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Terra Tech (TRTC) reported financial results for the second quarter and the company saw significant growth from a revenue perspective on a year-over-year basis.
Although we are favorable on this top-line growth, a majority of this revenue was generated by its Edible Garden subsidiary which has a very low gross margin.
Cannabis Products…A Margin Story
Terra Tech’s cannabis products continue to be a bright spot for the company as revenue increased by more than 2,800% on a year-over-year basis.
When you compare the gross profit derived from Terra Tech’s Edible Garden subsidiary to its IVXX subsidiary, it is easy to see where the company needs to focus.
The Edible Garden subsidiary generated less than $460,000 in gross profit on more than $5.8 million in revenue, while IVXX recorded more than $1.1 million in gross profit on less than $3.8 million in revenue.
Positioned for Success
We are favorable on developments by Terra Tech as it has better positioned itself for long-term success within the cannabis industry.
If you take a step back and look at how Terra Tech got to this point, you can see that management had a strategy and we are favorable on their execution of this strategy.
Through the development of its subsidiaries and the acquisition of businesses, Terra Tech has become a vertically integrated cannabis cultivator and retailer. Some of the developments we are most excited about are:
- In September 2014, Terra Tech formed IVXX for the purpose of producing a line of cannabis flowers, as well as a complete line of concentrates. IVXX products can be purchased at 200+ dispensaries in California. IVXX also sells clothing, apparel, and other various branded products.
- In April 2016, Black Oak came a wholly-owned subsidiary of Terra Tech. Black Oak operates a medical marijuana dispensary under the name Blüm in Oakland, California. During the same month, Terra Tech’s MediFarm subsidiary commenced operations at its dispensary in Las Vegas, under the Blüm brand.
Long-Term Play
Although we are favorable on Terra Tech’s long-term opportunity, we do have some near-term concerns that are related to financing some of its projects. The company needs to raise to capital in order to execute on its initiatives and this could serve as a headwind for the shares.
We would recommend a dollar cost averaging strategy with Terra Tech as the shares are an attractive investment opportunity due to its growth potential, but still possess risk due its rally this year (up more than 350% in 2016).
Terra Tech is trading at $0.4115 after the shares fell 3.5% yesterday and we would keep a close eye on how TRTC trades from here.
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