CannTrust Holdings Feeling Cannabis Growing Pains

CannTrust Holdings Inc. (TSX:TRST), one of the Canadian marijuana stocks, disappointed the Street with its fourth-quarter financial results

SmallCapPower| April 1, 2019: CannTrust Holdings Inc. (TSX:TRST) (NYSE:CTST), one of the Canadian cannabis stocks, Thursday reported its financial results for the quarter ended December 31, 2018. Net revenue increased by 132% YoY to $16.2 million in Q4 2018, driven by its medical patient base (up ~57% YoY to 58,000 as at December 31, 2018) and legalization of the adult-use recreational cannabis. Sold dried cannabis equivalent saw a huge jump on the back of a rising patient base (~3,407 kg compared to 758 kg in Q4 2017). Annually, net revenue increased 121% YoY to $45.6 million.

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The Company reported a gross loss of $8.3 million in Q4 2018, compared to gross profit of $11.0 million in the same period last year, due to the unrealized loss recognized on changes in the fair value of biological assets during the period. Excluding impact of unrealized gain on changes in the fair value of biological assets, gross profit was up by 136% YoY to $5.7 million, resulting in a margin expansion of 66bps to 35%. The growth can be attributed mainly to higher medical and recreational revenues, partially offset by the impact of the excise tax on medical sales and lower pricing on wholesale sales.

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Operating expenses increased by 234% YoY to $15.9 million, due primarily to higher general & administrative expenses, selling & shipping costs and salaries & benefits. The Company further incurred expenses related to marketing and promotion to the tune of ~$7 million, due to launch of four new recreational brands.

Despite a lower cost of production (cash cost per gram sold declined from $5.16 to $2.94), higher operating expenses resulted in a net loss of $25.5 million, compared to net income of $6.3 million in Q4 2017.

On the operational front, the Company purchased a 19.4 acre property adjacent to its Perpetual Harvest Facility in the Town of Pelham. The property is expected to be used to build its Phase 3 expansion, bringing CannTrust’s production capacity to 100,000 kg annually, once completed. The Company obtained all necessary permits in January 2019 from the Town of Pelham for the construction of 390,000 sq. ft. Phase 3 expansion on the 19.4 acres land. The completion of the Phase 3 expansion is expected to complete by Q3 2020.

Moreover, CannTrust has entered into Letters of Intent to secure ~200 acres of land through purchase and lease, which would add an additional 100,000 kg to 200,000 kg of production in 2020. The land is intended to be used for outdoor harvest of cannabis using its proprietary genetics. These transactions are expected to close in Q2 2019. Combined with Phase 3 expansion, the Company anticipates annual production capacity target to be in the range of 200,000 kg to 300,000 kg.

CannTrust Holdings Chief Executive Officer Peter Aceto said, “We expect the trajectory of revenue growth to continue in 2019 as we bring additional capacity online through our Phase 2 expansion, realize the potential of investments we have made into training and crop yield optimization, implement targeted price increases and distribute our products to more and more consumers. Additionally, CannTrust expects to take bold action to achieve leadership in growing cannabis outdoors. We have entered into Letters of Intent to secure approximately 200 acres of land, which we estimate will add an additional 100,000kg to 200,000kg of production in 2020, subject to regulatory approvals. In combination with our Phase 3 expansion, we estimate our annual production capacity target to be between 200,000kg and 300,000kg. We also plan to become an early-mover in vaporization products and develop further partnerships to bring innovative products to market. These initiatives are the result of thoughtful and calculated work the Company has performed in assessing its growth strategy. This is truly a very exciting time for CannTrust.”

Despite the healthy growth in revenue, the Street was disappointed with CannTrust’s overall performance as analysts were estimating even higher revenue growth. CannTrust shares slumped by ~19% on Thursday followed by a 5% decline on Friday. CannTrust stock trades at a market capitalization of C$1.1 billion with a price-to-book multiple of 6.1x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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