Pot Stocks – Bulls & Bears Week 16

If you can't trust CannTrust..who can you?

This week CannTrust updated the market on the cultivation and production capacity and capabilities. After this license, they went on to lay out their cultivation ramp:

  • The last 20% of the Phase 2 expansion is expected to be operating at full capacity by the end of Q2 2019.
  • With additional land under a letter of intent anticipated to be secured in the near term, the Company's outdoor cultivation operation is expected to total 100,000kg to 200,000kg of production in the second half of 2020. 
  • The Company's Phase 3 expansion of its perpetual harvest greenhouse is expected to add a further 50,000kg of capacity beginning in the second half of 2020. Phase 3 includes productivity and automation enhancements over Phases 1 and 2. Production from the Phase 3 expansion is also subject to Health Canada approval.

CannTrust's combined cultivation operations are expected to reach a total annualised capacity of 200,000kg to 300,000kg in the second half of 2020. This puts CannTrust right up there with the largest producers (behind Canopy Growth and Aurora, and potentially even ahead of Aphria).

"CannTrust Holdings Inc. is pleased to announce that its cultivation and processing permit under Health Canada Cannabis Regulations was amended to include the final 20% of its Phase 2 expansion. The entire 450,000 sq. ft. of its perpetual harvest greenhouse in Pelham, Ontario, is now fully licensed."



It is important to consider however, the potential excess supply that could exist in the market around the time CannTrust moves to full capacity. The only way this is negated would be if the Canadian retail market has properly developed and expanded, via store openings, increased exports, and the legalisation of new form factors like edibles and extracts (coming later this year).

CannTrust has come under immense pressure since their lackluster earnings release last week. The stock has been overly beaten up and, at current levels, offers investors a great upside in our opinion. We continue to hold CannTrust as one of our larger positions and believe current levels afford investors a great opportunity to dollar-average down.


Harvest on a buying spree!!

Harvest Health & Recreation, a vertically integrated cannabis company with one of the largest and deepest footprints in the U.S., has been on a massive buying spree recently. In March, they acquired Verano for $850 million, which at that point was the largest deal on US soil (then of course Cresco Labs bought Origin House), and have now followed that up this week, with the acquisition of CannaPharmacy.

CannaPharmacy owns or operates (through management companies) cannabis licenses in Pennsylvania, Delaware, New Jersey, and Maryland and holds a minority interest in a pending licensee in Colombia. Harvest expects that the transaction will be accretive to Harvest's 2020 revenue and EBITDA.


"All of our efforts back up our three core objectives; to expand and deepen our retail and wholesale footprint, build national brands and continue our path to profitable growth"

 – Jason Vedadi, Executive Chairman of Harvest.


Said Steve White, CEO of Harvest. "Harvest was already fully funded to build out our entire footprint, inclusive of the significant assets that come with the Verano acquisition. Our recent $500 million financing, secured in $100 million tranches for new accretive acquisitions like CannaPharmacy, continues to solidify Harvest's position as the leading company in the cannabis industry in reach, brands, infrastructure, assets and footprint."

CannaPharmacy has operations in four northeastern U.S. states. The licenses and assets of CannaPharmacy will add to Harvest's extensive national footprint, already the country's largest and deepest in terms of licenses and facilities. Upon closing of this transaction and closing of its previously announced acquisition of Verano Holdings, Harvest will hold licenses that allow it to operate up to 213 facilities, including 130 retail dispensaries. 

This acquisition includes:

New Jersey

  • One of six operational (and 12 awarded) fully vertical licenses, permitting cultivation, retail sales, and manufacturing.
  • New Jersey has 42,000 medical patients and growing 60 percent annually. Take a moment and consider just how fast this is!


  • One 46,800-square-foot cultivation and processing facility in the fifth most populous state in the country, with a statutory cap of 25 grower-processors.
  • Pennsylvania currently has 116,000 medical patients as of February 2019 and growing at 10 percent month on month.


  • One of three fully vertical licenses, permitting cultivation, manufacturing and three retail dispensaries.
  • Delaware currently has 7,104 medical patients, a 53-percent increase from 2017, and is experiencing rapid growth in a state with one of the most liberal lists of qualifying conditions in the country.

"The acquisitions of Falcon and Verano along with our already completed acquisition of CBx Enterprises will bring our proven best-in-class logistics and delivery model and suite of premium and best-selling brands to these vibrant markets to allow Harvest to quickly, safely and effectively provide the highest-quality cannabis to patients across the East Coast," said White.

Harvest's pending acquisition of Verano Holdings includes:

  • Licenses and operations in 11 states and territories, including seven cultivation licenses, 37 retail licenses and potential to reach 150+ million Americans;
  • Portfolio of premium proprietary brands with 150-plus product SKUs sold in 150-plus retail locations;
  • Total cultivation expansion capacity of 900,000 square feet in Illinois, Nevada, and Maryland;
  • Ownership of an interest in nine Zen Leaf dispensaries with average annual revenues 2.5 times higher than retail cannabis industry averages.

Harvest's pending acquisition of Falcon International includes:

  • 16 cannabis licenses spanning across the industry's cultivation, manufacturing and distribution verticals.
  • Falcon is one of the state's largest distribution platforms providing Harvest with access to over 80 percent of the California storefronts. Falcon's strong distribution network gives Harvest the ability to distribute its own high-quality brands to dispensaries across California.
  • A portfolio of top-selling California brands including Cru Cannabis, Littles and High Garden.



Harvest recently announced the private placement of US$500 million in convertible debentures to continue to finance acquisitions and corporate growth. The company is one of the only U.S. multi-state operators with a track record of profitability.

"These transactions allow us to effectively reach more than 1,000 dispensaries across the country. This move will finally enable the first national brands to establish themselves coast-to-coast in cannabis."

Harvest continues to expand, and this acquisition further solidifies Harvest's position as potentially the largest MSO in the United States. After this deal, Harvest has 130 dispensary licenses across the United States including 21 licenses in Pennsylvania. Harvest's nearest competitor is Green Thumb, with 83 dispensary licenses.


Make cannabis while the sun shines

In growing news this week, Aurora announced an update on the status of Aurora Sun, the Company's latest and largest Sky Class facility, which is currently under construction in Medicine Hat, Alberta. The name comes from the fact that Medicine Hat, gets more sunshine than most places in Canada.

To support rapidly growing global demand for high-quality medical cannabis in Canada and abroad, the facility will be expanded to 1.62 million square feet, representing a 33% increase from its originally planned 1.2 million square feet.


Rendering, Aurora Sun Facility, Medicine Hat, Alberta


The Company is confident in projecting an expected production capacity at Aurora Sun in excess of 230,000 kg of high-quality cannabis per annum. Aurora's Sky Class facilities are the most technologically advanced in the world. They are not greenhouses, but purpose-built, indoor cannabis grow facilities that create the most optimal growing conditions for cannabis.


"Aurora Sun represents the next evolution in our Sky Class facility design, delivering massive scale, low cost production, and consistent, high-quality cannabis"

– Terry Booth, CEO of Aurora.

A sophisticated glass roof, rainwater, and snowmelt recapture system, and a high level of technology and automation give Aurora full control over all anticipated environmental and harvest conditions, resulting in the production of consistently high yielding, high-quality cannabis at low-cost.


And when they were up, they were up, and…

This week was a mixed bag for Canopy Growth. It started with Scotiabank, one of the most important and influential banks covering the cannabis sector, slashing their guidance on Canopy's revenue. They suggested the Canadian recreational market was not going to grow as expected, which in turn would impact Canopy's ability to meet analyst's growth targets.

This put some immediate pressure on the stock with Canopy seeing their price drop nearly 5% on the day. However, fortunes were to change as yesterday, it was announced that Canopy was to be added to Canada's largest stock index, the S&P/TSX 60. This is a big deal for Canopy, as this addition will lead to hundreds of millions of dollars flowing into Canopy Growth stock as funds that track the index will need to add Canopy shares.

"Canopy Growth Corporation will replace Goldcorp in the S&P/TSX 60 Index effective prior to the open of trading on Thursday, April 18. Canopy Growth engages in growing, possession, and sale of medical cannabis, headquartered in Smiths Falls, ON."



As a result of this, Canadian index funds will add Canopy Growth to their portfolios. As in the United States, those funds control billions of dollars, so it is likely that this move will add hundreds of millions of dollars of inflows to Canopy Growth shares. This may also decrease the volatility of Canopy shares somewhat since they will be held in larger numbers by institutional investors who are more likely to hold long-term compared to retail investors.


KushCo Holdings…holding

Speaking of rocky weeks…this week saw one of our favourite ancillary plays – KushCo Holdings  – get put through the wringer. On Wednesday evening, KushCo announced they had made an accounting error and needed to restate 2017 and 2018 earnings, based on incorrect accounting for contingent consideration used in acquisitions.

The Company expects the corrected misstatements to have the following impact on its restated annual consolidated financial statements:

  • Increase net loss from $10.2 million to $24.3 million during its FY ended 08/31/17
  • Increase net income from $0.1 million to $1.7 million during its FY ended 08/31/18
  • No impact on its net revenue or gross profit for any of the restated fiscal periods; and
  • No impact on its cash flows from operations for any of the restated fiscal periods.

What is important to note, is that these changes will have NO impact on Kush's revenue and EBITDA. This is pure below the line accounting. Still, they hurt the market's faith in KushCo's management and the accuracy of KushCo's past and future accounting. 



With the stock nearly 7% down on the above news, KushCo then went on to announce their Q2 2019 earnings and the results were a mixed bag of great and worrisome. The highlight of the earnings was that revenue jumped 39% to $35.2 million, up from a 27% jump last quarter. Phenomenal revenue that was far and above any analyst's expectations.


Second Fiscal Quarter 2019 Financial Summary

  • Net revenue increased 240% year-over-year to $35.2 million compared to the same quarter a year ago. Net revenue rose by 39% sequentially over a quarterly high of $25.3 million reported during the first fiscal quarter of 2019.
  • Gross profit was 12.9%, compared to 28.1% during the prior year period.
  • Net loss was approximately $8.9 million, compared to a net loss of approximately $7.6 million during the second quarter of fiscal 2018. Loss per share was negative $0.10, compared to negative $0.12 for the same period a year ago.
  • Cash was approximately $17.9 million as of February 28, 2019, compared to approximately $3.0 million as of November 30, 2018. The increase in cash was the result of a registered direct offering that funded in January 2019. 


Source: Company Filings


Amazing revenue, but with pretty shitty gross margins. KushCo primarily makes packaging for cannabis companies, with two-thirds of their business coming from selling vaporiser-related products (vapes, refills, etc) to cannabis companies. That business is low-margin since larger clients will be able to purchase elsewhere if KushCo products are too costly.

Last quarter they were held back by air freight costs, as the company chose to expand sales at the cost of some margins by bringing in supplies quickly via air. This quarter, margins remained at 13% despite air freight diminishing, as tariffs are now the main concern. KushCo buys its products from China, and those products are now tariffed, which hurts gross margins.

KushCo raised their revenue guidance for FY2019 (this is the second quarter) to $140 to $150 million in revenue. This is significant growth and underlies why they are seen as the market-leading ancillary company. However, a business of this nature cannot make money at 12% margins. KushCo is maintaining their position that 30% margins are attainable as the company grows and employs economies of scale.


Trulieve do it again (and again)

And finally, this week saw Trulieve Cannabis Corp. announce its financial results for the fourth quarter and full year ended December 31, 2018. And the market loved them. First off, revenue beat analyst's expectations, growing 27% Quarter on Quarter to $36 million. In addition, Trulieve continues to earn good profits, with 42% EBITDA margins and positive net income and operating cash flow.

Source: Company Filings


Fourth Quarter 2018 Financial Highlights

  • Revenue grew from $28.3 million in Q3 2018 to $35.9 million in Q4 2018
  • Adjusted EBITDA increased from $12.6 million in Q3 2018 to $15.2 million in Q4 2018


Full-Year 2018 Financial Highlights

  • Revenue of $102.8 million
  • Year-over-year revenue growth of 419%
  • Adjusted EBITDA of $45.6 million, or 44.4%


"In 2018, we focused on building a foundation to scale the business over the long-term and made significant progress on Trulieve's core mission to create the preferred customer-centric brand in cannabis," said Kim Rivers, CEO of Trulieve.

"In the fourth quarter, we demonstrated our growth through brand expansion and scale by increasing our dispensary footprint in Florida by five stores, adding cultivation and state of the art processing facilities, on-boarding strategic brand relationships and making significant progress on our plans for growth beyond Florida with acquisitions in Massachusetts and California."

Trulieve is without a doubt one of the leading MSO's in the US. They have some of the largest revenue and are by far the most profitable, and with their latest SLANG Worldwide deal for exclusive distribution rights to Slangs's product range in Florida, they are extremely well positioned for growth in the coming year. A favorable ruling in Florida will also allow Trulieve to open 49 dispensaries while others are capped at 35 dispensaries.

The company offered revenue guidance for 2019 of $214 million (which would be a 108% increase on FY2018).


"2019 will be a year of execution for us as we leverage our strong revenue growth and positive adjusted EBITDA."

 – Kim Rivers, Trulieve CEO


"We will focus on innovating and delivering new products for our customers, such as smokable flower, edibles, and nano-emulsions. We will cultivate new strategic partnerships, as we have recently demonstrated with Slang and Blue River. Finally, we will execute on our plans for multi-state operational expansion."

Until next week friends.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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