Let’s look at TerrAscend’s fundamental financial metrics for their September 30, 2020 earnings release, financial statements and MDA.

What I said last Q:

With the ascent of TerrAscend and the decent of iAnthus, we have added our first Quarter in Pictures on TerrAscend and bounced iAnthus out of the US peer set.  It will take me a few Q’s to get in a groove with TER, so bear with me.

Guidance:

• Based on the ongoing strength of the Company’s operations, TerrAscend anticipates full year net sales of at least $192 million driven by second half 2020 net sales growth of at least 34% versus the first half of 2020 and 109% year over year.  Adjusted EBITDA for the year is expected to be at least $45 million.  The outlook is driven by the company’s continued emphasis on further expansion of its most profitable business in Pennsylvania and ramp up and further expansion of its retail footprint in Pennsylvania, New Jersey, and California while maintaining a tight overall focus on costs.    

This would lead to next six months sales of $110 million versus $82 million in the first half of F2020, a 34% increase.  Adjusted EBITDA for next six months of $28.6 million versus $16.4 million in the first half of F2020, a 74% increase. 

This Q:

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

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

MDA does not have QoQ narrative.

Open the fins and MDA and let us dive in.

CAD unless stated otherwise. IFRS too.

Income Statement Drivers & Breakeven Sales: Trend

TER operates in both Canada as an LP and the US as an MSO.  They have acquired a number of operations in the US.

• Arise in FLA in March 31, 2019 Q.
• Apothecarium in California in June 30, 2019 Q: 3 dispensaries with 4^th opened as a subsequent event
• 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 and
• State Flower in California in March 31, 2020 Q: 4 dispensaries with one more opening

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

Given the Contingent obligations they have some upcoming payments that exceed cash.

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 Q.

They purchased a Maryland operation from Cura post Q end.

Sales Table:

Sales increased $3.7 million +8% in the Q to $51 million after increasing 42% last Q. The US market is generating $3 million of the increase and represents 88% of the sales mix each of the last two Q’s. 

Canadian sales look to be largely wholesale. This past Q saw a 21% increase in sales to $6 million. Canada represents 12% of sales mix.

The wholesale-retail split is presently 67-33.  If we assume 100% of Canada is wholesale, then US is 62-38 wholesale-retail.

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

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 $0.48 for this metric, an increase from last Q $0.45, they rank 6^th in this peer set.

Income Statement Drivers & Breakeven Sales: Peer

Their income is reported in CAD. 

Gross Margin: Trend & Peer

GM% increased from 56% to 59% this Q, the fourth QoQ improvement in a row, or by $4 million to $30 million.

Canadian GM was +$1.0 million versus previous Q -$1.5 million. US GM was $29 million or 65% of sales versus previous Q $28 million of sales 66%. Those are healthy margins in the US that are reflective of vertical integration.  Canadian margins look to be compressed by low sales volumes relative to capacity.

They add a net $4 million credit for IFRS voodoo (comparable to last Q): $25 million unrealized Fair Value on Bio Assets (an increase QoQ of $2 million) offset by -$21 million (a decrease of $2 million QoQ) Realized Fair Value on inventory sold.

It is worth noting, since they are in vertical integrated states and have a wholesale lean, that the Unrealized Fair Value growth has slowed, which means they might be maxing out cultivation.  This could lead to sales stalls in wholesale unless more capacity is added. They have added more cultivation post Q end in California indicating they can ramp premium flower 500% (no comment on what that means $ wise) and added 25% in PA post Q.

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 $0.28, an increase from $0.25 last Q, and are 6^th in this metric in the Peer group.   

Gross Margin: USA Peer

TER is 4th highest in this peer group, same as last Q.

Gross Margin: North American Peer

TER is 4th highest on a North American basis.

SGA & SBC as % of Sales: Trend

Selling expense is low at $0.9 million, a $0.7 million decrease QoQ.

G&A come in at $13 million a decrease from $16 million QoQ.   The decreases stem from reductions of $1.5 million in office and general and $1.0 million in salaries.  Could be a rationalizing post acquisition of State Flower from Q1F20.

SBC increased to 9% of sales at $4.4 million an increase of $0.8 million from last Q.

Depreciation of $2.6 million, a decrease from $3.2 million last Q, rounds out Opex.

Opex decreased by $2 million to $20 million and decreased to 40% of sales from 48% last Q.

SGA & SBC as % of Sales: Peer

TER is the 4^th highest 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 $10 million versus $4 million last Q.  The increase in absolute GM by $4 million and a decrease in Opex by $2 million are the drivers.

NOP including IFRS voodoo was $14 million comprised of US +$20 million with Canada -$6 million, versus +$8 million NOP in June 30, 2020 Q of $16 million and -$8 million, respectively.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $33 million versus negative $12 million last Q. This consisted of notable changes in:

• Net increase in fair value of warrant and derivative liability of $22 million (Canopy warrants) versus nil last Q
• Revaluation of contingent consideration of $8 million versus $6 last Q
• Finance expenses of $3.3 million consistent with previous Q

Taxes were a credit of $2 million, versus $10 million debit last Q.  

F/X translation remined positive at $3.6 million from negative $5.6 million last Q.

Net Income before IFRS Voodoo was negative $26 million versus negative $23 million last Q.   

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

In the North American Peer group TER ranks 4th best.

+EBITDA: Trend & Peer

TER has now recorded three consecutive +EBITDA Q’s in a row, with +$18 million achieved for the latest Q, an improvement of $7 million. The improvement is the increase in GM$ plus the reduction in cash Opex.

My calculation is very close to theirs.

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

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

Balance Sheet Items of Note:

Cash position $40 million a decrease of $29 million QoQ.  Restricted cash decreased $4.5 million from $5 million, thus flowing into Cash.  They also used $25 million in cash post Q end to purchase a Maryland facility from Cura.  They will likely need some money soon.

Cash Flow from Operations generated $8.6 million, $1.7 million generated by financing activities, and -$30 million in investing activities. 

“Waterfall” Trend

Inventory is $32 million unchanged QoQ.   They did manage to increase FG by $2.6 million. FG is $8 million.

They will need more inventory to fuel sales.  They have new cultivation capacity on-lining in Q3.

“Waterfall” Peer

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

Other notable changes in balance sheet items:

• PPE increased by $12 million in the Q to $161 million. Assets in progress decreased $4.7 million while buildings and M&E increased $13 million and $4.7 million to $95 million and $22 million, respectively.

• Current Contingent Consideration decreased by $11 million to $189 million.  That will need to be financed by debt or shares as it matures.

• Preferred Shares decreased by $16 million to nil, while a $45 million warrant liability makes an appearance.

What I said last Q:

• Very good sales growth driven by California acquisition and organic growth from last years Pennsylvania acquisition.
• Very good GM in the US
• SGA increase significantly with a full Q of California acquisition
• EBITDA positive and it exceeds interest obligation
• They have a considerable contingent consideration to deal with in the next 12 months via either shares or debt.

This 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. 

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.