05/30/2014 12:06 EDT

Tweed Inc's Q1 Earnings Results Point To Growing Pains In Medical Pot Biz

Medical marijuana enthusiasts got their first glimpse into the state of Canada’s nascent industry Friday — and it suggests growing pains could continue to choke profits for some time.

Tweed Inc., the country’s first publicly traded medical marijuana company, reported no revenue and a $2.8 million loss in its first-ever quarterly results for a period that ended before it was technically able to sell product.

However, it also forecast that it would stay in the red until it can produce and sell enough product to turn a profit. It offered no timeline for that.

During the quarter the company was focused on transitioning to commercial production. It imported several new strains while waiting for its own original stock to grow, before starting shipments earlier this month.

Shortly after it began shipping, supply ran dry for a time due to pent-up demand in the market of some 40,000 patients. The company expects to report “limited revenue” in its second quarter.

The company, based in Smith’s Falls, Ont., said that it is struggling to cope with an influx of demand from patients switching to the new program. While it has accelerated the production cycle as much as possible, dealing with a crop that is highly regulated has created complexities and challenges. There has been a time lag of several months between decisions to expand capacity and the availability of new product, which has taken a hit on revenue potential, the company said.

“This constraint has been more impactful than anticipated by Tweed, has been a frustration to patients, and appears likely to be the singular limiter on growth in revenues for the balance of 2014,” it said.

“The sector as a whole has several participants that appear to be working through the same production volume challenge.”

Tweed’s operating expenses totalled $2.75 million in its first quarter of 2014 as it spent to hire employees, invested in educational outreach programs and purchased the required governmental permits, among other costs. Those costs also include non-recurring items like the cost of listing on the public exchange and orchestrating a reverse takeover.

Still, the company, which raised about $9.8 million through going public earlier this year, has about $7.7 million in available cash. Tweed has also raised another $15 million through a private placement of its shares since the end of the quarter.

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Tweed, which operates out of a converted Hershey’s chocolate factory, is one of the most high-profile commercial-scale grow operations that the government has approved to sell medical marijuana to patients under the new Marihuana for Medical Purposes Regulations, which came into effect April 1.

There have been some kinks since the new legislation came into effect — from a legal challenge by patients who want to continue to grow their own to seizures of shipments bound for licensed producers, including Tweed. But the company’s chairman Bruce Linton said he is encouraged by Canada’s regulatory and product standards for medical marijuana production.

"This is a sector that was established through the [new medical marijuana regulations] less than a year ago and, while much work remains, Canadians will benefit from this bold leadership."

Tweed is outsourcing its testing as it builds an in-house lab. The growing process takes about four months, followed by a five week period for drying, trimming,curing, testing and re-testing.

“This time commitment has merit, yet as Tweed has experienced, it does delay the initial production for volume release.”

Tweed also raised some medium-term challenges to the sector. Health Canada has so far granted about 20 licenses but there are some 800 applicants waiting in the wings.

Still, Tweed foresees a time when pent-up demand is exhausted and the sector will have to drive new demand. The company has invested in programs to educate doctors, many of whom are skeptical of the drug, so they might be more willing to prescribe it.

Tweed also said it is seeking out acquisition opportunities to expand its business as it believes it can capitalize on consolidation in the sector.