TerrAscend Corp. (PNK:TRSSF) Q1 2023 Earnings Call Transcript May 11, 2023

TerrAscend Corp. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.038.

Operator: Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I’d like to welcome everyone to TerrAscend’s First Quarter 2023 Earnings Call. Joining us for today’s is Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Executive Officer; and Keith Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the Company’s outlook, the Company’s guidance for fiscal year 2023, and estimates and assumptions relating there too and the company’s expectations regarding its market opportunities is listing on our Toronto Stock Exchange, and other financial and operational matters. Each forward-looking statements discussed in today’s call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance. Additional information regarding these factors appears under the heading Risk Factors and Company’s Form 10-K filed earlier today with the Securities and Exchange Commission or the SEC and other periodic filings which are available at www.sec.gov and on our website at www.terrascend.com. The forward-looking statements in this call will speak only as of today’s date, and we undertake no obligation to update or revise any of these statements. Also, during the call, we will present both GAAP and non-GAAP financial measures.

A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which you can find on our Investor Relations site or on the SEC website. I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.

Jason Wild: Good afternoon, everyone, and thank you for joining us. Today, we reported our six consecutive quarter of sequential revenue growth generating $69.4 million for the first quarter of 2023, an increase of 43% year-over-year. We achieved this growth despite the typical seasonality we see Q4 to Q1, as well as the ongoing macroeconomic and cannabis industry challenges. This achievement is a result of the dedicated focus on our strategy, strength of our business model, and the operational and balance sheet measures we took in 2022. Most notably, gross margin significantly improved sequentially by 420 basis points during the first quarter to 48.8%. We also achieved our third consecutive quarter of positive cash flow from operations delivering 8.4 million for the quarter.

What I’m most excited about is that we were a free cash flow positive for the quarter, having generated $5.9 million, which contributed to an increase in cash and cash equivalence from 26 million as of December 31st to 33 million as of March 31st. Not many in our industry can point to consistent financial progress like this in such a challenging environment. We have delivered on what we said we would do for the last several quarters by controlling what we can control and navigating the rest. This steady financial progress lends itself well to our plans to list on the TSX and we are on track to complete all of the steps required to do so. Our annual shareholder meeting is scheduled for June 22, where shareholders will be able to vote on the reorganization required for our proposed listing.

Assuming this is approved by our shareholders and the TSX grants approval for the listing, we should be in a position to commence trading shortly thereafter. We believe the TSX listing will provide the company greater access to a broader group of institutional and retail investors looking for attractive opportunities in the U.S. cannabis space. This broader appeal should provide increased trading volume and a considerable advantage during M&A discussions. And several ongoing discussions, we are seeing sellers more willing to accept tariffs on stock as consideration and assign a greater value to our shares once listed on a major exchange. Just to be clear, we don’t look at the TSX listing as a magic bullet. The capital markets have clearly been unkind to the cannabis space over the last two years.

We do believe, however, that a well-run cash flow positive company can unlock substantially more value and significantly lower its cost of capital if listed on a major exchange with more participants. This is in my view, not only a great opportunity for TerrAscend, but also for other players in the industry, as our successful listing could blaze the trails for others to follow. When we think about the trajectory of the company over the coming years, we see robust organic growth driven by our attractive line-up of states converting to adult use, and we see abundant M&A opportunities given our deep not wide strategy. This strategy has served to drive revenue and profitability through a more focused number of markets with the ability to go deeper, while also leaving an open map to enter new markets at the right price.

As I mentioned during our year-end conference call in March, we continue to see an increasing number of attractive opportunities in our pipeline. These opportunities range and type across the entire spectrum with private and public companies, single state and multi state operators as well as single and multiple sets of dispensaries within specific states. We are definitely still in a buyer’s market with distressed operators looking for a lifeline. However, we will remain patient and disciplined in our approach. I often say that the best way to get good M&A deals done is to not need to do any M&A. Given our runway, we feel like we are well positioned in this regard. Lastly, to comment quickly on the ebbs and flows of the regulatory environment.

Recently, a standalone safe banking bill was introduced in both the House and the Senate. Initial indications point to support from both parties, while we will continue to operate as we have them assuming no regulatory reform, any progress on this front would be a major catalyst for the industry. In conclusion, we continue to make substantial progress in Q1 across virtually all facets of our business. We grow revenue sequentially for the sixth consecutive quarter and 43% year-over-year, we significantly expanded our gross margins and generated positive free cash flow, which led to increase in cash on our balance sheet. These achievements are all after having materially lowered our debt and interest expense in the back half of 2022. Looking ahead, our organic growth runway is attractive and we have ample M&A opportunities in our pipeline.

Before I turn the call over to Ziad to review our operations in more detail, I wanted to congratulate him on his recent promotion to Chief Executive Officer. I want to personally thank him for all he has already achieved with TerrAscend and I know I speak for our entire team, when I say that I am excited to see all of his future contributions to our growth and success. Now I’ll turn the call over to Ziad to provide an update on our key markets. Ziad?

Ziad Ghanem: Thank you, Jason. I really appreciate those kinds words. I share your excitement regarding everything we have achieved in the last few quarters and what is in store for us in 2023 and beyond. I will now walk through our operations state by state. New Jersey continues to be a strong market for us at retail and wholesale, where we hold a top three market share position. Our already strong margins continue to improve in Q1 through various initiatives, including optimization of product mix and balancing retail versus wholesale revenue, combined with sequential revenue growth, and a further reduction in our cost of goods. The most recent BDSA data ranks as top three operator in this state where we are over indexing in key product categories, including flower, vapes and concentrates.

In pre roll, we gained four points of market share in the quarter and we expect to drive material market share gains in edibles with expected launch of one which takes place tomorrow. We remain on schedule and on budget for further expansion at our Boonton cultivation facility, which will enable us to extend our supply to this growing market in early 2024. Turning to Maryland, first quarter sales nearly tripled sequentially, although off of a low bay, mainly due to revenue contribution from our retail dispensary and the first harvest at our new state-of-the-art Hagerstown facility during the quarter. I’d like to add that while it usually takes a while to dial in the quality at a new cultivation facility, we have been extremely pleased with the quality of these early harvest as we are seeing yield per square foot, but to trans ratio, the THC Potency at levels comparable to our facilities in other states have been operational for much longer.

Now that we have absorbed the full cycle of harvesting, margins in Maryland for Q1 improved [indiscernible] and we expect to continue to expand as we ramp up our volume and move to adult-use in July. You have been gearing up for this [Maryland launch] as we did in New Jersey, strategically building inventory to ensure we have the capacity and resources to meet the expected demand surge. As you may recall, in late January, we closed on our AMMD dispensary acquisition, which contributed to revenue in February and March. Acquisition was Phase 1 of our vertical integration efforts in Maryland. AMMD is 10,000 square foot high performing medical dispensary that currently generate approximately $8 million in annualized sales, which is two times the state average per dispensary.

We are very excited for its future prospects as an adult-use dispensary due to its unique geographical positioning at the border of West Virginia and Pennsylvania, both currently medical only states. M&A in Maryland is a top priority for us. We remain focused on adding three additional dispensaries to get to the four-cap limit. Our strategy of entering with cultivation and manufacturing first, with a plant or is picking up retail as we get closer to adult-use is working out very well. The pipeline of dispensary operators, with a desire to sell increased substantially given the five-year transfer restriction contained in the new adult-use bill. We are actively in discussions with a number of excellent prospects and look forward to sharing developments on this front very soon.

We are also prepared for adult-use launch from a branding perspective with a broad portfolio of high-quality products and winning brands such as Kind Tree, Gage, Cookies, and [indiscernible]. When adult use is implemented in Maryland, we will be more than ready to capitalize on the opportunity. We have built a strong foundation to both support this launch and ensure our long-term success the state. Now let’s move to Pennsylvania, which as I mentioned on our last call, it is sleeping giants the current medical market size of more than $1.2 billion. Right now, the regulatory test of adult-use continues to progress. Although, we expect we will have more clarity on finding in the next few months. In the meantime, we will continue to minimize expenses and optimize efficiency of our existing operation.

For the first quarter, both retail and wholesale revenue were stable sequentially. As we’ve stated previously, we are already fully built out at our large-scale cultivation and manufacturing facility with plans in place to bring on currently unused capacity as needed in response to adult-use implementation. Turning now to Michigan, we continue to execute on our plan to drive further market share gains and profitability in the state. Revenue quarter-over-quarter was stable, even taken into account the expected Q4 to Q1 seasonality. Our rent strategy has proven to be very effective in this market, demonstrated by the significant premium to the average price in the state. The recent opening of Lemonade Centerline, we now have an 18 store retail footprint in Michigan.

We also completed a soft opening our 19th store in Oxford, with the grand opening scheduled for this [indiscernible]. Our revenue remains stable, gross margins extended materially versus Q4. Reflecting the actions we have taken to optimize our operations and reduce costs. During the quarter, we increase the mix of the TerrAscend’s brands versus third-party brands at our dispensaries. But our now fully operational extraction lab poised to add additional form factors and a broader array of products in the coming months. We are confident in our path to positive EBITDA during the second half of 2023. While we see a healthy pipeline of M&A opportunities to add to our retail store count of 19 in Michigan. We remained very disciplined, while focusing on margin expansion and profitability of our existing operation.

Last but not least, in Canada, we announced recently that we increased our ownership of our cookies retail store to 95%. This will enable us to focus more on our retail business in Canada and have better control of our own data. In closing, Q1 was a very successful quarter for us. We are pleased with sixth consecutive quarter of sequential revenue growth and our third consecutive quarter of positive cash flow from operations that we have achieved. We’re even prouder that both the operational and balance sheet measures that we took it in 2020 continue to result in improvements gross margin, EBITDA, cash flow from operations and free cash flow. With our exceptional team, high quality products and brands, and improved balance sheets and exciting lineup states and best-in-class institutional sponsorship.

I am more confident than ever and our ability to grow profitably both organically and through M&A. I would like now to turn the call over to Keith to provide a financial update.

Keith Stauffer: Thanks, Ziad. Good afternoon, everyone. The results that I’ll be going over today have already been filed on both SEDAR and EDGAR. And all results that I will reference today are stated in U.S. dollars. Net sales for the first quarter totaled $69.4 million, compared to $69.0 million for the fourth quarter of 2022 and $48.6 million during the same period last year, representing positive growth sequentially, and 43% growth year-over-year. Retail revenue for the quarter was $55.4 million versus $57.2 million in the previous quarter, representing a 3% sequential decline which we expected due to seasonality. Retail revenue was flat sequentially in Pennsylvania, down low-single-digits in New Jersey, Michigan and California, all due to expect to seasonality and up in Maryland driven by two months of sales related to the acquisition of AMMD.

Retail growth was 115% year-over-year, driven by the acquisitions of Gage and Pinnacle in Michigan, and AMMD in Maryland, as well as the launch of adult use sales in New Jersey in April of last year. Wholesale revenue was $14 million in Q1 versus $12 million in Q4, representing a 17% increase sequentially, driven by growth in New Jersey and the expansion of our branded wholesale business in Michigan. Wholesale revenue declined 41% year-over-year, driven by the discontinuation of bulk wholesale in Michigan after Q1 of last year, and decline in our wholesale business in Pennsylvania as a result of further virtualization in the state. Gross margin for the first quarter of 2023 was 48.8%, compared to 44.6% in the fourth quarter of ’22 representing a 420 basis point improvement quarter-over-quarter.

This impressive sequential improvement was driven by increased yields, optimization of mix and better utilization of capacity in New Jersey, Michigan and Maryland. General and administrative expenses for the first quarter of ’23, excluding stock based compensation, and depreciation and amortization were 26.0 million, compared to 33.6 million in the fourth quarter. G&A expenses excluding 1.9 million of onetime items, primarily related to stocks implementation and legal settlements in the first quarter, and excluding 9.9 million of onetime items primarily related to bad debt expense as previously disclosed in the fourth quarter were 24.1 million, or 34.7% of revenue, and 23.7 million or 34.3% of revenue, respectively. This modest increase in G&A expenses excluding these onetime items, was primarily driven by the acquisition of AMMD in Maryland.

Stock based compensation expense for the quarter was 1.7 million, compared to 1.6 million in the fourth quarter. GAAP net loss from continuing operations in the first quarter was 19.2 million, compared to a net loss of 2 million in the fourth quarter of ’22. The increase in net loss of 17 million quarter-over-quarter primarily relates to 21 million in reversal of goodwill and intangible impairments in the fourth quarter of ’22, related to the finalization of the purchase accounting for the Gage acquisition. Adjusted EBITDA from continuing operations for the first quarter of ’23, a non-GAAP measure was 12.2 million, representing a 17.6% margin, compared to 12.2 million and 17.7% margin in the fourth quarter of ’22. Turning to the balance sheet.

Cash and cash equivalents were 32.9 million as of March 31st of ’23, compared to 26.2 million as of December 31st. Cash provided by operations was 8.4 million for the first quarter, compared to 7.3 million in the previous quarter. This quarter-over-quarter increase in cash flow from operations was driven by lower interest payments, partially offset by an increase in inventory in Maryland, related to the scale up of our Hagerstown facility, and preparations for adult use in the state beginning on July 1st. It is important to note that while we did not make a tax payment during the quarter, if we had made a payment equivalent to what was accrued related to the current quarter, we would have still generated positive cash flow from operations. CapEx spending was 2.5 million in the first quarter, primarily relating to store openings in Michigan as Ziad outlined earlier.

Free cash flow for the quarter was 5.9 million. This was the first quarter that we generated positive free cash flow since the first quarter of 2021. Indicating the progress that we’ve made and the momentum that we have gained in our business. During the quarter, we received 12.8 million related to a factoring with recourse agreement for employee retention credits, for which we applied in the fourth quarter of ’22. We also closed on the acquisition of AMMD in late January for all cash consideration of 9.6 million. Looking ahead to Q2, we expect to deliver our seventh consecutive quarter of sequential revenue growth with revenue and adjusted EBITA growing in the low-single digits. We anticipate this sequential growth will be driven by favorable Q2 seasonality, along with additional growth in the northeast, including ramped up output at our Maryland facility and the benefit from a full quarter of retail sales at our newly acquired AMMD dispensary.

We also expect growth in Michigan from our two recent store openings and continued progress with branded wholesale. In Q3, we are excited about a further pickup in growth rate driven bought largely by Maryland adult-use beginning on July 1st. To summarize, we continue to make solid progress on executing on our strategic growth plans by challenging operating environment. This includes achieving sequential sales growth, improving our gross margin, and realizing SG&A leverage. At the same time, we remain focused on driving efficiencies and managing cost to drive positive cash flow from operations. Also, our existing footprint is fully built out thereby enabling cash flow from operations to mostly convert to free cash flow. Complementing this, we continue to proactively strengthen our balance sheet to reduce debt and interest expense, improving our capital structure.

With our ample access to capital, and our wealth [indiscernible], we are in a solid position to support our continued growth. You’re also well placed to capitalize on the growing number of active opportunities in our M&A — from distressed buyers with attractive assets in geographies, where we either have existing operations or are complementary to our current facilities. Our position here can only be strengthened by a listing on the TSX within a short number of weeks, subject to shareholder vote, and TSX approval. We look forward to providing updates on this expected listing, as well as additional updates on our progress in all areas of our business during the rest of [indiscernible]. This concludes our prepared remarks. I’d now like to turn it over to the operator.

Q&A Session

Operator: [Operator Instructions] Your first question comes from Andrew Partheniou with Stifel.

Operator: Your next question comes from Eric Des Lauriers with Craig-Hallum Capital.

Operator: Your next question comes from Matt Bottomley with Canaccord Genuity.

Operator: [Operator Instructions] Your next question comes from Noel Atkinson with Clarus Securities.

Operator: Next question comes from Andrew Semple with Echelon Capital Markets.

Operator: Your next question comes from Glenn Mattson with Ladenburg.

Operator: [Operator Instructions] There are no further questions at this time. Jason Wild, please proceed.

Jason Wild: Well, thank you all so much for joining our call today. We will see you again in about another three months. But we appreciate you taking the time to hear our updates.

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