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Edited Transcript of TRST.TO earnings conference call or presentation 14-Nov-18 10:00pm GMT

Q3 2018 CannTrust Holdings Inc Earnings Call

Jul 16, 2019 (Thomson StreetEvents) -- Edited Transcript of CannTrust Holdings Inc earnings conference call or presentation Wednesday, November 14, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Aceto

CannTrust Holdings Inc. - CEO

* Ian Abramowitz

CannTrust Holdings Inc. - CFO

* Eric Paul

CannTrust Holdings Inc. - Chairman and Co-Founder

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Conference Call Participants

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* Martin Landry

GMP Securities - Analyst

* Graeme Kreindler

Eight Capital - Analyst

* Alex Brooks

Canaccord Genuity - Analyst

* Antonia Borovina

Bloom Burton and Co. - Analyst

* Susan Xu

Beacon Securities Ltd - Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the CannTrust third-quarter 2018 earnings call. (Operator Instructions) CannTrust would like to remind listeners that the Company's remarks today may contain forward-looking statements that reflect the Company's current views with respect to future events.

Any such statements are subject to risks and uncertainties that could cause results to differ materially from those projected in the forward-looking statements. For more information on risks and uncertainties relating to forward-looking statements, please refer to the CannTrust's public filings, which are available on SEDAR.

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [2]

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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 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 am very excited about the cannabis industry and CannTrust's 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 nanotechnology to encapsulate cannabinoids in a 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 testament 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 have 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's 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 toward 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 in 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 progress of making our first shipment of Castles 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's international plans.

Another key initiative to expand our global reach is our strategic partnership with Cannatrek, one of the first vertically integrated license 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've seen in Canada. In the long term, we expect that 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 opioid-sparing effect 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 Canada is Canada's largest alcohol broker.

Kindred will represent CannTrust's 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 are excited that our products are part of a 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 brands.

October 17 was an 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 [licensed] producers with at least nine provincial agreements. This speaks to our position as one of Canada's top suppliers and we are 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 are 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 17 has been very positive. Our products are selling quickly and we are seeing good turns with strong consumer reviews on various social media platforms. In particular, Liiv Kinky Kush, 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 vape pens.

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. The listing of the Company's securities remains subject to approval and the satisfaction of all applicable listing and regulatory requirements, of course.

To position CannTrust for future expansion, we have 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 1.

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 will now pass the call to Ian Abramowitz to discuss our financial results for the third quarter.

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Ian Abramowitz, CannTrust Holdings Inc. - CFO [3]

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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 grams sold. We are also very pleased to have 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 1,364 kilograms of cannabis products. Volumes were higher across all our product lines, namely dried 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 costs were realized through 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 on to 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 Perpetual Harvest greenhouse 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-foot facility on the same site. 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 will now turn the call back to Peter for closing remarks.

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Peter Aceto, CannTrust Holdings Inc. - CEO [4]

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Thank you very much, Ian. I can't express how excited I am 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 a leader in the international cannabis market.

We have 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, Sylvie, for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Martin Landry, GMP Securities.

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Martin Landry, GMP Securities - Analyst [2]

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Hi, good afternoon, guys. 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.

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Peter Aceto, CannTrust Holdings Inc. - CEO [3]

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Yes, I think that's a great question. So here's 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 we were expecting turnaround times to be in the 10-day range sometimes were as long as 40 days. But we have taken steps to add some additional laboratory partners to try and manage that.

All in all, I think we are very excited. We were expecting 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.

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Martin Landry, GMP Securities - Analyst [4]

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Okay. And I think from what I've seen, some of your brands are positioned in the opening price points and amongst the cheapest out there. So I was wondering how is this going to impact your gross margins?

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Peter Aceto, CannTrust Holdings Inc. - CEO [5]

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Well, so initially in the early days, I think your observation is good. In the categories, 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 are not sharing forward-looking views on how that is going to evolve over time, but our prices today are right in line with what our planning is from a margin perspective.

So I think it is a little early days to see how things are going. And we are watching very carefully what is happening from a pricing perspective and a demand perspective.

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Martin Landry, GMP Securities - Analyst [6]

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

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Ian Abramowitz, CannTrust Holdings Inc. - CFO [7]

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Martin, our current capacity is 50,000 kilograms with the completion of Phase 2. And with the Phase 3, we expect to double that.

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Martin Landry, GMP Securities - Analyst [8]

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And you said that this was going to be operational I think in the fall. Is that correct?

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Peter Aceto, CannTrust Holdings Inc. - CEO [9]

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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.

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Martin Landry, GMP Securities - Analyst [10]

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So starting in the fall of 2019, you are going to have a capacity of 100 tons?

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Peter Aceto, CannTrust Holdings Inc. - CEO [11]

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That is what we are thinking. We are going -- we have seen in Phase 2 minor delays, so we are working on that from a construction perspective. But that is what our expectation is.

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Martin Landry, GMP Securities - Analyst [12]

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Okay, that's it for me. Thank you.

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Operator [13]

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Graeme Kreindler, Eight Capital.

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Graeme Kreindler, Eight Capital - Analyst [14]

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Yes, hi, good afternoon, gentlemen. 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 sales?

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Eric Paul, CannTrust Holdings Inc. - Chairman and Co-Founder [15]

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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 in the rec space.

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Graeme Kreindler, Eight Capital - Analyst [16]

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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 has been like in order for replenishing and resupplying across the provinces.

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Peter Aceto, CannTrust Holdings Inc. - CEO [17]

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Yes, no, absolutely. So as I said we have seen what we've 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.

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Graeme Kreindler, Eight Capital - Analyst [18]

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Okay, that's great. Thank you very much.

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Operator [19]

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Derek Dley, Canaccord Genuity.

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Alex Brooks, Canaccord Genuity - Analyst [20]

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

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Eric Paul, CannTrust Holdings Inc. - Chairman and Co-Founder [21]

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The oil is a very small component.

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Alex Brooks, Canaccord Genuity - Analyst [22]

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Okay. That kind of leads into my next question, but do you plan on expanding your oil offering at all within the recreational market internationally? I know with Stenocare you are, but mainly within the recreational market, do you plan on rolling out oil products?

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Peter Aceto, CannTrust Holdings Inc. - CEO [23]

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Yes, I would say we are eager 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 are eager to see when and exactly what those new rules are. So yes, I think that is our view on that at this time.

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Alex Brooks, Canaccord Genuity - Analyst [24]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [25]

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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 since that time we have seen growing patients in our medical channel and we see that as a 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.

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Alex Brooks, Canaccord Genuity - Analyst [26]

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Okay, perfect. Thank you very much and congrats on the results this quarter.

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Peter Aceto, CannTrust Holdings Inc. - CEO [27]

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Thank you, Alex.

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Operator [28]

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David Martin, Bloom Burton.

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Antonia Borovina, Bloom Burton and Co. - Analyst [29]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [30]

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

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Antonia Borovina, Bloom Burton and Co. - Analyst [31]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [32]

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Antonia, I'm sorry. I pause to answer it because I am not sure I fully understood the question.

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Antonia Borovina, Bloom Burton and Co. - Analyst [33]

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Yes, so we have noticed that compared to some of your competitors, your capsule 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?

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Eric Paul, CannTrust Holdings Inc. - Chairman and Co-Founder [34]

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It's Eric Paul speaking. All of the above applies, I think, Antonia. As Peter mentioned, we have accelerated our patient growth, which is a combination of our strategy and perhaps a lack of product in the market, from some of our competitors with maybe their stronger focus on rec. And we view the medical patients as a priority because it's something that they have to take every day as they would any other medicine. And therefore, that is 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.

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Antonia Borovina, Bloom Burton and Co. - Analyst [35]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [36]

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Yes, I would say that is an area that we continue to work on. And we have new automation and machinery that we are 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.

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Antonia Borovina, Bloom Burton and Co. - Analyst [37]

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Okay. Thank you.

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Operator [38]

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(Operator Instructions) Russell Stanley, Beacon.

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Susan Xu, Beacon Securities Ltd - Analyst [39]

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Hi, Peter and Ian. This is Susan on behalf of Russell. Thanks for taking my question. So my first question is now that you have supply agreements with nine provinces, do you plan to target Québec at all?

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Peter Aceto, CannTrust Holdings Inc. - CEO [40]

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Yes, so we have not discussed targeting Québec in the short term. So that is not a discussion we have had recently. So yes, that is where we are today.

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Susan Xu, Beacon Securities Ltd - Analyst [41]

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Okay, great. Thanks. And my next question is I think you mentioned that $2.6 million of your revenue comes from wholesale, which includes recreational, international, and wholesale activity of other LPs. Do you know what the exact split is there?

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Peter Aceto, CannTrust Holdings Inc. - CEO [42]

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

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Susan Xu, Beacon Securities Ltd - Analyst [43]

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All right.

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Ian Abramowitz, CannTrust Holdings Inc. - CFO [44]

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

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Susan Xu, Beacon Securities Ltd - Analyst [45]

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Okay, great. Thank you. And what is the expected timing of your New York Stock Exchange listing, if you know?

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Peter Aceto, CannTrust Holdings Inc. - CEO [46]

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Yes, so we have 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.

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Susan Xu, Beacon Securities Ltd - Analyst [47]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [48]

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Yes, it's a fair question. And I will revert back to an answer I mentioned earlier, which is we are finding a 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 for our own insights and to improve our business. But right now, we are just not in a position to answer that question.

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Susan Xu, Beacon Securities Ltd - Analyst [49]

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All right. Awesome. That is all for me. Thank you.

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Operator [50]

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

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Peter Aceto, CannTrust Holdings Inc. - CEO [51]

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Great. So last comments. 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.

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Operator [52]

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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.