Canntrust Holdings Inc. (CNTTF) CEO Peter Aceto on Q3 2018 Results - Earnings Call Transcript

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About: Canntrust Hldgs Inc. (CNTTF)
by: SA Transcripts

Canntrust Holdings Inc. (OTC:CNTTF) Q3 2018 Results Earnings Conference Call November 14, 2018 5:00 PM ET

Executives

Peter Aceto - Chief Executive Officer

Ian Abramowitz - Chief Financial Officer

Eric Paul - Chairman

Analysts

Mark Landry - GMP Securities

Antonia Borovina - Bloom Burton

Operator

Good afternoon everyone and welcome to the Canntrust Third Quarter 2018 Earnings Call. All participants are currently in a listen-only mode. Following the presentation we will open the line for question-and-answer session for analysts. [Operator Instructions].

Canntrust would like to remind listeners that the company's remarks today's may contain forward-looking statements that reflect the company's current views with respect to future events. Any such statements are subject to risk and uncertainties that could cause results to differ materially from those projected in the forward-looking statements. For more information on risk and uncertainties relating to forward-looking statements please refer to the Canntrust budget filings which are available on SEDAR.

I would now like to turn the call over to Canntrust CEO, Peter Aceto. Please go ahead sir.

Peter Aceto

Thank you operator and good afternoon everyone. Thank you for taking the time to join our fiscal third quarter and inaugural conference call. With me today is Ian Abramowitz our Chief Financial Officer and Eric Paul the Chairman of Our Board of Directors.

Our press release financial statements and MD&A are currently available on SEDAR as well as well as our company website. A live webcast is available during this call as per details in our press release.

Before we address our quarterly results and business highlights let me take a minute to address why as the company's newly appointed CEO I'm very excited about the cannabis industry and Canntrust prospects for the future in particular. At Canntrust, I believe we have a truly unique platform to lead the charge in our industry and positively impact the lives across the world. This begins with our deep and unique experience in servicing the medical cannabis market in Canada and our leadership position in the research and development of cannabis products.

Canntrust was founded by pharmacists. This medical foundation will allow us to remain at the forefront of global cannabis legalization provide world-class products for the recreational adult use market in Canada and continue to innovate in areas like nano technology to encapsulate cannabinoids in the standardized format for use in a variety of cannabis based products. Canntrust is well funded expanding at a fast pace and I'm keen to share more developments on the company's growth in the near term.

In the third quarter, we continue to experience rapid growth in demand across our product lines and set new records for total revenue and grams sold. Active patients increased to over 50,000 a 61% increase over the prior year we believe this is a resounding testaments to the quality of our products and our efforts to establish relationships with healthcare practitioners across the country.

As medical cannabis is really at the foundation of Canntrust we've chosen to prioritize our patients when it comes to allocating inventory, of course the adult recreational use market is a very important opportunity for us and we have been able to deliver top-quality products to our provincial partners as well. The increase in Canntrust new patients resulted in an increase in revenue of 39.1% and grams sold by 28.4% in the third quarter. We are very pleased with our rate of revenue growth and are keen to deliver more for our shareholders, especially given the legalization of cannabis in Canada during the fourth quarter.

We have a strong business in extracts and as the medical market continues to move towards cannabis extracts and as the adult use market in Canada opens to allow for new form factors like Vape pens, edibles and beverages, we believe our leadership and high quality cannabis extraction becomes a critical competitive advantage. Our efforts to increase our international footprint were advanced through a very significant milestone. Our first shipment of cannabis oil to our JV partner in Denmark Stenocare. This shipment was the first and only cannabis oil product in the Danish market. We are also in the process of making our first shipment of capsules to Denmark. We took a 25% equity stake in our partner Stenocare and they became the first medical cannabis company to list in the EU through a successful IPO a true template for Canntrust international plants.

Another key initiative to expand our global reach is our strategic partnership with

Cannatrek one of the first vertically integrated licensed producers in Australia. Cannatrek is building a world class 1.7 million square-foot facility in Australia which will position them as a low-cost producer and leader in the Asia-Pacific region. Cannatrek expects to commence commercial operations early next year and as a result of our partnership agreement we have taken a 19% ownership position in Cannatrek, and we expect to maintain this ownership level as they execute on their growth plans. We believe medical cannabis adoption in Australia is going to follow a similar growth trajectory to what we have seen in Canada. In the long-term we expected our partnership with Cannatrek will be our gateway to the Asian market, which is actively considering medical cannabis legalization.

As other countries adopt medical cannabis legislation and look for proven and consistent products we will continue to be at the forefront of medical cannabis adoption globally. Research and development will always be a critical component of our long-term strategy. During the third quarter, we have proudly formed a partnership with Australia's Gold Coast University hospital on a study to evaluate the efficacy of our proprietary CBD in slowing the progression of ALS. We have also partnered with McMaster University to research medical cannabis for chronic pain. This is the first and only double blind placebo randomized controlled trial on the impact of CBD on treating chronic pain. It is also the largest and longest randomized controlled trial to measure the opiate sparring effects of cannabinoids. We believe that cannabis based products can improve the lives of so many around the world and we will aggressively continue to pursue the benefits of medical cannabis in treating a variety of conditions.

Developing great partnerships that create value for Canntrust and its stakeholders is one of our core competencies and we are also doing this as it relates to the adult use market in mind. In October we entered into an exclusive partnership with Kindred a wholly owned subsidiary of Breakthru Beverage Group. Breakthru Beverage Group Canada is Canada's largest alcohol broker. Kindred will represent Canntrust cannabis products to the Canadian adult consumer market for recreational use and utilize their insights to deploy a state of the art route to market platform for Canntrust. Our partnership with Kindred allows us to hit the ground running, utilizing their proven business model, sales technology, infrastructure and extensive relationships across Canada. The Kindred team will focus on effective channel management by educating customers providing product knowledge, and capitalizing on strategic growth opportunities. This partnership allows us to leverage our partner's expertise and remain focused on our competitive advantage the research and development and production of high quality and standardized cannabis products it's a very synergistic arrangement and Breakthru is highly aligned with Canntrust and its shareholders through its $9.2 million investment in Canntrust, and its ability to make further investments if certain sales targets are achieved. This is a very exciting partnership.

Subsequent to quarter end we also partnered and invested in National Access Cannabis, a national retailer in Canada. Canntrust is thrilled to enter the growing Canadian cannabis retail environment with such a strong and like minded partner. National Access has a number of retail cannabis stores open today, with plans to expand aggressively over the next 18 months. National Access is poised to transform the cannabis retail landscape and we're excited that our products are part of the retail environment that focuses on exceptional in-store experiences and responsible customer education. We look forward to working with the national access team to provide Canadian consumers access to our fantastic recreational brand.

October 17thh was important day in Canada with the legalization of recreational cannabis. The third quarter only captured a small portion of the initial shipments made to the provinces, but the early response to our brands and products has been very positive. We are one of only four producers with at least nine provincial agreements. This speaks to our position as one of Canada's top suppliers and we're actively working with our provincial partners on product replenishments.

With the recent launch of our Peak Leaf brand we now have four recreational brands that are strategically positioned to target different consumer segments coast to coast. Our brand development has been driven by consumer insights to specifically target high market share segments in the recreational market. Leveraging our production expertise and low cost structure, we're able to deliver the same high quality and consistent experience that our medical products are known for at an industry leading price point.

The early feedback since October 17th has been very positive. Our products are selling quickly and were seen good terns with strong consumer reviews on various social media platforms. In livekinkykush which has some of the highest THC content in the market has been a top selling SKU at a number of provincial retailers. Our portfolio of brands will be fundamental as the recreational market expands beyond dried flower into margin enhancing products such as single serve, coffee, brewing pods, beverage products, edibles and weigh pans.

Lastly, management is intent on making every effort to maximize shareholder value. With that in mind steps are being taken to list our common shares on the New York Stock Exchange, a listing of the company and its securities remains subject to approval and the satisfaction of all applicable listing and regulatory requirements of course. To position Canntrust for future expansion, we've also made meaningful changes to our Management Team and Board of Directors. These changes have strengthened the company and will allow us to execute on our growth initiatives and maximize shareholder value. The Board appointed me as CEO, commencing on October 1st. Now at the end of October, our President Brad Rogers chose to leave Canntrust to pursue other interests, and Michael Ravensdale, our SVP of production recently resigned. We want to thank both of them for their contributions and wish them well in their future endeavors. Fortunately Canntrust is deep with skilled and talented leaders and the business has not missed a beat. On behalf of the company I also welcome Mr. John Kaden to our Board of Directors. John has deep experience as an entrepreneur and is a capital markets professional with expertise in the cannabis sector. We also thank Eric Paul for his vision and leadership stewarding Canntrust to this stage. As Chief Executive Officer I look forward to working with him in his new capacity as Chairman of the Board.

I'll now pass the call to Ian Abramowitz to discuss our financial results for the third quarter.

Ian Abramowitz

Thank you Peter. Please note that third quarter fiscal 2018 refers to the period ending September 30, 2018 and that all figures are in Canadian dollars unless otherwise stated. As Peter said earlier in the third quarter we experienced exceptional growth for our cannabis products setting new all-time highs for revenue and gram sold. We are very pleased that reported adjusted EBITDA of $558,000 in Q3. Revenue for the third quarter was 12.6 million more than 100% growth over the comparable period in 2017 and representing a 39% increase from the second quarter. For the third quarter, the company sold 1364 kg of cannabis products. Volumes were higher across all our product lines mainly dry cannabis and extracts for the medical market and wholesale dried cannabis. And again this is attributable to the rapid increase in our medical patient base from 31,000 patients this time last year to over 53,000 patients currently.

Adjusted EBITDA was $558,000 compared to $1.9 million in the comparable period last year. Our adjusted EBITDA reflects our continued investment in revenue growth the launch of our four recreational branded products and our strategic partnerships. The increased cost we realize to investments in general and administrative costs, marketing and promotion, salaries and benefits and selling costs. We will continue to invest in a consistent fashion to advance our research and development to launch products and to drive sustained revenue growth.

Moving onto our balance sheet, the company is in a very strong financial position, with over $86 million of cash on hand. We are nearing completion of the phase 2 expansion of our state of the art the perpetual harvest green house and this will increase total square footage to 450,000 square feet from 250,000 square feet and it will increase our annual production capacity to 50,000 kilograms.

We have recently acquired 19 acres of land adjacent to our existing 46 acre property in Niagara. This will facilitate the addition of another 600,000 square feet facility on the same sites. This expansion is fully funded with existing cash resources and is expected to further double our capacity with our first harvest expected in the fall of 2019. These investments are expected to entrench Canntrust as a global leader in the production of standardized cannabis products. We will continue to be vigilant in the allocation of capital toward maximizing value for our shareholders.

And I'll now turn the call back to Peter for closing remarks.

Peter Aceto

Thank you very much Ian. I can't express how excited I'm to lead Canntrust in its next chapter of growth. I truly believe that Canntrust is competitively positioned to increase its market share in Canada and become the leader in the international cannabis market. We've got a world class research and development team and expect our investments in nanotechnology will set us apart as new innovative products are developed in the medicinal and recreational markets. We are very well funded and have a clear path to further growth and increased company profitability. I look forward to sharing more developments with you all as we make significant progress on our strategic initiatives.

With that I'd like to now hand the call back to the operator, Selby for questions?

Question-and-Answer Session

Operator

Thank you Mr. Aceto. [Operator Instructions] And your first question will be from Mark Landry at GMP Securities. Please go ahead.

Mark Landry

My first question is on the recreational market. I was wondering, if you can discuss the first month what went better than your expectations and what was probably more challenging or disappointing in terms of your go-to-market strategy and your sales?

Peter Aceto

So here is our view on that. I think the first month was very exciting we were very, very pleased with certainly the demand and what we experienced with our brands and our products, we did experience some issues in terms of the supply chain most notably, some of our external labs that have we are expecting turnaround times to be in the 10 day range, sometimes we're as long as 40 days but we've taken steps to add some additional laboratory partners to trying to manage that. All in all I think we're very excited we are expecting to in a brand in this brand-new venture to adapt and to learn and to tweak things along the way but certainly very optimistic about the way our products have been received and our ability to deliver.

Mark Landry

And I think from what I've seen some of your brands are positioned in the year opening price points and then amongst the cheapest out there, so I was wondering how this can impact your gross margins?

Peter Aceto

Well, so initially in the early days I think your observation is good in the categories the quality categories that our products are in our choice was to be a great value so a blend between quality and the price. So obviously we're not sharing forward-looking views on how that's going to evolve over time but our prices today are right in line with what our planning is from our margin perspective. So I think it's a little early days to see how things are going and we're watching very carefully what’s happening from a pricing perspective and a demand perspective.

Mark Landry

Okay, and you mentioned that you've acquired a 19 acres of land and that's going to double your capacity. Can you remind us what’s your capacity right now and when you say that it's going to be double next year what number are you talking about?

Unidentified Company Representative

Our current capacity is 50,000 kg with the completion of phase 2 and with the phase 3 we expect to double that.

Mark Landry

And you said that this was going to be operational in the fall is that correct?

Peter Aceto

Yes, I think we said, so we are working on that next 600,000 square feet as we speak and we expect our first harvest to be in the fall of 2019 from the new structure.

Mark Landry

So starting in the fall '19 you are going to have a capacity of 100 tons.

Peter Aceto

That’s what we are thinking. We have seen in phase 2 minor delays. So we're working on that from a construction perspective, but that’s what our expectation is.

Mark Landry

Okay, that's it from me, thank you.

Operator

Next question will be from [Grin Clinley] at Ink Capital. Please go ahead.

Unidentified Analyst

I just had a question here on the wholesale sales that are segmented out here in the quarter. Can you let me know how much of that was adult use sale?

Eric Paul

It's Eric Paul here. The sales were in the last two weeks of the month and it was about $0.5 million in sales on the rack space.

Unidentified Analyst

Okay, thanks. And then can you share any color on how shipments have been rolling out to the provinces since then, obviously with what you said about it being the last two weeks of the quarter. What that's been like in order for replenishing and resupplying across the provinces.

Peter Aceto

Absolutely, so as I said we have seen what we provided to the provinces move very, very quickly and every day we make improvements operationally as well as with our partners in the entire value chain to get shipments out to the provinces. So we are probably shipping product to the provinces on a daily basis. So we continue to do that and we get more efficient every single day.

Operator

Next question will be from Derek Dley from Canaccord Genuity. Please go ahead.

Unidentified Analyst

This is Alex on the line here for Derek. Thank you for taking my question. I just wanted to touch on that wholesale number again just a little bit. I was curious what is that entire amount of gram sold during the quarter? Was that all dry cannabis? Or was there any oil equivalent in there as well?

Eric Paul

The oil is a very small component.

Unidentified Analyst

That kind leads to my next question but you planned on expanding your oil offerings and all within the recreational market internationally I know [indiscernible] but mainly within the recreational market do you plan on rolling out oil products?

Peter Aceto

Yes, I would say you to see, when new regulation comes out in the category of edibles and other products along those lines. So with that in mind we see extraction and oils and the things that the components, the nanoemulsions that go into edibles is going to be a very significant part of our business in the future. But we eager to see when and exactly what those new rules are. So I think that’s our view on that at this time.

Unidentified Analyst

And then just one more if I might. But just curious are you seeing any impact at all on your medical business since the recreational legalization in Canada?

Peter Aceto

Yes, I will tell you, I mentioned at the end of Q3 that we had 50,000 medical patients Ian mentioned in his statements that we had 53,000, so we've since the time we've seen growing patients in our medical channel and we see that's the trend that we expect to continue this is an area that Canntrust is particularly and will continue to be focused on, and expect to continue to grow that part of the market.

Operator

Thank you. Next question will be from David Martin at Bloom Burton. Please go ahead.

Antonia Borovina

Hi, this is Antonia on the line for Dave, thank you for taking my question. So my first question as I know that we're still in early stage of rec legalization but could you quantify your current market share in the rec market perhaps what is your percentage of provincial orders on the kilogram basis?

Peter Aceto

So a fair question except we just don’t have the data right now in order to answer that question so, so I think through with our partnership with breakthrough in the future we should have much better data but we certainly don't have the data to answer that question today.

Antonia Borovina

And then somewhat related we've been tracking your products and whether they are in stock and we’ve noted that none of your capitals or oils has been out of stock lately. So is that leading you to be taking away medical patients from your competitors and maybe than on the downside is this impacting your ability to supply the rec market?

Peter Aceto

Antonio I'm sorry either I've pause to answer so I'm not sure I fully understood the question.

Antonia Borovina

Yes, so we've noticed that compared to some of your competitors, your capital and oil products have not been out of stock, so just wondering if this is leading to your ability to take market share of medical patients away from your competitors. And maybe on the downside as you service the medical patients is it impacting your ability to supply the rec market?

Eric Paul

It's Eric Paul speaking, all of the above apply I think Antonia as Peter mentioned we've accelerated our patient growth which is a combination of our strategy and perhaps there are lots of products in the market from some of our competitors but maybe they are stronger focus on rec and we view the medical pieces as the priority because it's something that they have to take every day as they would any other medicine and therefore that's our obligation to ensure we are in stock. The issue in the rec market is certainly that would have some impact but in the rec market the provincial governments are mainly focused on flower they didn’t pay much they didn’t feel that the oils and capsules would be as significant in the market share. So I don’t think it's significantly impairing us in the rec market at this time.

Antonia Borovina

And then just finally what is the status of automation for labeling is that fully up and running?

Peter Aceto

Yes, I would say we're that is an area that we're continue to work on and we have new automation and machinery that we're working on perfecting every day, so is it exactly where we want to be not yet but it’s certainly headed in the right direction and the team is making improvements every day.

Operator

[Operator Instructions] And your next question will be from Russell Stanley at BK. Please go ahead.

Unidentified Analyst

This is Susan on behalf of Russell. So my first question is now that you have supply agreement with nine provinces do you plan to target Quebec at all?

Peter Aceto

Yes, so we have not discussed targeting Quebec in the short-term, so that’s not a discussion we have had recently. So that’s where we are today.

Unidentified Analyst

Okay, great thanks. And my next question is I think you mentioned that 2.6 million of that revenue comes from wholesale which includes recreational international and wholesale activity to up other LPUs you know what the exact split is there?

Peter Aceto

We heard your question Susan we are just trying to see if we can give you a thoughtful answer.

Ian Abramowitz

Susan recreational would be about 0.5 million and international about 200,000.

Unidentified Analyst

And what is the expected timing of your New York Stock Exchange listing.

Peter Aceto

So we just begun the process formally so we have started the process formally but in terms of the time for vetting and the various processes we are not sure and certainly aren’t in a position to set a timeframe at this time.

Unidentified Analyst

And my final question is can you possibly shed some light on what the best province is for rec sales are so far? And who is rolling out better than others?

Peter Aceto

It’s a fair question, I'll revert back to an answer I mentioned earlier which is we are finding tremendous amount of demand in all provinces. And we just don't have enough data to give you an educated response of one province over the other. But we are absolutely looking forward to getting more data and information and of our own insights and to improve our business. But right now we aren’t just in the position to answer that question.

Operator

And at this time Mr. Aceto we have no other questions. I would like to turn the call back over to you sir.

Peter Aceto

Great, so last comment, thank you everyone for your participation today. We are honored that you could take the time to be a part of our Q3 call. So again, thank you very much and thank you to the operator.

Operator

Thank you sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time we do ask that you please disconnect your lines. Have a lovely evening.