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MedReleaf Corp.’s Having Some Real Cost Issues While Canada Delays Recreational Sales

While Sales, In Particular for Extracts, Are Doing Well, Overhead Costs Are Making Net Growth Challenging

Company specific risk is one of the elements of owning individual stocks that makes them particularly risky. Today, MedReleaf Corp. (TSX:LEAF) closed down more than 7% after third quarter results showed a net loss of $5 million. The entire cannabis sector average had a down day with the Horizons Life Sciences Marijuana ETF (TSX:HMMJ) down a little over 4% amidst news that Canada will delay retail sales of recreational marijuana until later in the summer.

MedReleaf Corp.’s struggles come from costs rather than a lack of demand. Sales of cannabis extracts is on a steady rise however their bread and butter is dry flower sales. Costs out of their Bradford Facility kept the company from being profitable. Relative to the overall cannabis market, investors are seeing this as a weakness in the company for right now.

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.

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.

MedReleaf Corp. will likely recover from the costs setback, as the rest of the cannabis sector likely will once consumers come to terms with the delay in recreational sales. Many investors may see a dollar cost averaging opportunity with this dip in the market. We would love to get some feedback on how you might play this slight downturn.

read more at smallcappower.com

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Richard Lowe

Richard Lowe is a 14-year veteran of the financial sector with licenses as a commodity broker (Series 3) and investment advisor representative (IAR Series 65). Along with a focus on raising capital for the firms he was employed with, he also wrote and edited much of the content published by them. He holds a BA in Journalism from the University of Massachusetts. He has been a longtime advocate for marijuana legalization due to the social injustices associated with marijuana prohibition and the strong potential for the medicinal benefits of cannabis.

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