CannTrust Holdings Inc (CTST) Q4 2018 Earnings Conference Call Transcript

CannTrust Holdings Inc.  (CNTTQ)
Q4 2018 Earnings Conference Call
March 28, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, everyone, and welcome to CannTrust's fourth quarter 2018 earnings call. All participants are currently in listen-only mode. Following the presentation, we will open the line for a question and answer session for analysts. Instructions will be provided at that time for research analysts to ask questions.

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 related to forward-looking statements, please refer to the CannTrust public filings, which are available on SEDAR. I'd now like to turn the call over to CannTrust's CEO, Peter Aceto. Please go ahead, Peter.

Peter Aceto -- Chief Executive Officer

Thank you, operator, and good morning, everyone. Thank you for taking the time to join our conference call for the fourth quarter and year ending December 31, 2018. With me today is Greg Guyatt, our Chief Financial Officer. Our press release, financial statements, and MD&A are currently available on SEDAR and our company website. A live webcast is available during this call as per details in our press release.

All right, let's begin. The CannTrust team made excellent progress in its strategic priorities in 2018, and this is evident in the record sales that we've made to our patients and customers. Our continued growth in our patient base, the quality products and services we've delivered, the intellectual property we've cultivated, and the partnerships we have forged and invested in. The milestones we've achieved this year support our conviction that CannTrust is well positioned for success in Canada and globally.

Looking forward, we will be bold in fulfilling our vision to become a leader in providing innovative cannabis-based products to the world. To deliver on this vision, we're focused on the following five strategic priorities: Expanding capacity while at the same time, driving down costs, continuing to invest in our extraction capabilities, developing innovative products and intellectual property, accelerating our international expansion, and advancing strategic partnerships with global partners. Achieving these strategic priorities will take investment in people and processes, and it will require deliberate and disciplined capital allocation.

Now, in the fourth quarter of 2018, we delivered a number of accomplishments which align with our focused pursuit of our strategic priorities. CannTrust increased its revenue to CA$16.2 million in the fourth quarter of 2018, a record quarterly sales figure for the company and a 132% increase over the fourth quarter of 2017. This record result was achieved by increasing our sales volume to 3,407 kg sold for the period. Revenue for the full year increased to CA$45.6 million, which was a 121% increase over the previous year. Forty-six percent of our revenue was derived from sales of extract products, which include oils and capsules. Extract products have always been a relatively high percentage of our total sales given our roots in medical cannabis, and we expect this to position us well as the adult use and medical markets evolve to include a broader range of product offerings.

One of the primary drivers behind these record results is CannTrust's continued success at increasing its medical patient base. As of year end, we've increased our medical patients to over 58,000, which was a 57% increase during 2018. Our patient count has continued to accelerate since then, and stands at 66,000 patients today. We believe the growth in our patient count is a testament to the quality of our products and our excellent customer service.

In fact, we were recognized by consumers in both of these categories at the 2018 Canadian Cannabis Awards. Voted on by over 17,000 consumers, CannTrust was selected as their top licensed producer in customer service. We also received Best Product awards in five product categories, including both dry flower and oil categories. CannTrust was also awarded the most prestigious honor as the Licensed Producer of the Year. These awards are a proof point that our people, processes, and knowhow are leading the way in the cannabis industry, delivering the highest-quality product and service among our competitors.

Another driver of our growth has been the legalization of the adult use recreational market in Canada, which occurred in the fourth quarter of 2018. This rollout has not been without its challenges for the company, its competitors, and provincial distributors. For CannTrust in particular, we have had to train hundreds of new staff, absorb the cost of a much larger facility, and vigorously implement automation and process improvements, particularly related to product testing, quality assurance, and product handling.

We've also invested significantly into the optimization of our Perpetual Harvest greenhouse. In order to increase yields and total production, we've invested in statistical measurement tools, made leadership appointments in each of our grow rooms in our greenhouse, and invested heavily into continuous training of our people. The team is certainly very proud of the progress that we're making.

Regarding CannTrust's strategic initiatives, let me share some progress with you. We have completed the construction of our Phase 2 Perpetual Harvest greenhouse facility in Pelham, which should bring our capacity to 50,000 kg on an annualized basis. We have also received approval from the Town of Pelham to proceed with the construction of our Phase 3 facility, which will bring our production capacity to 100,000 kg in the second half of 2020.

We have realigned our executive team with the explicit purpose of allocating more resources to our innovation and international partnerships initiatives. We've made several additions to our executive team as well -- in particular, Greg Guyatt to the position of CFO. These organizational changes were made with the intention of further improving our ability to execute on the many growth initiatives that we are pursuing.

Our partnership with Apotex continues to advance. We're currently working on developing three products and structuring international distribution efforts with them. We're very pleased to have Apotex as a partner, but we also plan to enter into similar agreements to advance our innovation and distribution efforts with global companies. Our international business development opportunities are moving ahead as well. We've applied for Health Canada approval to export our extract-based products to Australia, and we expect to make our first shipment to that market in 2019. Our partner in Australia, Cannatrek, in which we own a 19.8% interest, is also making progress on its 35,000-square-foot facility, which should be in production later this year. We also remain only one of two LPs shipping into Denmark through our partner Stenocare, in which we have an equity interest of 19%.

Lastly, as most of you are aware, we successfully listed on the New York Stock Exchange last month, trading under the symbol CTST. This was a significant milestone for the CannTrust team and another step in our quest to create shareholder value. We truly believe that CannTrust is positioned to be a global leader, and that our NYSE listing was a tremendous step in that direction.

I would now like to share some near-term developments that we're working on in order to deliver on our long-term strategy. We've been very diligent and disciplined as we evaluated these initiatives, and in some instances, you can expect us to take further bold actions to leverage our existing strengths. First, we plan to lead the market in growing cannabis outdoors. We have evaluated many land acquisitions and farming outsource alternatives. To that end, we have signed two letters of intent, securing approximately 200 acres of land through purchase and lease arrangements. We expect the outdoor cultivation from these properties to add 100,000-200,000 kg of capacity in 2020.

Our outdoor cultivation initiatives will leverage our already existing strengths in three areas. First, our development of proprietary genetics, our leadership in low-cost cultivation, and our ability to produce quality extract at scale for both the medical and recreational markets. Secondly, we're quickly moving forward with in-house production of distillate for vape cartridges. We have placed orders for equipment and have made accommodations in our Vaughan facility. If market demand for cannabis-based vape products in the U.S. is any indication, this product category will be a material segment of the recreational market as soon as later this year, and we plan to be prepared by offering quality products to those consumers under our existing recreational brands: Liiv, Synr.g, Xscape, and Peak Leaf. We're also exploring other product formats that will be permitted under the expected new cannabis legislation.

Thirdly, we plan on undertaking further product development and distribution initiatives with global market leaders. Cannabis is rapidly becoming destigmatized, and consumers are looking for new outlets to learn about how cannabis products can help them in their day-to-day lives. Similarly, global organizations are looking to partner with CannTrust because of its proven track record for developing top-quality products and intellectual property.

We expect that our product development initiatives will leverage the IP we've gained, and our team of scientists and clinicians, who have already created nanoemulsions which dissolve cannabinoids in liquid in a colorless, odorless, tasteless manner as well as self-nanoemulsifying drug delivery systems that we expect will deliver significantly higher bioavailability to individuals in various forms, including capsules, tablets, and powdered formats. Now, the team and I are very excited to be able to share these developments with you today. With that, I will now turn the call over to Greg for further commentary on our financial results.

Greg Guyatt -- Chief Financial Officer

Thanks, Peter. Please note that the fourth quarter fiscal 2018 refers to the period ending December 31st, 2018, and all figures are in Canadian dollars unless otherwise stated. CannTrust increased revenue to CA$16.2 million in the fourth quarter of 2018, up from CA$7 million in the fourth quarter of 2017, resulting from an increase to our medical patient count and the introduction of sales into the recreational market in Canada, while our volume sold increased considerably over the fourth quarter of 2017 and more than doubled over the prior period. Absorbing the excise tax on our medical products had a CA$900,000.00 negative impact to the top line.

Growth profit before fair-value changes to biological assets increased to CA$5.7 million from CA$2.4 million in the fourth quarter of 2017. This is primarily the result of our increased sales over the prior period. Gross margin before changes to the fair value of biological assets was 35%, up 35%, was consistent with the same period last year, as lower costs per gram were offset by lower realized pricing per gram. The sequential decline in gross margin from 69% in the third quarter of 2018 was primarily from the impact of absorbing excise taxes, lower prices in the wholesale channel, and the additional costs incurred as we invest in our Phase 2 expansion, which was not yet fully operating or operating at full capacity.

We have a number of levers on production cost which we believe will put us among the leading low-cost producers. We expect that gross margin will improve going forward due to the following: 1). Implementation of selective price increases in the wholesale channel, 2). The realization of yield and cost efficiencies from investment in our process improvements, and 3). The impact of the capacity increases with our Phase 2 expansion.

Adjusted EBITDA declined to a loss of CA$8.5 million down from a loss of CA$850,000.00 in the prior year. This reflects the deliberate and disciplined investments into our business development, including marketing costs to support the launch of our four recreational brands, investments into personnel to advance product development and our international strategy, and costs in preparation for the company's listing on the New York Stock Exchange.

We expect this level of EBITDA to sustain through the first quarter of 2019. Profitability is expected to improve following the full contribution of the increased operational capacity of the Phase 2 expansion. We are targeting profitability in the back half of the year, depending on our strategic initiatives. As the Phase 2 expansion contributes to positive operating leverage, the company expects to return to profitability. Our financial position remains strong. We ended the fourth quarter with cash of CA$72 million and a working capital position of CA$122 million. I'll now pass the call over to the operator to open the lines for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press *1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press *2. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Martin Landry of GMP. Please go ahead.

Martin Landry -- GMP Securities -- Managing Director

Hi. Good morning, Greg and Peter. My first question -- in your press release, you talk about the fact that your revenue growth for 2019 is going to start in Q2. I just want to make sure I understand correctly -- does that imply that you expect Q1 revenue to be maybe stable sequentially versus Q4?

Greg Guyatt -- Chief Financial Officer

That's correct. As we ramp up our production, we expect the revenue to start ramping up in Q2 and onwards during 2019.

Martin Landry -- GMP Securities -- Managing Director

Okay. And then, just so I understand correctly, the bottleneck here -- is it cultivation or downstream processing and packing?

Greg Guyatt -- Chief Financial Officer

I'd say it's mostly on the production side. As we're ramping up our production capacity and building inventory, we expect most of that to start flowing through the system in the latter half of Q1, but really starting to ramp up in the back half of 2019. We don't believe that our packaging processes are a significant contributor to the revenue ramping up in the back half of the year.

Martin Landry -- GMP Securities -- Managing Director

Okay. And then, in your opening remarks, you also talked about price increases helping your gross margin. I'm wondering -- when's the timing for those price increases and the extent of the increases?

Peter Aceto -- Chief Executive Officer

We've got a lot of feedback from our medical patients as well as our provincial consumers about the high, high quality of our product as well. So, we've already had conver -- we've already done some price increases on the medical side of our business on specific strains, and we've already implemented some changes. Those are happening through discussions with the provinces, so we certainly respect our discussions with them, but some of those have already been implemented, and we continue to have those conversations.

Martin Landry -- GMP Securities -- Managing Director

Okay. Is there potential for introducing, perhaps, new SKUs priced higher up?

Peter Aceto -- Chief Executive Officer

Yes, we're definitely exploring those options, and I think you'll see significant opportunity as the legislation changes and there's new product formats that we're working on.

Martin Landry -- GMP Securities -- Managing Director

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

Operator

Your next question comes from Graeme Kreindler of Eight Capital. Please go ahead.

Graeme Kreindler -- Eight Capital -- Analyst

Hi, good morning, guys. First question -- just to follow up with respect to pricing, if I look at this correctly, the prices of your extract and oil products were significantly less than that of your dried flower products. Is there any reason why the pricing would be lower there? I think generally, what we see in the industry is products selling for a higher price per gram.

Peter Aceto -- Chief Executive Officer

We're not sure we see it quite the same way. We would think the prices per gram would be higher. I don't know, are we missing something? The one thing that we can say related to that, in which we should see some changes with the new rules with regards to the excise tax as it relates to the amount of grams that make up extract -- and certainly, the excise tax on that will change, hopefully with the passing of the new rules in the budget. There has been absorption of the excise tax, which may have had an implication in Q4 versus Q3, but we would generally see that the extracted products should have a better margin than the whole flower. You would agree directionally?

Greg Guyatt -- Chief Financial Officer

I agree.

Graeme Kreindler -- Eight Capital -- Analyst

Okay. And then, with respect to the outdoor growing, do you have the projected timeline for submitting site packages and any estimates for -- within the 100,000-200,000 kilos per year, how many crops that assumes within a cycle? Is that something you can share at this time?

Peter Aceto -- Chief Executive Officer

Yeah. I think what we can share is -- we haven't divulged some of the details because we want to make sure that we've dotted some i's and crossed some t's. That being said, our assumptions are based on one crop per season, and our assumption is that is 100,000 kg per acre, which we think is a conservative metric based on the research that we've done with people who are already growing cannabis outdoors.

Graeme Kreindler -- Eight Capital -- Analyst

Okay. And, any capex budget...maybe per acre or what you guys are looking at right now for the 200 acres that have been secured?

Greg Guyatt -- Chief Financial Officer

Yeah. We don't have a number per acre, but I can say that the capital requirements for the outdoor growing are substantially lower than what we would have incurred for any of our greenhouse investments.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, thanks. I'll jump back in the queue.

Operator

Your next question comes from Derek Dley of Canaccord Genuity. Please go ahead.

Derek Dley -- Canaccord Genuity -- Analyst

Hi, guys. I have a question on the recreational market in general. Have you guys seen -- recently here, as we get into the end of Q1 -- any of these bottlenecks within the market loosening? Are any provinces, in your view, performing better than others?

Peter Aceto -- Chief Executive Officer

So, I'm probably not going to comment on which provinces are performing better than others. We're fortunate enough to be one of the licensed producers who's in nine provinces, and we're enjoying our relationships with all of them. The demand -- certainly, the demand versus supply matter continues to persist, and we're working hard to make sure we have quality product for both our medical patients and also our customers in the nine provinces. I'd say that through the measures that I mentioned before with regards to training and process improvement, we're seeing an improvement there, and certainly expect that to continue throughout 2019.

Derek Dley -- Canaccord Genuity -- Analyst

Okay. And then, can you just provide an update just on your edible and -- I know beverage has been a big focus for you guys -- plans? How are you in terms of your product development lifecycle there? Are you feeling you've got some products already that would be ready to go for potential October launch if the market goes ahead with that timeframe?

Peter Aceto -- Chief Executive Officer

Yeah. This is something we're quite focused on. We've made a lot of headway in product development. As I mentioned in my comments, we bolstered the team with some additional senior leadership and technical expertise as well. I also alluded in my comments to our development from a vape pen perspective, and that we're already pursuing having product available when those become legal. We've shared in the past our proprietary patents on Brew Buds, which are coffee, tea, and hot chocolate pods, and our patents in North America, Europe, and Australia, as well as patents pending globally, and we've already acquired the machines and the packaging equipment in order for us to do that in our Vaughan facility.

We are focused on beverages as well, and we're exploring several options in that category, but we don't have anything concrete enough to share with you today about that. We're also in earlier stages of exploring ointments, creams, and confectionaries in a few other products. So, I would say in that order, that is how our thinking has progressed.

Derek Dley -- Canaccord Genuity -- Analyst

Okay, that's great. I appreciate the color. And, just one more, if I can. Greg, maybe this one's for you. Can you just provide an update on your capital expenditures expectations for 2019?

Greg Guyatt -- Chief Financial Officer

Yeah. We're not providing guidance on the specific number, but I can say the broad categories we're looking at include expansion of our extraction capability. We mentioned earlier in our press release that we've actually invested in new extraction equipment in our Vaughan facility, which is going to substantially increase our extraction capacity there. We have a significant amount planned for Phase 3 expansion, and we're going through the final RFP processes on that to finalize the numbers there, and finally, focusing on international and product innovation. So, those are the primary buckets that will be significantly greater than what we spent in 2018.

Derek Dley -- Canaccord Genuity -- Analyst

Okay. Thank you very much.

Operator

Your next question comes from Tamy Chen of BMO Capital Markets. Please go ahead.

Tamy Chen -- BMO Capital Markets -- Analyst

Thanks. Hi, Peter and Greg. First question is I want to go back on the pricing and the excise taxes. So, I understand that your revenues are net of both medical and rec taxes, but specifically on the pricing for oils in your medical sales, if I add back the amount of excise taxes, the selling price before taxes I get on your medical oils is still notably lower than in prior quarters. What else is contributing to that delta?

Peter Aceto -- Chief Executive Officer

We're just having a brief discussion about that. So, when we are making oils, we're using Grade 3 bud and trim -- cannabis with lower cannabinoid content, and so, using more grams to get the same amount of extract than we possibly were before. So, that has an impact from a tax perspective, but that's something we can probably go back and take a closer look at.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay, got it. Thanks. And, next question is are you able to give some more color on the wholesale volumes, how much that was to selling to other licensed producers in the quarter, and would you still continue to do that now that the recreational market is up and running?

Peter Aceto -- Chief Executive Officer

In the fourth quarter, we actually had very minimal sales to any other parties beyond our traditional channels. That's an area that we will exploit from time to time as opportunities arise, but it's certainly not a core part of our strategy going forward.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay, got it. Thanks. And, last question here is -- so, you mentioned that construction of Phase 2 is now complete, but could you talk a bit more about where are you in ramping up the growing and planting of the Phase 2 and what licensing, if any, is still outstanding for the Phase 2 part?

Peter Aceto -- Chief Executive Officer

Yeah. So, the construction is complete on Phase 2, and we await final license -- so, we have a broad license which we make amendments to, which has created efficiency in our process with Health Canada, but there still remains our last few rooms that we await Health Canada approval from, and we will continue to wait for that. Their turnaround times have been generally reasonable, so the last rooms, we await final licensing for.

Tamy Chen -- BMO Capital Markets -- Analyst

And, the rest have been planted, I assume?

Peter Aceto -- Chief Executive Officer

Correct. Anything that's been licensed has been planted.

Tamy Chen -- BMO Capital Markets -- Analyst

Got it. Okay, that was all for me. Thank you.

Operator

Your next question comes from Scott Fortune of Roth Capital Partners. Please go ahead.

Scott Fortune -- Roth Capital Partners -- Director

Hi, good morning. Just wanted to follow up on the medical side. You're seeing continued medical patient growth and the medical side growing for you guys going forward. As supply comes on board, do you see the medical side holding up or a cannibalization to the rec side a little bit from that side? Talk to me about the medical side of the business here.

Peter Aceto -- Chief Executive Officer

Yeah, certainly. I would say that although we've always been a leader in terms of medical and growing our patients, we've seen a noticeable increase -- an acceleration -- in the growth of our patients since the legalization. I think in many ways, it's because of several factors. 1). Although medical cannabis has been legal in Canada for five years, I think in the eyes of most Canadians, it truly became legalized only six months ago, really reducing the stigma and increasing the conversations people are having about the use of medical cannabis. We've got relationships with many, many physicians across the country, and they've told us that their patients are coming to them asking them more and more about cannabis. But, I still feel that those patients are interested in going through a physician or being able to talk to our customer service reps -- who are award-winning and best in the industry -- about dosing, about usage, and those types of things.

So, even though supply has not been there for people who want to move to the recreational market, we see strong demand in terms of patient growth and using the services that we provide that they may not be getting from the recreational experience, so we're going to continue to focus on the medical business, expect to see growth from a patient perspective, as well as this is a very important spear for international expansion as medical becomes legalized around the world.

Scott Fortune -- Roth Capital Partners -- Director

Okay. And, on that note, your strategy for international from a U.S. side of things -- have you put together a hemp/CBD strategy potentially moving into the different countries from the international standpoint? Touch base on the international strategy as far as the U.S. potential here.

Peter Aceto -- Chief Executive Officer

As I alluded to in my comments, but only at a high level, we now have a dedicated team dedicated to our international expansion in a very thoughtful, prudent way. Of course, the U.S. market is included in that expansion, and we are in active conversations with -- on the hemp side in the U.S., trying to find trusted partners that we would like to work with. I'd say those discussions are in relatively early stages, and everything we would do, we would ensure are on the right side from a legal and a compliance perspective, but this is definitely an international opportunity that we're actively pursuing.

Scott Fortune -- Roth Capital Partners -- Director

Okay. And, I know it's early -- last question. Are you seeing any throughput from consumers for your brands on the rec side as far as a premium brand for Liiv or Synr.g? I know obviously, you've got the lift or the different awards, but are we seeing any kind of ideas of how that's selling on the rec side?

Peter Aceto -- Chief Executive Officer

Yes, absolutely, but firstly, the feedback we're getting from the provinces is that the quality of our products are very good, and I think most products are selling relatively quickly, but what we're getting is the velocity of ours is very fast, so we're seeing significant uptake on our brands, I think Liiv in particular, because the blend between price and quality is very good. One other piece of data that I didn't share is just two weeks ago -- sorry, last week -- a consumer website who is the most reputable in the space came out with the top five products in Ontario, and that would have come from Ontario consumers post-rec, and our products were named three of the top five most preferred by consumers under the Liiv brand. So, we are seeing traction in all four of our brands.

Scott Fortune -- Roth Capital Partners -- Director

Okay, thanks.

Operator

Your next question comes from Rahul Sarugaser of Paradigm Capital. Please go ahead.

Rahul Sarugaser -- Paradigm Capital -- Analyst

Good morning, Peter. Good morning, Greg. Thanks so much for taking my question. So, a couple of my counterparts mentioned the comment about the extracts being around CA$4.29, and being somewhat surprising. So, I'm not going to drill down any further, but you are driving more contribution margin on the dried cannabis into the medical market. So, do you see going forward that you will continue to drive primarily these extracts, or is it going to be more of a shift into this channel where you are driving more margin?

Greg Guyatt -- Chief Financial Officer

Obviously, margin is going to be a driver for how we position our products going forward. We view extract as being a really important part of our future growth strategy. Peter alluded to when edibles legislation comes on and our focus on vape pens. I think it's important to note with respect to extraction, we do believe that the margins will improve there, not just through our production and process improvements, but also through some of the potential changes in the excise tax legislation. So, it allows us to really be very efficient with how we allocate our top-quality flower versus the lower-grade, lower-cannabinoid-content flower, which is more going to be geared toward the extract product.

Rahul Sarugaser -- Paradigm Capital -- Analyst

Great, thank you. And then, focusing on the other end of the spectrum here, you referred to a focus on IP going forward, and we do know that you have clinical trials in Australia as well here in McMaster, in ALS and chronic pain respectively, so it'd be great to get an update on both of those trials as well, please.

Peter Aceto -- Chief Executive Officer

Yeah, sure. Yes, we do have those clinical trials -- the pain study at McMaster and the ALS study in Australia. We are working on others as well. Both of those are proceeding. I don't have details that I can share with you today about the specifics of exactly where those are. I know the ALS study in Australia has been approved, and they have begun to put together their participants in the study, and I'm just not 100% sure where we are on the McMaster pain study, other than I know it's forging forward. So, we'll take that as an action item to follow up on.

Rahul Sarugaser -- Paradigm Capital -- Analyst

Great. That's all for me. Thank you.

Operator

Your next question comes from Neal Gilmer of Haywood Securities. Please go ahead.

Neal Gilmer -- Haywood Securities -- Analyst

Yeah, thanks very much, and good morning, guys. A lot of my questions have been asked at this point. Maybe just a clarification with respect to your outdoor activities. Maybe I missed it in your prepared comments, but do you expect a crop going in this summer, or is it too early to assess? I know you stated that they're in LOI; you're trying to turn them into definitives, but just on the timing of that.

Peter Aceto -- Chief Executive Officer

So, there's two separate parts to our outdoor strategy, and one of them, there's a higher probability that we could get plants in the ground this spring and get a harvest this year, but we're not 100% certain about that. We also -- these outdoor grows, just like our rooms in our Perpetual Harvest greenhouse, need to be licensed by Health Canada, and that's something we're respectful of, so, not 100% sure of the timing there as well. So, there is some chance that we can have plants in the ground this spring and harvest later this year, but not sure how probable that is at this point.

Neal Gilmer -- Haywood Securities -- Analyst

Fair enough. But then, safe to assume that it will be for sure in place for the 2020 growing season.

Peter Aceto -- Chief Executive Officer

I think that's fair to assume.

Neal Gilmer -- Haywood Securities -- Analyst

Okay. That's my only question at this point. Thanks very much.

Operator

Your next question comes from David Martin of Bloom Burton. Please go ahead.

Antonia Borovina -- Bloom Burton -- Analyst

Good morning. This is Antonia on the line for Dave. My line was briefly cut off, so I apologize if I ask any questions that have already been asked. Maybe firstly, you're bringing your cash cost per gram sold down nicely, but it's still at CA$2.94 per gram, so just wondering -- is the CA$0.75-0.80 still your target, and is this achievable in your greenhouse, or do you have to move to outdoor for that?

Greg Guyatt -- Chief Financial Officer

First of all, just to clarify a point on that -- so, the CA$0.75-0.80 is our growing cost, so that excludes the cost of any packaging and supply chain, et cetera. So, we are still on track for that aspect of it. On the supply chain side and the rest of production, as we ramp up, we're going to continue to gain further economies of scale, and as we get better at it, we do expect that the cost will come down. We see ourselves -- or, we believe that we will be among the leaders in the low-cost producing category of LPs.

Antonia Borovina -- Bloom Burton -- Analyst

Okay. And then, for -- just trying to understand. You sold 3,407 kg while your current greenhouse capacity is 50,000 kg per year, so did you only have demand for the 3,400, or is that all you could supply?

Peter Aceto -- Chief Executive Officer

No, it's definitely the supply side, not the demand side. So, Phase 2 has ramped up gradually throughout the year, only being completed very recently, and not all rooms are fully licensed. And then, the cycle time of a crop, and a harvest, and going through production. So, as Greg mentioned when he answered a question earlier, we're expecting to see that number continue to ramp up as the throughput from the greenhouse and through our manufacturing processes increase and we get our full growing capacity online.

Antonia Borovina -- Bloom Burton -- Analyst

So, what proportion of full capacity did you achieve by the end of fourth quarter?

Peter Aceto -- Chief Executive Officer

I don't know. That's a challenging question to ask. When we get our final rooms licensed in Phase 2, we'll be at 50,000 kg annualized, but we've brought room systematically online as we've continued to build Phase 2, so I think that number has changed. And actually, Phase 2 -- for much of the case, the output that we sold in Q4 did not primarily come from plants grown in Phase 2.

Antonia Borovina -- Bloom Burton -- Analyst

Okay. And, I might have missed this, but did you say where the 100-200 acres of potential outdoor grow is located?

Peter Aceto -- Chief Executive Officer

You didn't miss it. We did not say that. As I said, we have letters of intent in place, and it's our preference at this point to not share those facts at this point.

Antonia Borovina -- Bloom Burton -- Analyst

Okay, thanks.

Operator

Your next question comes from Martin Landry of GMP. Please go ahead.

Martin Landry -- GMP Securities -- Managing Director

Hi. Just to follow up, just to make sure I'm clear on your Phase 3 expansion, what's the timing of completion there and what's the capacity going to be?

Peter Aceto -- Chief Executive Officer

We expect Phase 3 to be completed toward the second quarter of 2020 and operational toward the end of the second quarter. And, the capacity is, on an annualized basis, an additional 50,000 kg per year.

Martin Landry -- GMP Securities -- Managing Director

Okay. And, when's the construction starting?

Peter Aceto -- Chief Executive Officer

I mentioned a little bit earlier -- we're in the process of finalizing all of our RFPs. We're making great progress on that right now, but we are expecting to commence that project in the coming month or two.

Martin Landry -- GMP Securities -- Managing Director

Okay, perfect. Thank you.

Operator

Your next question comes from Ryan Tomkins of Jefferies. Please go ahead.

Ryan Tomkins -- Jefferies -- Analyst

Hi, guys. Just one quick one for me, please. Just interested in your thoughts on the outdoor growth that you've planned. Obviously, we haven't seen too much of that from other large competitors. I know it's only recently been allowed to be licensed from Health Canada, but just want thoughts around consistency and quality, whether that's going to be achievable outdoor, whether you've done any testing or seen anything like this, and also, whether or not you have plans to use this for dried cannabis or whether this is only going to be used for extract. Thanks very much.

Peter Aceto -- Chief Executive Officer

Yes, happy to share a few more thoughts on our view about outdoor grow. So, outdoor grow for us is 100% for extracted product. So, our thinking there -- as the demand for cannabis-based products in Canada changes with the new rules and regulations allowing edibles and other formats of cannabis to be sold, that this is a further significantly lower-cost way to get cannabinoid content for that market. So, for us, this is about biomass, and it's about extracting the entire crop, specifically for those product innovations. So, we look at our Perpetual Harvest greenhouse and our Phase 3 as providing high-quality dry bud at a low cost because of the upwards of five harvests we get in a year. We see our outdoor grow specifically to be extracted for these innovative product types.

Ryan Tomkins -- Jefferies -- Analyst

Okay, that makes sense. Thank you very much.

Operator

Your next question comes from Jesse Pytlak of Cormark Securities. Please go ahead.

Jesse Pytlak -- Cormark Securities -- Analyst

Hey, good morning. Just one quick question from me. Are you able to provide a little bit more color on the Apotex partnership just in terms of the product types that you're working on and maybe a timeline for commercialization?

Peter Aceto -- Chief Executive Officer

Yes, sure. We have been working over time on our relationship with Apotex, and I mentioned that we are considering three products which we've decided that we'd like to keep confidential for now because there is some testing that we need to do. We want to make sure that from a timing perspective and in terms of the outcome that we want that we feel certain -- more certain -- before we share. We're discussing medical applications, both under the Cannabis Act and ultimately providing DIN numbers, possibly, but I'd say those conversations -- although they're real and they relate to three products, we're just not comfortable sharing specific details around timing or what those products will be at this time.

Jesse Pytlak -- Cormark Securities -- Analyst

Okay. And then, just one follow-up, I guess. I think you mentioned earlier that you feel that there's probably some ability to move some pricing higher on your medical products. Do you think there's that same ability on the adult use side as well?

Peter Aceto -- Chief Executive Officer

Yes. In fact, we've already had conversations with our provincial customers and have actually increased prices in some of the provincial stores already, and those conversations will continue.

Jesse Pytlak -- Cormark Securities -- Analyst

All right, thank you. I'll rejoin the queue.

Operator

Ladies and gentlemen, as a reminder, should you have a question, please press *1. Your next question comes from David Martin of Bloom Burton. Please go ahead.

Antonia Borovina -- Bloom Burton -- Analyst

Hi. I just wanted to follow up again on the outdoor grows and the LOIs that you signed. Just wondering if you're able to disclose whether that is for outdoor grow in Canada or potentially outside of Canada.

Peter Aceto -- Chief Executive Officer

Yeah. So, what I was referring to was growing inside of Canada. Our international team are exploring opportunities outside of Canada, but my references -- our references to outdoor grow were related to Canada.

Antonia Borovina -- Bloom Burton -- Analyst

Okay, thanks.

Operator

Your next question comes from John O'Connell of Davis Rea. Please go ahead. My apologies -- John O'Connell?

John O'Connell -- Davis Rea -- Chairman and Chief Executive Officer

Sorry. Peter, just to expand on the outdoor grow, which is where a lot of the future, obviously, is going to be with regard to your future production, you're talking about 1,000 kilos per acre. That sounds kind of low. Could you expand on whether you think you can enhance your yield per acre and/or how many -- given where you're going to grow, whether you think you'll be able to get more than one turn per year out of your inventory.

Peter Aceto -- Chief Executive Officer

Certainly. I do agree that 1,000 kg per acre is a conservative number. The research we have done with people who are growing cannabis outdoors -- not just in Canada, but in other places as well -- that we should be able to get somewhere between 1,000-3,000 kg per acre, but understanding that this is Canada, and that we're going to get really good at this over time, and we need to get our first crops in the ground, and that they may not go perfectly, we wanted to be conservative in our assumptions. So, the people we have talked to suggest that somewhere between 1,000-3,000 kg per acre would be reasonable. Our assumptions also include just one harvest per year, but we believe that two harvests are possible, but have chosen to be conservative at this early stage.

John O'Connell -- Davis Rea -- Chairman and Chief Executive Officer

And, just to follow up on that, I take it you've already done some outdoor grow, and have you been able to -- where you've done that outdoor grow, have you been able to get more than two crops with your genetics?

Peter Aceto -- Chief Executive Officer

So, CannTrust has not done outdoor grow, but we have been in conversations with multiple experts in different jurisdictions to get those assumptions.

John O'Connell -- Davis Rea -- Chairman and Chief Executive Officer

And, do you expect that -- when you do this, it's all going to be for extraction purposes. Will you be building your own extraction capabilities or will you be using a third party?

Peter Aceto -- Chief Executive Officer

Our plans today, which are sited in our five strategic priorities, is to continue to leverage our current expertise in the extraction market. We're already a leader in this area, and so, our plan is to continue to extract on our own. That being said, there are more players coming to the fore who can do extraction for others, but based on the due diligence and the research we've done, we don't feel comfortable relying on them at this point, but I think this is something we will continue to evaluate how it is we partner with people who can extract as a core competency. This is something we're very good at today, and we want to continue to bring that leadership to our business, and it's very applicable to the evolution of the cannabis market.

John O'Connell -- Davis Rea -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Graeme Kreindler of Eight Capital. Please go ahead.

Graeme Kreindler -- Eight Capital -- Analyst

Thanks for taking the follow-up here. I was wondering -- could you just elaborate a little bit on the kindred relationship with Breakthru, how that's developed so far, and what types of work they're going to be doing, particularly as we're going to get stores opening in Ontario?

Peter Aceto -- Chief Executive Officer

Yeah. So, we're very happy with our relationship with Kindred. We meet with them on a very regular basis. What they do for us is they're our eyes and our ears and our teachers in the provinces and all the physical locations, so we're getting a tremendous amount of feedback and insights on consumer preferences from coast to coast. They're educating people about CannTrust and about our products and the quality of our products, and we're getting positive feedback about that. I think as there become more and more retail stores across the country, and particularly in Ontario, that strategic relationship will be even more beneficial to CannTrust.

Graeme Kreindler -- Eight Capital -- Analyst

And, does Kindred look at the competitive positioning on price as well, or is there more in terms of preferences on SKU, strains, and form factor?

Peter Aceto -- Chief Executive Officer

It really is all of the above. They really are experts from a retail perspective, and partnering with them has allowed us to leverage their skill and ability versus building a team of our own with those skills and abilities. So, it's definitely all of the above: Consumer preferences, what's being experienced in the retail environment, quality, what people prefer, and absolutely, pricing.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, understood. Thank you very much.

Operator

There are no further questions at this time. Please proceed.

Peter Aceto -- Chief Executive Officer

Excellent. Thank you very much, everyone, for your time this morning. I really appreciate the thoughtful questions as well. And, operator, thank you very much. Have a good day, everyone.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.

Duration: 52 minutes

Call participants:

Peter Aceto -- Chief Executive Officer

Greg Guyatt -- Chief Financial Officer

Martin Landry -- GMP Securities -- Managing Director

Graeme Kreindler -- Eight Capital -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Tamy Chen -- BMO Capital Markets -- Analyst

Scott Fortune -- Roth Capital Partners -- Director

Rahul Sarugaser -- Paradigm Capital -- Analyst

Neal Gilmer -- Haywood Securities -- Analyst

Antonia Borovina -- Bloom Burton -- Analyst

Ryan Tomkins -- Jefferies -- Analyst

Jesse Pytlak -- Cormark Securities -- Analyst

John O'Connell -- Davis Rea -- Chairman and Chief Executive Officer

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