TerrAscend ($TER) has my full attention this morning. Given they fired their CEO on the same day these financials came out, it often signals results might not be as good as expected, or that some acquisition has gone in pear shaped.

Longer term readers will recall that they guy they just fired (Ackerman), came in from the Executive Chairman’s spot as interim CEO barely more than a year ago, replacing one of the founders in Michael Nashat. Another founder – Jason Wild – ‘unfortunately’ ejected Ackerman this morning. Given $TER had 2 major apparent missteps around acquisitions (under Nashat in Gravitas and Solace Health), there could be a pattern emerging.

$TER did have circumstance to take out a loan to pay for another acquisition’s earn-outs (Ilera) – adding $60MM in interest costs to the buy. It’s notable they didn’t raise with equity. Perhaps the timing was off and missed the run in late fall. Perhaps they see free cashflow generation from the asset satiating the liability, and funding itself (most likely).

If the latter, it means they bought a 3 dispensary vertical and immediately mortgaged it, foregoing ‘free cash flow’ that could support the wider business. That’s a structured finance move. Perhaps there’s a story that makes sense, but it is a fact that until that loan is paid, they won’t have the deed.

We detailed Ilera in a previous Structure. In our last Structure, and we noted $TER’s relatively poor performance in Canada. If you’ve got an inclination for conspiracies, you might see their decision to shutter a Canadian facility being made by $WEED. And as that last Structure points out, $WEED’s been lighting them up for cheap options, and it’s easily seen that $TER’s been pretty intimate with Canopy for a while. We predicted SBC is going to get lit up, and expressed concerns that they are in full asset deployment – and don’t have much existing ability to accelerate growth. Perhaps NJ has helped.

All values in $CAD unless otherwise noted.

To the financials!

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• Cash at $75MM, inventory up $10MM (to $44MM).
• Revenues up strongly QoQ to $65MM ($51MM previous quarter). ‘Branded Manufacturing at $44MM & Retail at $21MM ($34MM & $17MM Q prior).
• Sales in Canada look to be stalled out at $7MM, unchanged QoQ. I’m gonna let Blue do the lifting on operations from here. His spreads are robust. I usually just look for certain landfalls, while he maps the entire coastline.
• ‘Contingent Consideration’ is down $151MM QoQ, replaced by loans payable increasing by $159MM. Balance sheet shuffle.
• Total liabilities up $23MM QoQ. Despite the borrowing to extinguish that contingent consideration on the Ilera purchase, ‘warrant liabilities’ has blown out, increasing $123MM QoQ. More below.
• The expansion of the Ilera grow op in PENN and capital spending in NJ wasn’t cheap, consuming some $60MM over the year. Operations brought in half that. The big numbers around cashflows stem from financing ($284MM in) and investing ($251MM out). As mentioned (and notably) $190MM of that ‘investing’ was simply to close the Ilera deal. Yeep.
• 30MM shares went out in Proportionates. Recall, a single one of these converts into 1000 subordinates. There’s about 120MM subs/exchangeables out there. $TER issued ~=12,000 of the proportionates for acquisitions, yet 75k of them remain.
• Inventory and throughput look stable.

Ok. These financials are a pretty dense read.

An interesting look into contingent consideration calculation is in Note 22. Looks like over the 2020 fiscal year, inputs used to value the liability changed. Meaning, the chances of the acquisitions hitting milestone payments increased, which, increased the liability by some $25MM YoY. How do I know? The risk in the underlying assets increased (discount rate rose), but profitability increased as well. It implies a relatively sophisticated calculation.

It’s model supported, and I can tell it’s likely not been run through a formal risk engine (‘probability weighted scenarios’ says no). If it said Monte Carlo, that’d be a more formal method. There’s other equally formal simulations as well, but it’d be pretty out there for a grow-op. But the more I think about it, estimation of production yields and forward curves (for wholesale and retail and region and interest rates and hurdle rates) fits well to this type of financial modelling. A capital partner would have them doing this to support a cost of capital calculation, or, perhaps they’d do it to support forward DCF models. There’s several reasons why it could be used. As it is, looks like they used a quick and dirty:

One can also see some sophistication in their market risk calculation. Despite their primary asset base being in USD, all of their financial instruments are in their native currency. So, despite earnings and assets being primarily in USD, they rely on the share price mechanism to accommodate/reflect forex exposure:

Lots happening in ‘Subsequent events’, which mentions their $224MM raise in January, and also advises of a settlement reached with Pharmhouse on an off-take agreement. This is different from the larger lawsuit, which is ongoing. $TER even mentions Ackerman’s firing (day of release no less), and that it looks like some $3MM USD of preferred share warrants were cashed in, as well as another 325 of them ‘cashlessly’.

Gads, looking at those preferred, they’re convertible into a proportionate. So, those 325 that went out meant someone got 325,000 $TER shares for free (at current share price, about $3.5MM CAD). The additional ones (warrants) saw 1,245 of them struck at an average price of $4.00/subordinate. That means, whoever cashed those in came into about $11MM as well.

Mentioned last time, the preferred’s went out in a $50MM private placement last year, with a unit in the offer having a preferred share for $3/subordinate coming with a preferred share warrant (1 year tenor, $4 /subordinate strike). Founder level leverage in these babies. The warrants are live until May 22, 2021.

SBC was only $6MM during the quarter. Some folks will look at this (and executive comp) and suggest a company might be modest if these two aren’t a large number. $CURA’s often thought of in this regard, yet I’ve chronicled 3 related party transactions that saw two people in management there walk out with some $70MM in profit on asset sales into $CURA. A look into related party transactions at $TER lets us know that now-interim-CEO Wild took out $30MM in warrants alone during 2019. They represent 85MM shares. In 2020?

Umm, these guys aren’t exactly starving. And there’s many ways for folks in the executive to compensate themselves. Just pointing it out. I’d also venture a guess that it was Ackerman exercising his preferred shares on his way out the door in those mentioned above.

So, that leaves the most material change in their capital structure (aside from the proportionates and preferred shares and their related warrants), is that the ‘warrant liability blew out this quarter (increase of $146MM).

I’d initially assumed it was the Canopy warrants – since they were sent out for so little in that last financing. $TER really got lit up in that financing. But, it isn’t them. They’re valued using the accounting treatment for derivatives, and not at fair value. They’re negligible.

Nope, it’s the $50MM private placement in preferred shares $TER did. Each of the $2,000 USD ‘units’ in that raise (comprised of a preferred and a preferred warrant) is denominated in a non-native currency, and thus, need to be accounted for at fair value. The entire $146MM comes from these. Check out this note:

I calculated that the overhang on the issue was around $178MM: it’s a combination of share and warrant value I calculated. Because they have to do these at fair value, this is an excellent example of overhang crystallizing on a balance sheet. Share price has even advanced 30% since then. If it holds, expect another $70-$90MM increase in this liability next quarter. From my Q3 F2020 Structure:

The reader will also note that $TER itself priced the share overhang $7MM lower because share price is up. Notably – $TER also says they’ve got not plans to raise before May 22nd, 2021. Given the amount they just got in the door, I’d say that’s a pretty good assumption.

Ok.

I’d like to be able to say I like an MSO asset somewhere, and I do. That’s pretty much between $GTII and $TRUL, who’ve shown some decent prowess in operations. $TER’s demonstrating a decent margin and sales growth as well. I’m less thrilled about the capital structure of any of them, with either leverage via optionality and control ($TRUL/$GTII) or optionality and leverage and control ($TER).

Any and all of my interest lays around share price, and forward expectations. Regarding $TER – despite some good growth this quarter – there’s been no new acquisitions since a buy of a small producer/processor in Maryland last November. All growth has presumeably come with previous acquisitions coming online, and whatever they’ve organically created.

I’ve mentioned $WEED several times. I can’t help but think that $TER’s been positioned as their hedge on $ACRG (that’s as charitable a take as you’ll hear from myself). GoBlue and I were talking this morning about $TER, and he mentioned their relative lack of focus on retail might be $STZ positioning away from potential retail exposure in the US. It’s no secret that $WEED CEO David Klein sees the US as their natural place for growth, and $STZ is a very sophisticated actor. If they’re anticipating an ability to nominally enter the US via markets and allocate capital – this might be their vehicle of choice. Just musing.

This capital structure is levered. Yet, institutional interest is definitely there, as 80% of that January raise came from 4 of them.

A subscriber asked last Structure what I thought of management at $TER. I really couldn’t offer an opinion. I’ll say now that I don’t know much more. They do seem to be operators, which is good. The capital structure is ornate, which seems to be standard issue for MSOs, even if not attractive to my eye.

I’d really like to know what happened to Ackerman, and how a hire of CPG wonderfulness got a one day walkout on the next yearend’s financials. Did a major deal just blow up? Like, really. What the hell happened? This isn’t exactly like landing something on Mars. It’s a weed outfit. How philosophical can it be to grow and sell dope?

That might be a little flippant. But seriously, the question is valid.

As before, this company makes me feel like I’m using braille to read the financials. I get the numbers and all, but I get no strategy nor vision. Thus, I can’t say I’ve got a line of sight on them. They’ve got some heavyweight support and look sophisticated in-house. But, there’s nothing in the pipeline, and their next planned add is a single dispensary opening sometime in April 2022.

Wish I could offer you more. I do believe their sales rates need to ramp hard to maintain that share price and existing leverage though. And I’d place them at high operational risk because of that. Their optionality is a beast as well, and a different issue.

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 position in $TER