I just reviewed our last Structure on Terrascend ($TER) (along with the one prior to that), getting prepared to look at their latest financials, which dropped late yesterday.

Sigh.

Despite having had a pretty fulsome look at this company: detailing acquisitions and regional exits and retail strategy and leverage all that good stuff…..I don’t have much confidence in claiming to have a line of sight on them.

They’re largely ‘average’ in terms of MSOs. They’re making founder Jason Wild buckets of money (normal). They fired a CEO one day before the last financials dropped based upon ‘philosophical differences’ (not normal, I guessed that $STZ’s handprints were on this). Expensive optionality shot out when capital was thin (normal). A large surge in sales predicted over the next several quarters (normal).

GoBlue’s dropped his “Quarter in Pictures” on $TER’s latest – I’ll be reading it after I’m done. I’ll also defer to him on the operational nuts and bolts, and keep this primarily in the capital structure lane.

All dollars in USD unless otherwise noted. To the financials!

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• Cash up thanks to that raise in January – $235MM + $10MM in A/R. $20MM of it was shot out on April 30th – part of a $63MM buy of the rest of 3 dispos in PENN.
• Along with $TRUL’s recent buys, a single storefront runs about $20MM there, implying an outfit will need a quarter billion at this point to set up shop and hit a licence cap. Ilera, a prior acquisition in PENN – that proved early moves were even more expensive – *should* support supply chain verticality.
• $JUSH appears to have gotten into PENN for less than either $TRUL or $TER. $HARV’s set up with an expensive 50k ft² cultivation/processing there as well. I’m curious as to the quality of the underlying assets of each, and wish we had visibility. None seen nor likely coming from any of them sadly. Truly a frustration for an analyst, worse for the investor. We’ll do what we can.
• Inventory up $3.5MM QoQ. Orderly given run rates. While we’ve talked about similarities between the US and Canada Relatively even throughput is one of the starkest contrasts.
• $TER converted to USD as functional currency on their balance sheet. It tripped me up in a couple of spots, I was backtesting and couldn’t tie to a couple of line items at first. Fortunately GoBlue dissembled the lot of it. Nothing to see here (at least materially that I can see….Note 23).
• Ilera’s contingent consideration has been finalized – the aggregate upwritten by some $850k this quarter. The total amount of it was up-written in the previous quarter by some $19MM, for a total of ~=$225MM CAD paid. The initial earn out was estimated to be $144MM. All in all, Ilera cost a grand total of $375MM CAD (if one includes the interest on the loan $TER took out).
• 16MM in $3 warrants expiring before end of year. Another 15MM 9 year (!) at $9. In total, they have 40MM warrants with an average of 5 years at $5.
• Previously mentioned, there’s 16k of warrants for proportionates, 2 years remaining, and a notional strike of $3/common share. So, another 16MM common share warrants coming in at $3.
• 18MM 5 year options at $5.50
• Total common share count increased by 100MM (!) shares during the quarter. About 20MM were created from the raise/warrant/debt conversions, the bulk appeared due to 76k proportionates being swapped into commons (~-76MM shares).
• Total share count (as converted) up 23MM (to 232MM, or ~=14%), and that doesn’t include the warrants/options above.

Ok.

I alluded to segment/regional disclosure above, and its’ paucity. Subscribers will know our frustrations around it. GoBlue’s able to divine some state level activity from incremental additions, and at least we can tease out wholesale/retail in many cases. All $TER provides is country level segmentation. From current financials:

This and the next quarter are a big part of $TER’s expected ramp. I wondered in Q3 F2020 if they were able to expand into the run rates they were anticipating – and given the cost of acquisitions – if they will support it. Their share price has ranged from $20 (Feb 10) to a low of $11.70 (Mar 30). It’s back to $14 as of writing. It’s a great illustration of sector volatility. Aside from trading this (I did and made some money, but not enough of an annualized return basis to justify holding this level of risk), looking at the company itself reveals a hard increase in total share count.

They are relatively cashed up. The most recent acquisition (HMS in Maryland) is modest in cost relative to previous buys, and $TER will need to demonstrate execution in sales growth and profitability.

I’m looking forward to the next financials, which will bear out whether they’re expected hitting run rates. As MSOs go, I don’t see anything special here, particularly in a capital structure that’s more expensive than most. This is the third MSO that’s begun collapsing preferred’s/compressed/proportionates/multiples recently. I think this general housekeeping will continue – the Big Boards and serious institutions won’t put up with billions in unchecked optionality go forward.

The market can do what it wants with price, I won’t be having any exposure to this until I can get a bead on whether sales will fill up the equity holes in their balance sheet and service the leverage that’s been installed. In terms of capital structure, at this point, they look awfully ‘Tier 3’ to my eye. Sales and profitability are the only things that will help at this point.

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 no position in $TER