Let’s look at TerrAscend’s fundamental financial metrics for their March 31, 2021 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
NEW Guidance for 2021:
- TerrAscend is raising full year guidance and expects Net Sales to exceed USD $300 million versus previous guidance of USD $290 million and Adjusted EBITDA to exceed USD $128 million versus previous guidance of USD $122 million.
Upping revenue by $10 million and EBITDA by $8 million.
Tracking to Guidance: Annualized Q sales would get them to $214 million or 74%, while EBITDA annualized gets them to $94 million or 73%.
What I said last Q:
- Nice increase in sales by $14 million +28%, largely wholesale
- Gross Margin slid back to 55% from 59% but increased in absolute terms to $36 million from $30 million
- SGA control remains good
- They went and got cash.
They flipped to USD from CAD and, let’s just say… they are selective of the info they provide for sequential quarters.
Sales increase of 7%. US retail actually drops QoQ by 7% (I did not see that mentioned in their presser and MDA. Selective) and Cdn operations drop another 22%
Very nice increase in Gross Margin +10% to 65%.
G&A increased by $4.5 million or $3.1 million if you back out the PharmHouse legal settlement.
Adjusted EBITDA disclosure was FABULOUS as they provide footnotes to each adjustment. And the footnotes that were backed up by the financials I gave them the add back. My EBITDA is slightly larger than theirs.
Cash of +$230 million is sufficient. They do have contingent consideration to pay in the next twelve months of $41 million.
MDA does not have QoQ narrative.
Open the fins and MDA and let us dive in.
USD (this Q, so there are some legacy charts with CAD) 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 4th 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 2nd 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.
Acquiring: Additional PA 3 dispos for USD 70 million.
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. And will open an Apothecarium on May 7 in Q2F21.
Stores: 9 total (no change QoQ): 3 PA, 1 NJ, 5 CA.
Cultivation and processing: CA 20,000 sq ft, PA 150,000 sq ft, NJ 140,000 sq ft, and FLA Hemp.
Sales increased $3.5 million +7% in the Q to $53 million after increasing 28% last Q. US Wholesale is the entirety of the increase.
Canadian sales are wholesale. This past Q saw a 22% decrease in sales to $3.7 million. Canada represents 7% of sales mix.
US operations evidenced a -$1.1 million decrease in Retail with no new stores added in the month. No where is this mentioned. I will take a read through the CC transcript to see if there is anything I should add. As an aside… I really do not like it when companies do not disclose information like this in presser and MDA. Sales can back up. Acknowledge and explain.
USA Wholesale drove the entirety of the sales increase at +$5.6 million to $35 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 of F2020 and PA and NJ are driving sales so far in F2021.
Retail Revenue: Peer and Trend
Revenue per average retail stores in the Q decreased to $1.7 million from $2.0 million -17%.
They forecast opening two more stores in NJ in 2Q F21 (one opened May 7, 2021) and 3Q F21.
Wholesale Revenue: Peer and Trend
As mentioned above, this is where the entirety of the QoQ sales increase. Both PA and NJ have wholesale operations. CA has expanded flower cultivation… presumably that is for wholesale as well.
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 $0.69 for this metric, an increase from last which is CAD, they rank tied for 4th in this peer set with CURA.
Income Statement Drivers & Breakeven Sales: Peer
They are 6th largest by revenue in the above peer.
Gross Margin: Trend & Peer
GM% reversed last Q’s decrease from 55% to 59%, bouncing to a record high of 65% this Q. Improved cultivation. This is an impressive increase especially when you consider retail went backwards in the Q (Retail tends to have higher margins). So, there might be increases left to see here.
Wholesale increased in mix to 70% of US revenue from 64%.
They add a net $2 million credit for IFRS voodoo up from $20 million last Q: $24 million unrealized Fair Value on Bio Assets (a decrease QoQ of $46 million) offset by -$21 million (a decrease of $5 million QoQ) Realized Fair Value on inventory sold. I am kind surprised by the drop in Unrealized gains on Bio assets QoQ. I am wondering if they trimmed Fair Value Increment as they did not offline any cultivation. Something to watch next Q.
I might bitch about IFRS, but it does give some insight into cultivation that GAAP does not. I guess I just like more data points.
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 $0.42, an increase from last Q which was CAD, and are 3rd (+1 QoQ) in this metric in the Peer group. That 65% GM sure helps here. Is it sustainable??
Gross Margin: USA Peer
TER jumps from 6th highest in this peer group last Q to 2nd.
Gross Margin: North American Peer
TER is 2nd highest on a North American basis.
SGA & SBC as % of Sales: Trend
Nice trend line in SGA… gets interrupted this Q.
Selling expense is low at $1.0 million, a $0.2 million decrease QoQ.
G&A come in at $14.8 million an increase of $4.5 million QoQ. They had a $1.4 million legal settlement on PharmHouse supply contract embedded in there. The majority of the balance appears to be in salaries and expenses. Wondering if the firing of the CEO came with a severance?
SBC decreased to 8% of sales at $4.2 million a decrease of $0.1 million from last Q.
Depreciation of $2.3 million, stable from last Q, rounds out Opex.
Opex increased by $4 million to $22 million and increased to 42% of sales from 36% last Q.
SGA & SBC as % of Sales: Peer
TER is the 4th lowest in aggregate SGA and 6th 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 $7 million and a increase in Opex by $4 million are the drivers.
NOP including IFRS voodoo was $15 million versus $25 million in the previous Q.
Other Income (Expenses) and Taxes:
Other Income for the Q was negative $3 million versus negative C$131 million last Q. This consisted of notable changes in:
- Net increase in fair value of warrant and derivative liability of C$124 million (Canopy warrants) last Q versus only a $5 million increase this Q
- Revaluation of contingent consideration of C$5 million last Q versus $3 million this Q
- Finance expenses of C$4.3 million last Q versus $7.2 million this Q as they have the new debt for the full Q.
- FX loss this Q of $2.9 million versus minimal last Q
Taxes were $10 million, versus C$11 million last Q.
F/X translation was negative at $2.0 million from negative C$9.3 million last Q.
Net Income before IFRS Voodoo was negative $13 million versus negative C$138 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 five consecutive +EBITDA Q’s in a row, with +$23 million achieved for the latest Q, an improvement of $5 million. The improvement is the increase in GM$ is the driver.
Excellent footnotes in MDA on each adjustment to EBITDA. The ones I could tie back into the notes to the financial statements I included. I am a touch higher than their EBITDA as they had other items embedded in Finance Expense that I could not back out.
+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer
TER would be at breakeven EBITDA at 57% of sales assuming GM% and cash OPEX $ remained constant.
+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.
TER had an aggregate of interest and taxes of $17 million this Q, EBITDA covers same comfortably. Next step would be amortizing principal on a schedule.
Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales
This metric remained consistent at 12% QoQ.
Balance Sheet Items of Note:
Cash position $234 million an increase of $175 million QoQ. A combination of $173 million equity raise and $9.2 million in warrant and option conversion are the drivers.
Inventory is $41 million +$6.5 million QoQ. The decrease in FG could be problematic this Q unless throughput increases. Inventory is at 0.8:1 Sales for the Q.
A mix of US GAAP and IFRS make comparing difficult.
What I said last 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.
They have some intriguing metrics. They have room to grow considerably in PA as they can open more dispos than the 3 they have. Maryland will hit next Q but its population at 5.8 million and medical only will likely not be too significant.
Next Q they open up additional retail in NJ, which will launch Adult use late in 2021 or early 2022. The retail number will be interesting to follow.
I wonder if they make a play for Harvest FLA assets that will need to be disgorged by TRUL.
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.