TerrAscend Turns Its First Profit as Revenues Rise

Multistate cannabis operator TerrAscend (TRSSF -7.94%) purchased new facilities and acquired new brands in Midwest and East Coast cannabis spheres in Q1 2022, flexing its strategy to go deep in medical markets prior to adult-use cannabis's arrival. Consequently, costs have risen as the company acquired new facilities and workforces in medical cannabis and adult use cannabis states alike. But over the past four years revenue and profits have risen much faster than SG&A spending.

TerrAscend expands into new markets

Building on the brand's major presence in the San Francisco market, where it has a cultivation facility and five area dispensaries, TerrAscend bolstered its operations in four Midwest and East Coast markets.

• New Jersey: Thanks to its inroads into the state's medical cannabis market prior to adult use's arrival, the company was selling cannabis on day one of statewide legalization at its Maplewood and Phillipsburg dispensaries. TerrAscend was also the first company in the state to have a hydrocarbon concentrate -- a technique to increase cannabis products' potency, and one of the top-seling cannabis product categories -- for sale. It's signed a lease for a new 150,000-square-foot cultivation facility as it anticipates opening a third dispensary.
• Michigan: TerrAscend acquired Gage, a Michigan dispensary chain with five stores, as a wholly owned subsidiary last year, and most recently announced that it would be opening another dispensary in the state. The multistate operator then purchased five new dispensaries from Pinnacle, and was approved by state regulators for an concentrate extraction and packaging facility. Michigan allows medical and adult-use cannabis sales.
• Maryland: The company scooped up Allegany Medical Marijuana in Cumberland, Maryland, setting itself up to become vertically integrated in the medical-only state in the hope that adult-use cannabis passes this November. The company is just starting to spend in this state.
• Pennsylvania: TerrAscend offered the first hydrocarbon concentrates in this medical-only state, in addition to its extensive strain library. It has six medical stores, a respectable footprint that likely will need to expand to fill out an adult use market.  

Spending more to do more

You can see TerrAscend's commitment to its brand and eye to the future in its significant rise in selling, general, and administrative (SG&A) expenses over the past four years, as the company takes on new employees, strengthens its brand, and learns new markets. TerrAscend spent $18 million on SG& in 2018; that spending grew to $83 million over the trailing 12 months ending with Q1 2022, a nearly fourfold increase.

The expansion in SG&A seems to have spurred large increases in revenue and profits, leading TerrAscend to report a trailing-12-month profit -- a modest $928,000 -- for the first time in Q1 2022. 

Data source: Yahoo Finance.

SG&A spending as a portion of revenue and profit have fallen.

The fourfold growth in SG&A was far less than the 40-fold boom in revenue, a 164% difference. furthermore, the difference between gross profit increases and SG&A spending was nearly 180%. Both comparisons show how much bang for the buck the company is getting from SG&A spending. Looking deeper, Sg&A was 360% of revenue in 2018. That percentage had shrunk to only 40% of revenue by the end of the trailing twelve months ending with Q1 2022, an 89% decrease. after reporting SG&A as an 1,400% portion of gross profit in 2018, SG&A fell to 90% of gross profit at the end of the trailing twelve months ending in Q1 2022, a 94% decrease that highlights the strength of TerrAscend's business plan. That strength also shows up in the company's operating income, which turned positive in 2020 and, while not growing steadily, has remained in the black ever since.

All signs point to TerrAscend solidifying its presence in its key adult use markets, while building out operations in Maryland and Pennsylvania, who may lag behind until 2025, or beyond, before adopting an adult use program. Whether expanding in those key markets, getting into other medical markets early, or making moves when federal legalization happens, the company is in good shape to continue implementing its business plan despite the SG&A increases.

Rising revenues and profits are a good sign for TerrAscend. But, the steady growth of negative free cash flows are a metric to watch as they could impede the company's ability to take advantage of future growth opportunities as regulations become more favorable for the cannabis industry in the coming years.