Terrascend has been on our radar a couple of times. Earlier this year we noted change in their executive, and GoBlue has just dropped a ‘Quarter in Pictures’ on their latest financials. They’ve also been touted recently as being a dark horse – a couple of price targets have been revised, and CB1 Capital has recently been drooling over them as well (CB1 drools over a lot of companies btw, some….not so great).

We have to go pretty far in the wayback machine though to find a specific reference to Terrascend ($TER), and it comes from Canopy’s February 2018 financials. $WEED had a significant position in warrants in $TER used a different volatilities to value liabilities versus assets (that’s similar to what the NY State prosecutor is alleging/investigating that Trump has done in filing federal income taxes: skewing asset/liability values to suit purpose. $WEED’s action in this example wasn’t terribly nefarious…..it’s permitted under GAAP, and its’ fully disclosed):

To the financials!

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• Sales are showing a hard ramp. $88MM on the year, $47MM this quarter. Margin a crisp 55%.
• G&A stable at $15MM/Q, which is good improvement given sales increase. Total OPEX at $22.5MM.
• Man, income tax expense nets out to 20% of gross sales – $9.8MM charged against the quarter. Combined federal and provincial rates are 26.5% (wow!)
• 47% of all assets are goodwill and intangibles. Pretty standard fare. There’s a large liability ($201MM) in Consideration Payable. More below.
• They spent $31MM in PP&E during the quarter. Right of Use Assets
• Receivables are tame at ~=$6MM. Concessions and returns estimated at $1.8MM, also tidy.
• They took a $66MM write-down on $91MM of goodwill related to Ilera (below), some $600k on ‘packing materials’ and $4MM on ‘Brand Name’ – which is probably related to the packaging. Immaterial, but it shows how fast and fickle and costly branding can be.
• Annual compensation for the executive is tracking to $20MM/yr. That’s quite a chunk of change, next couple of quarters will reveal how well they positioned themselves.

Ok. Pretty straightforward.

Terrascend is kind enough to segment Canadian from US operations: they do have a pretty decent presence in Canada, posting $8MM in sales so far this year. Its’ packing a negative gross margin though:

Indeed, their Canadian side was initiated in late 2018 within a joint venture with Canopy Rivers, and a long term supply deal was struck with Pharmhouse. Like so many term deals we’ve see evaporate in the sector, this one appears fallow as well. The only mention they make of it is that Terrascend is in ‘good faith’ negotiations with the JV. Looks to be doubtful if the deal will ever come near it’s initial promise.

They have some moving parts in ‘Contingent Consideration’ – it accounts for earn outs of acquisitions. If the acquisitions they’ve made bear out certain EBITDA and sales milestones, boom – cost goes up. There was a net increase in the liability of some $170MM since the beginning of the year. 2 prior acquisitions saw large changes in their valuation, with a California cultivator (State Flower) picked up for $15MM ($14MM in goodwill and intangibles, natch), and a far larger onboard in something called Ilera – an established 3 dispensary vertical in Pennsylvania. It cost though, with the buy now coming in around the $200MM mark. Primarily, this sum is driven by proportionate shares in the deal (1000:1) and the proportionally large leverage they bring with them. There is also a cash component of some $1.75MM USD/quarter to be paid over the next year or so (2 payments down, 3 to go). There’s a 50.1% controlling interest that’s been committed to be bought in State Flower, and until it’s paid for, it’ll sit there. The valuation of this and Illera was part of a forward ‘what if’ scenario – as in ‘what’s the value of this thing after we upgrade the grow op and pull in our first harvest’?. We find out in these financials that the upgrades aren’t yet complete – but expected to be sometime in October of this year:

They’re still busy as well opening new stores (2 in July), now at a total of 7. It looks like they’re going to roll with Ilera’s ‘Apothecarium’ brand, as they opened a shop in California under the same name. They’ve also just go a green light from the state of New Jersey to start growing, and they claimed they’ve planted. NJ is seriously hot real estate at the moment. We’re beginning to see how some of these operators also position themselves – Terrascend doesn’t have the retail depth of others, instead generating the bulk of their revenue from wholesale:

The sales mix here is what I’m going to be tracking over the next couple of quarters. They have significantly less in ‘Right of Use’ assets due to their profile being more on the production side. The promise if Ilera was a run rate or $48MM/year – as of right now, they’re on target to come in 20% below that.

That NJ entry wasn’t cheap either. They’re spending $10MM alone on ‘success fees’ related to their purchase of assets there. Half paid when they get a license (check), the second payment coming when they complete their first retail sale there, which they claim is ‘probable’ in 2020. Total deal cost isn’t yet broken out.

An interesting bit of industry sausage making – with a reference to a product swap that Terrascend did with Canopy growth. Looks like they needed something they didn’t have:

In general, these are pretty good looking financials. They still lost $20MM in the quarter, but the business appears to be tracking. The capital structure is inelegant, and they did down raises during critical moments of 2020 (2 capital raises this year, and they rolled over a credit facility). The raises went out with sugar (like, a metric ton of it), as they contained proportionate voting shares and conversion into both subordinates (vis a vis the units), and Preferred Shares (the warrants). One doesn’t see this often, might have been for tax reasons or the preference of the buyers. In any case, anti-dilutive measures were installed – but also a feature that should future equity issues be significantly lower than these most recent raises, the holders can ask for a look-back, and have the conversion ratios (or even price) modified down to match.

This is not un-orderly, but definitely has potential to whack the capital structure pretty hard. I’m lingering on their sales split between wholesale and retail. I’d take any tightening of the ratio (currently at 3:1 wholesale v retail) would be a positive signal of new entry points and incremental store openings. Their depth in retail isn’t much, but they assure us that’s going to change. California is an odd case: medical cannabis there has been legal for more than 20 years – yet penetration by MSO’s hasn’t been intense. I’m curious to see how a mature market with such a well established legacy component looks like. We haven’t had much visibility into it, yet.

They might decide to free up some cash by executing some sort of buy/leaseback agreements. They do have $70MM in cash of these, so there is some runway. I know our friends at CB1 Capital are pretty bullish on Terrascend (hey – they’re bullish on absolutely everything in-sector). These financials don’t scream the wonderfulness they claim to see, but costs are decent, they’ve proven capability in wholesale, and they’re funded for a bit. Optionality isn’t pretty, and where surprises will come is if they are blisteringly successful – all them optional chickens will be coming home to roost. We’ve seen some crazy numbers paid for brands and existing licenses (see: Select Extracts), and $200MM for a 2 store outfit with a 20k square foot grow op is a prime example.

Another quarter of strong sales expansion, their ability to get NJ up and planing, and deployment of their retail concept (very ‘ultra-lounge’ by the way) will go a long ways to getting broader attention. Share price has been on a relative tear since early July. And another quarter like this one will keep supporting it.

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 holds a position in $TER