Let’s look at TerrAscend’s fundamental financial metrics for their December 31, 2020 earnings release, financial statements and MDA.

Guidance for 2021:

• Converts guidance to US dollars and raises full year 2021 guidance for Net Sales to exceed USD $290 million and Adjusted EBITDA to exceed USD $122 million, both exceeding the high end of previously announced guidance ranges

This compares to F2020 of CAD 211 million revenue and CAD 60 million EBITDA (theirs).

What I said last Q:

Second Q in Pics on TerrAscend. Still getting to know them.

• Sales growth slowed
• GM remained strong and increased
• SGA control good
• Looks like they will need cash soon

This Q:

MDA does not have QoQ narrative.

Open the fins and MDA and let us dive in.

CAD unless stated otherwise. IFRS too. Moving to USD and US GAAP.

Income Statement Drivers & Breakeven Sales: Trend

TER operates in both Canada as an LP and the US as an MSO (FL is hemp, CA, PA, NJ, MD).  They have acquired a number of operations in the US.

• Arise in FLA in March 31, 2019 Q. PP CAD 17 million.
• Apothecarium in California in June 30, 2019 Q: 3 dispensaries with 4^th opened as a subsequent event. PP CAD $96 million.
• Ilera in Pennsylvania in September 30, 2019 Q: 1 of 5 vertically integrated licenses in the state and wholesales to 80 dispensaries, two dispensaries opened with 2^nd opened a subsequent event. PP CAD $206 million and
• State Flower in California in March 31, 2020 Q: 4 dispensaries with one more opening. PP CAD $15.4 million.
• HMS Health in Maryland in November 6, 2020 for PP CAD $35 million.

State Flower contributed net sales of $2.6 million and Net Loss of $1.1 million for F2020.

These acquisitions have come with significant increase in Goodwill and Intangible assets.

They also own a majority of a vertically integrated entity in New Jersey with ability to open three dispensaries. Their 37,000 square foot greenhouse opened in the 3Q.

Sales Table:

Stores: 9 total +1 CA to 5, +1 NJ, 3 PA.

Cultivation and processing: CA 20,000 sq ft, PA 150,000 sq ft, NJ 140,000 sq ft, and FLA Hemp.

Sales increased $14 million +28% in the Q to $65 million after increasing 8% last Q. The US market is generating the entire increase and represents 91% of the sales mix last Q.   

Canadian sales are wholesale. This past Q saw a 1% increase in sales to $6.1 million. Canada represents 9% of sales mix.

US operations evidenced a $4.1 million increase in Retail as they added 1 store in NJ and 1 in California. Total stores are now 9.

Wholesale drove the bulk of the sales increase at +$10 million to $38 million.  Pennsylvania and NJ are likely driving this increase.

There is no geographic segmentation provided in MDA on US operations.  It looks like Pennsylvania and California acquisitions have driven sales the last three Q’s. 

Retail Revenue: Peer and Trend

Revenue per average retail stores in the Q decreased to $2.6 million from $2.8 million -7%.  This could be due to timing of the stores opening in the Q.

They forecast opening two more stores in NJ in 2Q F21 and 3Q F21.

Wholesale Revenue: Peer and Trend

As mentioned above, this is where the bulk of increase revenue was generated in the Q. Both PA and NJ have wholesale operations.

Annualized Sales $ per (PPE + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggerate of PPE and G/I to see how much sales are being generated and what the trend is. I added PPE and G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (Cura and GTII)

As per acquisitions listed above, TER is a roll up styled company.  At $0.62 for this metric, an increase from last Q $0.48, they rank tied for 4^th in this peer set with CWEB.

Income Statement Drivers & Breakeven Sales: Peer

Their income is reported in CAD.  In USD they would slot between Harvest and AYR.

Gross Margin: Trend & Peer

GM% decreased from 59% to 55% this Q, reversing four QoQ improvements.  GM, driven by sales growth, increased by $6 million to $36 million. 

Wholesale increased in mix to 64% of US revenue from 62%.  So, this could be exerting some downward pressure on GM%.  Or it could be the NJ assets.  No reason is given in MDA as there is no QoQ.

They add a net $20 million credit for IFRS voodoo up from $4 million last Q: $46 million unrealized Fair Value on Bio Assets (an increase QoQ of $21 million) offset by -$26 million (an increase of $6 million QoQ) Realized Fair Value on inventory sold. Their cultivation footprint grew in CA (went from 5,000 to 20,000 sq ft) and I assume PA (+25% in Q) and NJ (37,000 sq ft of greenhouse) added to the increase too.

Annualized Gross Margin $ per (PPE + Goodwill/Intangibles)

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + G&I.

TerrAscend recorded a $0.34, an increase from $0.28 last Q, and are 4^th in this metric in the Peer group.   

Gross Margin: USA Peer

TER is 6th highest in this peer group, backslid from 4th last Q.

Gross Margin: North American Peer

TER is 6th highest on a North American basis.

SGA & SBC as % of Sales: Trend

Nice trend line in SGA.

Selling expense is low at $1.4 million, a $0.5 million increase QoQ.

G&A come in at $13.5 million a slight increase from $12.8 million QoQ.   They had a +$1.7 million in Professional fees offset by a $1.5 million reduction in salary and wages. Other expense categories increased slightly.

SBC increased to 9% of sales at $5.6 million an increase of $1.3 million from last Q.

Depreciation of $2.5 million, stable from $2.6 million last Q, rounds out Opex.

Opex increased by $3 million to $23 million and decreased to 36% of sales from 40% last Q.

SGA & SBC as % of Sales: Peer

TER is the 4^th lowest in aggregate SGA and aggregate SGA and SBC.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer

Net Operating Profit before IFRS voodoo was positive $13 million versus $10 million last Q.  The increase in absolute GM by $6 million and a decrease in Opex by $3 million are the drivers.

NOP including IFRS voodoo was $33 million versus $14 million in the previous Q.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $130 million versus negative $33 million last Q. This consisted of notable changes in:

• Net increase in fair value of warrant and derivative liability of $124 million (Canopy warrants) versus $22 last Q
• Revaluation of contingent consideration of $5 million versus $8 last Q
• Finance expenses of $4.3 million versus $3.3 million in the previous Q
• They also reversed $3.9 million in previously impaired Intangibles as they repurposed Apothecarium brand in PA.

From Financials: “During the year ended December 31, 2019, the Company recognized impairment losses of $3,865 related to the brand intangible asset at Apothecarium. During the year ended December 31, 2020, the Company assessed whether there is an indication that impairment loss recognized in prior periods should be reversed as the brand intangible is now being used at the dispensaries in Pennsylvania and alternative treatment centers in New Jersey and therefore provides favorable changes to the cash flow forecasts. As a result of the assessment performed, the Company recorded a reversal of impairment loss of $3,928 which is included in impairment of intangible assets on the Consolidated Statements of Loss and Comprehensive Loss.”

Taxes were $11 million, versus $2 million credit last Q.  

F/X translation remained negative at $9.3 million from negative $3.6 million last Q.

Net Income before IFRS Voodoo was negative $138 million versus negative $25 million last Q.   

+Net Operating Profit Sales Breakeven divided by Current Q Sales: North American Peer

In the North American Peer group TER ranks 3rd best.

+EBITDA: Trend & Peer

TER has now recorded four consecutive +EBITDA Q’s in a row, with +$23 million achieved for the latest Q, an improvement of $5 million. The improvement is the increase in GM$ plus the reduction in cash Opex.

Their EBITDA is $3 million higher than mine as they added back $3 million in inventory writedown, which I cannot find for the Q.

+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer

+EBITDA Sales Breakeven divided by Current Q Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

This is our newly added metric to help keep in focus the amount of cash the operations generate less Interest and taxes.

This tells a different story than EBITDA, even if we add back the $3 million in inventory writedown that I cannot track.  TER drops in this metric from $17 million to $8 million this Q due to increase in interest of $1 million and increase in in period taxes of $13 million.  The latter is likely due to increase in FVI generated during the Q. 

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

This metric dropped from 32% to 12% due to aforementioned taxes and interest.

Balance Sheet Items of Note:

Cash position $75 million an increase of $35 million QoQ.   LT Debt increased $156 million to fund the contingent consideration payable which decreased $150 million. $21 million came in in share capital and contributed surplus.

Corporate taxes payable crept up to $35 million +$4 million QoQ.

As mentioned above, the warrant liability increased by $123 million to $168 million.

“Waterfall” Trend

Inventory is $44 million +$12 million QoQ.   They did manage to increase FG by $7.2 million. FG is $15 million.  Nice to see FG increase along with the sales increase.  Good throughput.

“Waterfall” Peer

TER is in CAD while others (except LHS) are in USD.

What I said last Q:

• Sales increase slowed considerably to $4 million from $12 million previously.
• GM continued to improve and remains in top quartile of peer group
• Progress was made on Inc from Operations in both Canada and USA

They added 25% to cultivation facility in Q3 in Pennsylvania, next Q will reflect a full Q from same. In New Jersey they expect to open their first retail operation shortly.  They also purchased a Maryland facility from Cura (who had to divest after they acquired another Maryland facility from Grass roots) that cost them $25 million in cash and a $2.5 million note from Cura.  They have also increased State Flower cultivation facility in California and opened a fifth retail operation there.

They will likely need to raise some more capital soon. 

This Q:

• Sales increased nicely.  Wholesale made up the bulk of the increase.
• GM did slide but remains in top half of peer group.
• SGA remains well controlled.
• Took on more debt to pay out contingent considerations.

Post Q they raised $224 million in a private placement, so they have adequate cash for organic growth.  They still have $40 million in contingent consideration to retire in the upcoming fiscal and $35 million in corporate tax payable.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in TER and will not start one in the next five days.