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TC

TerrAscend Corp. (TSNDF)·Q1 2024 Earnings Summary

Executive Summary

  • Net revenue of $80.6M (+16.1% YoY) with adjusted EBITDA of $16.2M (20.1% margin), and seventh consecutive quarter of positive operating cash flow; sequential revenue declined vs Q4 on mix and scale-up costs while margins remained resilient .
  • Wholesale strength was the driver: New Jersey wholesale remained robust and Pennsylvania wholesale grew 80% YoY; Michigan gross margin hit 40% for the second straight quarter; Maryland wholesale rose 22% sequentially as capacity expansion progressed .
  • Q2 2024 guidance: YoY revenue growth of 11–13%, adjusted EBITDA growth of 20–25%, with gross margin and G&A rates similar to Q1; management is pursuing refinancing of ~$120M maturing year-end debt .
  • Potential catalysts: Pennsylvania adult-use momentum and DEA rescheduling would eliminate 280E, materially improving net income and cash flow; management also targets accretive M&A (e.g., Ohio) leveraging existing infrastructure .

What Went Well and What Went Wrong

What Went Well

  • Wholesale-led growth and margin resilience: “Wholesale revenue for the quarter was $26.9 million… representing a 92% increase year-over-year… and an 80% increase in Pennsylvania” .
  • Sustained cash generation and debt paydown: “Seventh consecutive quarter of positive cash flow from operations totaling $13.3 million… another quarter of positive free cash flow of $10.5 million… we paid down $9.8 million in debt” .
  • Michigan profitability and Maryland ramp: “Michigan achieved 40% gross margin for the second consecutive quarter… Maryland wholesale revenue grew 22% sequentially; we completed an expansion, doubling cultivation capacity” .

What Went Wrong

  • Gross margin modestly lower YoY and sequential revenue decline: Gross margin 48.0% vs 48.8% YoY; Q1 net revenue $80.6M vs $86.6M in Q4 2023, reflecting channel mix shifts and scale-up costs in Maryland .
  • Ongoing GAAP losses: Net loss from continuing operations of $14.9M; diluted EPS of -$0.06; finance and other expenses of $8.6M weighed on results .
  • Retail softness in certain markets: “Retail revenue… $53.7M vs $55.4M… a 3% decline year-over-year, mainly driven by new door openings in New Jersey and reductions in unprofitable revenue in Michigan” .

Financial Results

Quarterly Trend (Sequential)

MetricQ3 2023Q4 2023Q1 2024
Net Revenue ($USD Millions)$89.2 $86.6 $80.6
Gross Profit Margin (%)53.6% 48.2% 48.0%
Adjusted EBITDA ($USD Millions)$24.2 $19.6 $16.2
Adjusted EBITDA Margin (%)27.1% 22.7% 20.1%
Net Loss from Continuing Ops ($USD Millions)$(8.4) $(41.8) $(14.9)
Diluted EPS ($USD)$(0.04) $(0.35) $(0.06)
Cash from Operations ($USD Millions)$9.4 $9.4 $13.3
Free Cash Flow ($USD Millions)$7.7 $7.9 $10.5

Year-over-Year Comparison (Q1 2024 vs Q1 2023)

MetricQ1 2023Q1 2024
Net Revenue ($USD Millions)$69.4 $80.6
Gross Profit Margin (%)48.8% 48.0%
Adjusted EBITDA ($USD Millions)$12.2 $16.2
Adjusted EBITDA Margin (%)17.6% 20.1%
Net Loss from Continuing Ops ($USD Millions)$(19.2) $(14.9)
Diluted EPS ($USD)$(0.08) $(0.06)

Revenue Mix (Wholesale vs Retail)

MetricQ1 2023Q1 2024
Wholesale Revenue ($USD Millions)$14.0 $26.9
Retail Revenue ($USD Millions)$55.4 $53.7

KPIs and Cash Flow

KPIQ1 2023Q4 2023Q1 2024
Cash & Restricted Cash ($USD Millions)$33.5 $25.3 $25.7
Capex ($USD Millions)$2.5 $1.5 $2.8
Debt Paydown in Quarter ($USD Millions)—$4.1 $9.8
G&A ex SBC as % of Revenue (%)37.5% 29.4% 32.9%
Basic Shares Outstanding (as of date)—367M (Mar 13, 2024) 368M (May 8, 2024)
Warrants & Options Outstanding—42M @ $3.91 42M @ $3.93

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue Growth (YoY)Q2 2024Not provided11–13% —
Adjusted EBITDA Growth (YoY)Q2 2024Not provided20–25% —
Gross MarginQ2 2024Not providedSimilar to Q1 (≈48–50%) —
G&A Rate (as % of revenue)Q2 2024Not providedSimilar to Q1 —

Note: Management indicated ongoing debt refinancing efforts for ~$120M maturing at year-end; not formal guidance but operational objective .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3’23, Q4’23)Current Period (Q1’24)Trend
New Jersey wholesale/retail mixWholesale doubled in NJ; market share gains Wholesale robust; retail pricing pressure muted by wholesale stability; margins stable with automation and yields Mix shifting to wholesale; margin stable
Maryland adult-use rampAdult-use started; Q4 margin impact from crop issue and scale-up Wholesale +22% seq; cultivation capacity doubled; margin improved QoQ, further improvement expected Improving trajectory
Pennsylvania wholesale growth & adult-use pathRetail/wholesale returned to growth Wholesale +80% YoY; additional grow rooms; Governor support for adult-use by Jan 1, 2025 Strong growth; regulatory tailwind
Michigan margin recoveryMargin optimization; exits Q3 at 40% in Sept Achieved 40% GM for second consecutive quarter Stabilized profitability
DEA rescheduling/280E—Rescheduling would eliminate 280E; expected ~$26M refunds; multiple reform paths (DEA, Boies case) Regulatory relief narrative strengthening
M&A and Ohio entryRaised FY23 guidance; expanding strategy “deep and wide” Targeting Ohio before adult-use; leverage MI/MD infrastructure; seeking accretive deals Expansion focus intensifying

Management Commentary

  • Jason Wild, Executive Chairman: “We delivered our seventh consecutive quarter of positive cash flow from operations totaling $13.3 million… another quarter of positive free cash flow of $10.5 million…” and highlighted rescheduling as “a groundbreaking event… [that] would eliminate 280E taxes and dramatically improve net income and cash flow” .
  • Ziad Ghanem, President & COO: “In Pennsylvania… Wholesale revenue grew both sequentially and year-over-year at rates of 23% and 80%, respectively… Legend and Valhalla edibles were key drivers” .
  • Keith Stauffer, CFO: “Wholesale revenue… $26.9 million… a 92% increase YoY… Retail revenue… $53.7 million… a 3% decline YoY… G&A as a percent of revenue, excluding stock-based compensation, was 32.9%” .

Q&A Highlights

  • New Jersey mix and margins: Wholesale shift offsetting retail pressure; margins stable due to yields, automation, efficiencies; EBITDA margins can be favorable in wholesale given lower rent and labor .
  • Pennsylvania outlook: Significant upside with adult-use; canopy capacity far exceeds other states combined; added grow rooms to meet demand .
  • Maryland verticality: Parkville relocation; cultivation expansion with first harvest mid-year; vertical integration driving margin and revenue opportunities .
  • Pricing and competition in NJ: Wholesale pricing “exactly where it started 2 years ago,” TerrAscend commanding a premium; supply/demand expected to remain in equilibrium .
  • Margin outlook: Near-term gross margin expected in 48–50% range; improvement potential from M&A and operational initiatives .

Estimates Context

  • S&P Global consensus estimates for Q1 2024 were unavailable at time of analysis due to data access limits. As a result, we cannot assess beats/misses vs Wall Street for revenue, EPS, or EBITDA at this time. Values would be retrieved from S&P Global when available.

Key Takeaways for Investors

  • Wholesale-led growth is the engine: New Jersey and Pennsylvania wholesale strength is offsetting retail softness, supporting margins and cash generation .
  • Cash flow discipline and deleveraging: Positive operating cash flow and free cash flow with ongoing debt paydown provide balance sheet flexibility ahead of planned refinancing .
  • Regulatory optionality: DEA rescheduling and Pennsylvania adult-use momentum are meaningful upside catalysts for margins, cash flow, and valuation; monitor progress through year-end .
  • Maryland is mid-ramp: Capacity expansion and verticality should drive sequential margin improvement in 2H, with initial harvests midyear .
  • Margin range realistic near term: Expect 48–50% gross margin near term; upside beyond 50% contingent on M&A execution and continued operational gains .
  • Strategic expansion: Management’s “wide open map” approach seeks accretive entry into Ohio and other Midwest states leveraging Michigan infrastructure; expect deal flow to be cash-flow accretive .
  • Trading implications: Near-term stock moves likely tied to Pennsylvania adult-use legislative milestones, DEA rescheduling timelines, and debt refinancing terms; Q2 delivery vs guidance (11–13% revenue growth, 20–25% EBITDA growth) is a key checkpoint .