Exclusive Interview with TerrAscend Chairman Jason Wild
TerrAscend (CSE: TER) (OTCQX: TRSSF) has a five-state footprint in the U.S. The company has opted to build greater scale and market share in a smaller number of states rather than stretching across many markets. Though the cannabis industry has had a challenging year, the multi-state operator has still been able to access capital. In December, Canopy Growth converted some of the company’s debt to equity. Chairman Jason Wild sat down with NCV for the first time since June to talk about how the company is positioned across its footprint, the value of the Canopy relationship and navigating the current environment in the cannabis industry.
Listen to the entire interview or read the summary below:
When TerrAscend made the decision to expand its operations into the U.S., it made its first acquisition in California. Today, it has five dispensaries in the state under the Apothecarium name. It also has a cultivation facility and brand in San Francisco: State Flower.
The California market has been weak. The state is not a major driver of profitability for the company, but it hasn’t taken as severe of a hit as some other operators, according to Wild. During the first year of the COVID-19 pandemic, travel restrictions and lockdown orders negatively impacted the company’s Bay Area stores. But since then, TerrAscend has streamlined its operations and those stores are operating at a break-even level.
On the cultivation and manufacturing side of the business, the company only grows and sells about 320 pounds of flower per month under its boutique brand. It is able to move all of that product and be profitable.
TerrAscend has a significant footprint in the Michigan market. It completed its acquisition of Gage Growth in March and the acquisition of Pinnacle in August. Now, it has 16 dispensaries open, three cultivation facilities and a lab where it does extraction and makes edible and vape products.
Michigan has become one of the most competitive states over the past year, according to Wild. Over the past few quarters, the company has reduced and streamlined its operations to manage through that environment.
Now, the company is considering bringing on additional dispensaries at attractive multiples to drive profitability in the state. And the TerrAscend team is seeing strong deal flow in Michigan. Over the next 12 months, Wild anticipates the market will shift. There could be a decrease in cultivation capacity and the number of dispensaries.
In Pennsylvania, the company has approximately 220,000 square feet of cultivation and manufacturing space, which has the ability to supply a large portion of the market, according to Wild. It also has six Apothecarium dispensaries in the state.
TerrAscend applied for and won a license in New Jersey, which has proven to be a strong market for the company. The state’s adult-use market launched in April. The company has cultivation and manufacturing in the state, as well as three Apothecarium dispensaries.
Two of the company’s dispensaries are at a mid-$30 million run rate. Its third dispensary in the state is not quite at that level, but it is still a strong performer. These three retail locations are the top performers out of the company’s 32 total dispensaries, according to Wild. The company has also launched a number of brands in the New Jersey market, including Gage and Cookies.
While these boom days may not last in the state, the overall challenge in the industry have given the company an edge in New Jersey. There is not as much cultivation capacity as anticipated in the market because operators don’t have access to the capital necessary to fund additional buildouts in the state, according to Wild.
In Maryland, the company recently completed construction on a new cultivation and manufacturing facility. With adult-use cannabis set to launch next year, TerrAscend is poised to supply the market with high-quality flower and manufactured products. It also is under contract to buy dispensary in the state. The dispensary is located within six miles of three different states, all of which have yet to launch their own adult-use programs.
Retail and Wholesale Operations
TerrAscend has both retail and wholesale operations. It focuses on producing high-quality flower for its own brands, as well as through partnerships with other brands, like Cookies. On the retail side of the business, the company operates its Apothecarium retail stores. It also has Cookies and Gage retail stores in the Michigan market.
As markets become more competitive and the wholesale environment remains challenging, owning retail is important, but Wild does see the value of having both retail and wholesale operations. Companies that cultivate and sell their own products do improve their margins, but they leave revenue on the table if they only sell what they make. Consumers want to see more selection when they go to a store.
The Cookies Partnership
TerrAscend has continued to grow its partnership with the Cookies brand. That relationship began in Michigan, and it has been expanded to New Jersey and Pennsylvania. The brand awareness that Cookies brings to the partnership draws consumers to the company’s retail stores. Consumers not only buy Cookies products but also have a chance to learn about the company’s other products. The company is looking to expand that relationship to more states, according to Wild.
TerrAscend in Canada
The company’s business in Canada is smaller than it once was. Over the last quarter, TerrAscend has significantly shrunk the burn in that market, according to Wild. He pointed to challenges in the Canadian market, including competition with legal products from all over the country and the dynamics of the provincial governments controlling distribution. It sells wholesale across the country, and it has an exclusive partnership with Cookies in Canada. It recently opened its first Cookies dispensary, located in Toronto.
The Balance Sheet
In December, Canopy USA converted CAD$125.5 million of TerrAscend’s debt to equity at CAD$5.10 per share. In addition to this equitization, the company recently paid down $30 million of its senior secured Michigan loan. It has reduced its overall debt level by approximately 45 percent, according to Wild. Between Canopy’s equitization and the reduction of Michigan debt, the company has taken its overall debt position from more than $300 million to roughly $185 million.
The company’s goal is to operate as if the capital markets are always going to be challenging and regulations like 280E are going to remain in place. TerrAscend is aiming to be profitable in this environment, and one of the key ways to achieve that goal is by lowering expenses. By cutting its debt, the company has reduced its annual interest costs by $10 million, according to Wild. Additionally, it has significantly reduced its cost per pound to grow over the past few quarters.
TerrAscend is not planning to take on any additional debt. It would not expect to get a fair value from the equity markets at this point, though positive legislative movement could change that.
The company is considering some other opportunities to unlock more value from its stock price. For example, the Toronto Stock Exchange could start listing U.S. operators in the next six to eight months, according to Wild.
Navigating a Challenging Environment
The launch of adult-use in New Jersey was an important driver of growth for the company, helping to offset the weakness in the majority of other markets. Looking ahead, adult-use in Maryland and potentially Pennsylvania represents exciting opportunities for TerrAscend. The company has already spent most of the necessary CapEx and built out the facilities in those markets. It will be ready for the launch of adult-use.
The company has improved its profitability over the past few quarters, demonstrating its ability to execute in a tough environment, according to Wild. He expects some of the competition will fall behind in the coming months and years while TerrAscend will be positioned to ramp up its growth and profitability.
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