I’d professed interest in Terrascend’s ($TER) next two fiscal quarters in our Q1 F2021 Structure. I’d also stated that I didn’t feel I had much of a line of sight on them.

GoBlue’s ‘Quarter in Pictures’ on $TER’s Q2 precedes this, and lays out their landscape well. Guidance was pulled due to ongoing ‘construction and enhancement’ work, which clipped yields. I’ve tried to trace the source – whether KCR or Ilera to no avail. From their conference call:

I’ve illustrated the total price of Ilera – which was very high. I can’t help but muse if this is again an Ilera facility (ie: more cost). $TER’s since gone on ahead with KCR and bought Gage – bringing with it a Cresco Labs-esque JV in Spartan. We won’t have much visibility into the entrails of the financial aspects of the deal, as a vote by $TER to acquire doesn’t happen until November 11th.

I mention that JV – because the primary purchase agreement (a 104 page beast published on SEDAR on September 10th) – reveals that Spartan’s JV partner (“Hermiz”) – looks to be coming into $TER whole as part of the agreement:

Materially, it won’t have the same potential EPS impact as the Cresco Labs LLP JV – but I see it as a potential risk point. If there was a potential tell of the Gage acquisition – is that its’ announcement was preceded by two weeks by the announcement of $TER getting an exclusive to Cookies in NJ. (NB – ‘Hermiz’ is made up of a Michael Hermiz and Rami Reda – who are listed as co-founders of Gage).

<An aside – Hermiz was previously a mortgage broker; Reda…. a franchisor who still runs a chain of Subways and BusyBee Convenience stores>

Maybe it took a Jason Wild to bring this deal together, we’ll likely never know…… but on its’ face….seems like a ‘yep’.

Either or, subscribers will know I’m un-enthusiastic about the capital structure $TER’s packing at the moment, and from that purchase agreement – all of Gage’s existing optionality will be ported directly onto $TER’s balance sheet.

I’m going to focus on $TER’s existing overhang (there’s buckets). $TER’s share price (anecdotally) appears to have suffered more than peers since February’s highs – and there’s been many a moan in the echo chambers about it:

To the financials!

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• ‘Contingent Consideration’ – a liability at $41MM last quarter, at $11MM this quarter. Since the share price increased between the 2 reporting dates ($12.81 to $14.25), it means there’s more than just share price linkage.
• And yep, $29MM of that contingent consideration was paid in cash during the quarter.
• They replaced the EVP of NE Region when they made the final Ilera payout. Seems the last of the Ilera people wanted a desk until the check cleared.
• There’s a ‘potential’ contingent consideration of $75MM coming on the next set of financials from the KCR acquisition. It was valued at $1MM at time of purchase. Terms will set the ramp or decline of it – it could be based upon sales/margin/EBITDA/yields – I can’t find much info on it at the moment. Next fins I should be able to find and derive.
• Warrant liability increased QoQ from $122MM to $139MM. My quick calc says the increase should be ~=$22MM, not far off, but always a good idea to open the hood though.
• They did record a loss of $20MM on the warrant liability as well. There’s two components to that warrant liability: warrants on preferred shares and another on common shares. An expensive raise they made in May 2020 (their stock was hugging $2.50 at the time (I wrote about the preferred’s here).
• So, the loss reported is the difference on the market price v the $3 strike price on the day it occurred.
• Which, still begs the question of why warrant liability went up.
• Ah. This is attributable to the Canopy warrants (~=17MM @ ~=$3.25) that expire in 2030/31. Gonna be a long decade.
• Impaired $8MM of Goodwill and Intangibles (brand name/customer relationships). The brand isn’t mentioned, the relationships were part of a distributorship in FLA
• As far as I can tell – the licensing agreement with Cookies appears to be held by Spartan Partners LLC – not GAGE – which is the JV $TER only owns 51% of. We’ll wait to see how the royalty flows. Ownership and ultimate corporate structure is opaque, and in flux.
• The HMS acquisition was paid for by $24.4MM in cash. As to net assets acquired? A $7MM liability. Total tangible assets were $1MM in inventory and $700k in receivables.
• About $850k going out each quarter of this year in RSUs, which vest at the price they were granted at.

Ugh. This is one of my least favorite companies to do – because they’ve got exposure across so many instruments and it litters the place.

Here’s the fun part: share structure.

Common shares have increased by some 105MM this year, with 78MM of them coming in from the preferred shares and proportionates. As mentioned, the preferred share warrants were already handled (and brought in $37MM upon exercise).

The equity component of the preferred shares though are ‘cashless’ now, but were sold for $2,000 initially (remember, they convert at 1000:1). Any gain/loss at the time would have been booked to S/E.

You’ll note that there’s still 14MM subordinates still outstanding for conversion from the preferreds.

If there’s something I can say that’s kind of a positive – is that $TER took the steps to get the proportionates off the balance sheet. I say ‘kinda’ – because they could have been done sooner – at less ‘cost’ in foregone capital to the common shareholder.

Meh – it’s truly a matter of personal perspective, and really, trust in management. I mean, some of the things I’ve seen management pull on common shareholders is <ahem>…..unkind. If you are jaded – you’d be asking why they aren’t converting proportionates the minute they come into the money. If you’re of the mind that management should be rewarded for taking risks and applying their talent – well, you might not be too begrudging.

I do believe that this ‘new’ trend in MSOs of cleaning up capital structures isn’t coming from within, but from without.

And that’s really where this lays: opinion. I caveat that with it being an informed opinion.

I will say that my view of $TER’s capital structure is improving – but we’re dealing with more (unknown) incoming optionality. That they smacked all of those proportionates in one-shot is a ‘good’.

Tomorrow I’m going to lay out the whole jam of overhang and zero/partially rated capital and why it matters. I’ll present it as clearly and the best that I can.

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, nor any of the companies mentioned.