Let’s look at TerrAscend’s fundamental financial metrics for their September 30, 2021 earnings release, financial statements and MDA.

Last Q they pulled guidance because of PA had a bit of a cultivation issue and they are reserving product for NJ adult use launch.  Why wholesale for a $1 in Q4F21 what you can retail for $1.20 in Q1F22 when adult use kicks off.  I like the strategy although 6 month and counting old inventory might be an issue if NJ delays adult use kick off.

What I said last Q:

• Sales +10% QoQ, lowest of MSO’s in the peer group. Canadian sales increase 71% on sleeved product skus.
• GM softens from 65% to 59%, as PA cultivation hits a bump. Expect it to last through Q3.
• SGA declines in $’s and as % of sales.
• They impair Arise FLA hemp business by 50% of purchase price, of which 96% was goodwill and intangibles. And they add $112 million via new acquisitions that had an aggregate purchase price of $95 million.
• Lots of fair value movements impacting Net income.
• EBITDA flat QoQ.
• Cash -$80 million QoQ to $154 million as they pay $20 million for KCR in PA, $22 million for HMS in MD, and $30 million final payment for Ilera in PA (which is their work horse and had 119% G/I to PP).

This Q:

• Revenue drops -16% or -$10 million to $49 million as was anticipated last Q on CC
• GM decreases from 59% to 46% as PA re-ramps flower.
• G&A stable QoQ.
• NOP without IFRS decreases to $3.8 million from $11.3 million
• EBITDA decreases -$13 million to $10 million
• Cash decreases $51 million to $103 million but they expect warrant execution before year end and in F22.

MDA does not have QoQ narrative.

Open the fins and MDA and let us dive in.

USD (past four Qs, 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 G/I 96% of PP. IMPAIRED by 50% Q2F21.
• 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.
• KCR in Pennsylvania in Q2F21 for USD 70 million PP.

Sales Table:

Stores: 13 total (0 QoQ): 6 PA, 2 NJ, 5 CA.

Cultivation and processing: CA 20,000 sq ft, PA 150,000 sq ft, NJ 140,000 sq ft, and FLA Hemp. Added MD with 20,000 sq ft Q2F21. Ceased cultivation in Canada Q4F20.

Sales decreased $9.6 million -16% in the Q to $49 million after increasing 10% last Q, 7% in Q2F21 and 29% Q4F20.

USA Retail revenue had no new stores but experienced +11% to $25 million QoQ.  Q3 gets benefit of all stores opened for the full Q. This is a new record. They did not mention the split between new and organic stores.

USA Wholesale decreased -29% or -$8.9 million to $21 million. This is back-to-back decreases in wholesale.  Their PA facility had a cultivation issues in Q2F21, as they are converting greenhouse growing rooms (primarily for biomass for extracted products) to indoor growing rooms.

I am tracking KCR in PA and HMS in MD, which were acquired in F2021:

• KCR saw sales retreat $7.1 million to $7.9 million in Q3F21
• HMS saw sales retreat $2.5 million to $2.7 million in Q3F21

Canadian sales are wholesale. This past Q saw a -52% decrease in sales to $3.0 million after the Q2F21 record of $6.3 million. Canada always seems to have a drop in sales after a load-in regardless of LP these days.

There is no geographic segmentation provided in MDA on US operations.  They are very reliant on PA for corporate success.

Retail Revenue: Peer and Trend

Revenue per average retail stores opened in the Q decreased to $1.9 million from $2.0 million last Q or -6%. This could be a function of timing of openings in Q2F21.   

They forecast opening one more store in NJ in 4Q F21.

Wholesale Revenue: Peer and Trend

Wholesale revenue took a hit as the PA facility had a decrease in yield and their own stores were prioritized versus wholesale.

They are converting greenhouse rooms in PA to indoor rooms.  They expect to have a +60% increase in yield when done.  It will take another Q for results to flow through.

Annualized Sales $ per (PPE + ROU + 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 $0.43 for this metric, a decrease from last Q which was $0.53 they rank tied for 9^th in this peer set.

This metric was impacted by the increased denominator by $13 million (all PPE) and sales slid QoQ. 

Income Statement Drivers & Breakeven Sales: Peer

They are 9^th largest by revenue in the above peer.

Gross Margin: Trend & Peer

In Q2 they had a burp in cultivation in PA, which is their highest yielding GM% segment (PA wholesale) had to be curtailed as their own retail stores get priority. They indicated that this GM reduction might worsen in Q3 before the new rooms have saleable products.

And in Q3… GM% dropped to 46% from 50%.  This is the worst % since March 31, 2021 of 45%.  GM$’s was down QoQ to $22.6 million or -$12 million QoQ.

Wholesale decreased in mix to 46% of US revenue from 57% QoQ.   

They add a net $0.9 million credit for IFRS voodoo down from $12 million last Q. A $24 million unrealized Fair Value on Bio Assets (a decrease QoQ of $3 million) offset by $23 million (an increase of $8 million QoQ) Realized Fair Value on inventory sold.

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 + ROU + 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 + ROU + G&I.

TerrAscend recorded a $0.20, a decrease from last Q which was $0.31, and are 9th in this metric in the Peer group.   The drop in GM% and $ and the increase in denominator the drivers.

Gross Margin: USA Peer

TER slides 6 spots spot to 9^th.

Gross Margin: North American Peer

TER is 9^th highest on a North American basis.

SGA & SBC as % of Sales: Trend

Trend line is very bouncy.

Selling expense is low at $0.8 million, a $0.3 million increase QoQ. No new stores in the Q.

G&A come in at $14.2 million a decrease of $0.1 million QoQ.   Nice to see as they saw the GM% slide coming.

SBC decreased to 3% of sales at $1.5 million a decrease of $4.7 million from last Q. Stock price softened.

Depreciation of $2.3 million, stable from last Q, rounds out Opex.

Opex decreased by $4.6 million to $18.8 million and decreased to 38% of sales from 40% last Q.  The bulk of the reduction was SBC.

SGA & SBC as % of Sales: Peer

TER trails GTII, Cl and HARV in Aggregate SGA, but they have only 13 stores which impacts SGA (and revenue) and are in only 5 states. They are 5^th in Aggregate SGA and SBC.

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

Net Operating Profit before IFRS voodoo was positive $3.8 million versus $11.3 million last Q.  The decrease in GM$’s offset improvement in Opex$’s is the reason.

NOP including IFRS voodoo was $4.7 million versus $22.9 million in the previous Q.

Other Income (Expenses) and Taxes:

Other Income for the Q was positive $62 million versus negative $36 million last Q. This consisted of notable changes in:

• Net decrease in fair value of warrant and derivative liability of -$69 million (Canopy warrants) this Q versus +$20 million last Q. That is an $89 million swing.
• Finance expenses of $7.8 million this Q versus $10 million last Q.
• FX gain this Q of $1.2 million versus loss of $3.0 million last Q
• Transaction and restructuring costs of $1.0 million versus $0.4 million last Q.

Taxes were $4 million, versus $10 million last Q.  

F/X translation was positive at $1.3 million from negative $3.0 million last Q.

Net Income before IFRS Voodoo was positive $60 million versus negative $32 million last Q.   The swing is largely the CGC warrants plus GM decrease.

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

In the North American Peer group TER ranks 5th best (-1 QoQ).

EBITDA: Trend & Peer

TER has now recorded seven consecutive +EBITDA Q’s in a row, with +$9.9 million achieved for the latest Q, a slide of $13 million QoQ,

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 lower than their EBITDA, as they had other items embedded in executive severance and Other One-Time expenses that did not make the cut for me. Their aEBITDA was $10.5 million.

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)

We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

TER dropped QoQ from $0.21 to $0.09 due to the increase in denominator and numerator going backwards.  They are 7th best in peer group.

+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 $12 million this Q versus $20 million last Q, EBITDA no longer covers same. 

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

This metric dropped from 5% to -4% QoQ, the aforementioned reduction in GM is the reason.

Balance Sheet Items of Note:

Cash position $103 million a decrease of $52 million QoQ, as they pay contingent consideration on acquisitions.  They have another $25 million payment scheduled for Q4.

“Waterfall” Trend

Inventory is $71 million +$7 million QoQ.   They also had a decrease in FG by $3.4 million despite the decrease in sales.  Q2F21 CC they indicated they were building inventory for New Jersey switch flip to adult use.  They can make more selling it retail than wholesale. But this reduction seems to show that PA had a greater influence.

On Q3F21 CC they indicate they are well provisioned for NY to flip the switch to adult use.  One interesting thing about the new NJ licenses issued in last Q to competitors… They must build out cultivation and supply medical for one year before selling to adult use.  Nice head start for those in NJ prior.

“Waterfall” Peer

A mix of US GAAP and IFRS make comparing difficult. CURA, TER and VRNO are still IFRS.

PPE $162 million +$17 million as they build out MD, refurbish PA and ready NJ for adult use.

A/P and accrued increase $24 million to $48 million. This is highest since I have been spreading. (Dec 2019).

Corporate tax payable decreases $15 million to $11 million in the Q.

Warrant liabilities decreased $69 million to $69 million.  Canopy.

What I said last Q:

Sales increase was lowest of their peers QoQ, as they look to shift PA production to more valued flower versus greenhouse biomass. GM will be pinched by this for at least one more Q.  If PA pricing competition heats up (on CC they say it is more at retail and lower end value offerings) returning to 65% might be hard do.

SGA control is good.

Cash is reasonable.  They do have $26 million in corporate tax payable.

On CC they mentioned Massachusetts as a market where the number of buyers able to afford entry of $100 million is getting smaller.

Stock price is getting a rough ride today.  IMHO it is overreacting to toady’s news of guidance pull plus PA burp.  This comment is not a reflection on whether it is a good buy but simply speaking to the 14% drop relative to peers today.

This Q:

They did telegraph the reduction in sales and GM in Q2F21 CC.  How quickly will they fully bounce back?  I would suggest they get part way there in Q4F21 but will not get back wholly until they can get some higher margin sales out of NJ to compliment PA.

They indicate they have cash incoming in Q4F21 from in the money warrants and expect in the money warrants to be struck in F2022.

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.