MedReleaf Corp.’s Rising Costs Could Be a Concern

Extracts drive MedReleaf Corp.’s (TSX:LEAF) third-quarter revenues to record levels, but its bottom line disappoints

SmallCapPower | February 16, 2018: MedReleaf Corp. (TSX:LEAF) announced third-quarter results recently that showed record quarterly revenues of $11.4 million, up 9% YoY and 16% QoQ, driven primarily by strong growth in extract-based products, offset by a decline in dried cannabis products. Extract sales jumped multifold (~700%) to reach $2.3 million, or 21% of total sales for the quarter, on growing industry demand and the launch of topical creams and softgel capsules. Sales of dried cannabis fell 13% to $8.6 million, attributable to issues related to veteran volume capacity and pricing limitations. MedReleaf expects extracts to account for an increasing share of total revenues as the Company continues to launch innovative products to capture growing industry demand for extracts.

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Total volume sold increased 27% YoY and 20% sequentially to 1,263.5 kgs of cannabis products, while the average selling price decreased to $8.98 per gram from $10.50 in the prior-year quarter, attributable to discounts offered to qualifying Veterans due to the VAC Policy change that provides for a maximum reimbursement rate of $8.50 per gram effective November 22, 2016.

Cash cost per gram sold increased to $1.83 for the third quarter from $1.55 during the prior-year quarter due to increased plant operating costs and fixed overheads at the Bradford facility. However, the costs are expected to decrease going forward as increased production and yield improvements are realized at the Bradford facility. As a result, adjusted product contribution per gram sold decreased to $5.80 from $8.65. On the same lines, increased cash costs weighed on gross profits, which increased only 2.8% YoY to $9.9 million from $9.7 million in Q3 2017.

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Adjusted EBITDA for the third-quarter 2017 was a negative ($0.2) million compared to a positive $4.1 million in the prior-year period, due to overhead costs at the Bradford Facility, increased operating expenditures (professional fees; sales and market, patient support) as well as discounts to qualifying Veterans to assist with the non-reimbursable portion of their medication.

As a result of the above-mentioned factors, MedReleaf reported a Q3 net loss of $5.0 million, or $0.05 per share, compared to net income of $1.7 million, or $0.02 per share, during the same period last year.

Overall, MedReleaf’s third-quarter results were a mixed bag, with revenues showing strong growth on growing extract sales while increasing costs weighed on the bottom line. Going forward, revenues should increase considerably as recreational market opens up while costs should come down as the costs at Bradford facility as well those with VAC policy change are sorted out.

As evidenced by quarterly results from Canopy Growth and Aurora, cannabis producers’ revenues seem to be accelerating this quarter as the impact of VAC policy change gradually wanes. Canopy Growth Corporation (TSX:WEED) leads with third-quarter revenues of $21.7 million, followed by Aurora Cannabis Inc. (TSX:ACB) at $11.7 million (Q2 2018), MedReleaf at $11.4 million and Aphria Inc. (TSX:APH) at $8.5 million (Q2 2018). With the recreational market opening up in mid-2018, revenues are expected to increase multifold.

In another development, MedReleaf announced on Wednesday that it has signed an LOI with Société des alcools du Québec (“SAQ”) to supply eight tons of adult-use cannabis per year to the Province of Quebec. The deal marks the first recreational contract for the Company.

Canada’s first and only ISO 9001 and ICH-GMP certified cannabis producer, MedReleaf is focused on producing premium high-quality cannabis. MedReleaf currently trades at a market cap of $2.2 billion, or 52.3x its TTM sales of $42.0 million.

Disclosure: Neither the author nor his/her family own shares in any of the companies mentioned above.

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