CannTrust Holdings (NYSE:CTST) hopes to become one of Canada's biggest and lowest-cost marijuana producers, and this week, it unveiled first-quarter financials that show it's making progress toward its goal. The company's harvest surged because of expansion projects, and strong medical marijuana sales more than offset a sequential slowing of recreational market sales. Can CannTrust Holdings' success continue? Here are three important takeaways from its first-quarter financial report.
1. Sales growth is blistering but slowing
CannTrust is a major medical marijuana player with 68,000 active registered medical marijuana customers, up from 58,000 exiting December. It's also generating substantial sales from Canada's recreational market, which opened last October.
Medical and recreational sales comprised 67% and 33% of the company's 16.9 million Canadian dollars in revenue in Q1, respectively. Overall, it sold about 3,000 kilograms of cannabis in the quarter, up 200% from last year.
Although revenue increased 115% from one year ago, sales only improved 4% quarter over quarter, and year-over-year sales growth slowed. For comparison, revenue was CA$16.2 million in Q4, up 132% year over year.
The slowdown isn't too surprising given Health Canada's monthly sales updates have revealed declining recreational market sales since December. Retail marijuana sales were CA$57.3 million in December, CA$54.9 million in January, and CA$49.9 million in February. The decline, which was likely caused by seasonal slowing and supply shortages, caused CannTrust's wholesale revenue, including recreational market sales, to fall to CA$5.5 million in Q1 from CA$6.5 million in Q4.
2. Cannabis capacity is climbing
Canadians spend about CA$6 billion per year on cannabis, and since it's only early days for legal recreational market sales, production growth now is key to capitalizing on the shift from the black market to legal stores.
In Q1, an expansion to CannTrust's existing indoor facilities boosted its harvest to 9,424 kilos of marijuana from 4,816 kilos in Q4 and 1,749 kilos in Q1 2018. It usually takes about 60 days for harvested marijuana to turn into revenue, so the substantial increase last quarter bodes well for this quarter.
Production growth could fuel even greater revenue upside through 2020. CannTrust expects to reach a 50,000 kilogram run rate in Q3 2019, and it could harvest an additional 75,000 kilos this fall from 81 acres it recently acquired if regulators cooperate. In 2020, another expansion should bring indoor production to 100,000 kilos annually. And additional acreage it plans to buy could lift companywide production to between 200,000 and 300,000 kilos per year exiting 2020.
3. A return to profitability?
Historically, high-margin cannabis extracts have accounted for a larger proportion of CannTrust's sales than dried cannabis flower, making it one of the most profitable marijuana growers.
However, CannTrust reported a net loss of CA$25.5 million in the fourth quarter because extract sales represented a smaller proportion of revenue and operating expenses increased. In the first quarter, extracts accounted for about 70% of medical marijuana sales and a larger proportion of recreational sales, and costs per gram decreased, so gross margin improved to 46% from 35% in Q4.
The improving margin is good news, but the company's net income of CA$12.8 million in Q1 was solely due to a $26 million gain associated with fair-value adjustments to its marijuana inventory, a line item that can swing wildly from quarter to quarter. Excluding that gain, CannTrust would've lost money, because its cost of goods sold totaled CA$9.1 million, and its operating expenses totaled CA$16.2 million.
Nevertheless, the company made solid headway toward operating profitability last quarter, and it told investors on its quarterly earnings conference call that it expects to return to operating profitability later this year.
What to watch next
CannTrust is investing in capacity and extraction equipment that it hopes will allow it to take advantage if Health Canada authorizes recreational sales later this year for additional cannabis products, including vapes, edibles, and beverages.
Its cash cost per gram fell from CA$2.94 in Q4 to CA$2.77 per gram, including $0.70 to $0.75 for crop-to-harvest costs. Those costs should fall once its outdoor acreage is up to speed, because it estimates outdoor crop-to-harvest costs will only be about $0.15 per gram.
Since the company's tripling its extraction capacity, it should be able to sell more high-margin product that it's grown at increasingly lower costs, allowing it to solidify its reputation as one of the most profitable players in the industry.