common shares on the Nasdaq Capital Market on May 4, 2021), for total consideration of $0.39 per Inner Spirit common share. The Transaction has been unanimously approved by the Boards of Directors of Sundial and Inner Spirit and is expected to close early in the third quarter of 2021. 

Network Expansion 

During the first quarter of 2021 and subsequent, the Company has continued to expand its network of Spiritleaf retail cannabis stores across Canada. Spiritleaf operated 68 stores to begin the first quarter of 2021 and opened 14 stores during the quarter in Alberta, Saskatchewan, Ontario, and Newfoundland and Labrador. In April and May, Spiritleaf has opened an additional 10 stores in Alberta, Saskatchewan and Ontario. With the recent additions, Spiritleaf has a total of 92 stores across the country (72 franchise owned and 20 corporate owned). Please visit www.spiritleaf.ca for information on store locations and their operating hours.

“We’ve been able to expand the Spiritleaf network organically due to the support and dedication of our franchise partners, employees, customers, strategic partners and investors. We have developed a strong business model that is attracting entrepreneurs to invest their hard-earned capital in the Spiritleaf opportunity and to represent our brand in their communities and with their neighbours. We have additional Spiritleaf store locations being readied to open at this time and expect to celebrate achieving our 100^th store this summer,” said Bondar.

Operations Update 

Spiritleaf stores have been operating with enhanced customer service processes to ensure the safety of employees and customers due to the ongoing COVID-19 pandemic. Spiritleaf’s Select & Collect service enables customers to pre-shop and order online prior to pick-up in store or curbside or via delivery where permitted. The fast-growing and popular Spiritleaf Collective customer benefits program, which recently surpassed 280,000 members, streamlines and individualizes the shopping experience for guests. The Collective program was recently recognized with a Gold Award at the annual Hermes Creative Awards competition for its innovative approach to brand building in the cannabis space. 

The Company also noted Spiritleaf has received a special industry designation from the Canadian Franchise Association (the “CFA“) for a second consecutive year. The Franchisees’ Choice Designation was achieved due to exceptional survey satisfaction rankings from Spiritleaf franchise partners. The designation is part of the CFA’s annual awards program to recognize franchising’s top-performing organizations.

Prior Period Restatement

The Company has restated its December 31, 2020 and 2019 audited financial statements to correct an error in the measurement of the amortized cost calculations on the debentures.  The net impact to the December 31, 2019 financial statements is a decrease in total liabilities of $0.7 million and a decrease in net loss of $0.7 million.  The net impact to the December 31, 2020 financial statements is a decrease in total liabilities of $1.2 million, a decrease in deficit of $1.2 million and a decrease in net loss of $0.5 million.  The full effect of this restatement can be found in Note 26 of the amended and restated audited consolidated financial statements for the years ended December 31, 2020 and 2019.

As a result of the above restatement, the Company has restated its March 31, 2020 comparative period to adjust the debenture accretion on the March 31, 2020 income statement.  The net impact to the March 31, 2020 consolidated income statement is a decrease to convertible debenture accretion by $0.4 million and decrease net loss of $0.4 million.  The full effect of this restatement can be found in Note 23 of the interim condensed financial statements for the three months ended March 31, 2021 and 2020.