TerrAscend Corp.

Good evening, my name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrasen's 4th Quarter and Full Year 2023 Financial Results Conference Call. Joining us for today's call is Jason Wild, Executive Chairman, Ziad Ghanem, President and Chief Executive Officer, and Keith Stuffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook and estimates and assumptions relating thereto, and the company's expectations regarding its new market opportunities like Ohio, the benefits of its listing on the Toronto Stock Exchange, the benefits of the company's plans to file tax refund claims for past years, and other financial and operational matters. Each forward-looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance. Additional information regarding these factors appears under the heading Risk Factors in the company's Form 10-K, filed with the Securities and Exchange Commission, or the SEC, and other filings that the company makes with the SEC from time to time, which are available at www.sec.gov, on Cedar Plus, and on the company's website at www.terrasend.com. The forward-looking statements in this call speak only as of today's date, and we undertake no obligation to update or revise any of these statements. Also, during the call, the company will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release and filings, which you can find on the company's investor relations website, or on the FEC and CJ Plus websites. I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.

Good evening, everyone, and thank you for joining us. 2023 was a record year for Terrasen. We made substantial progress across virtually all facets of our business, including significantly improving our margins, transforming our balance sheet, materially lowering our interest expense, delivering positive operating and free cash flow, acquiring four high-performing dispensaries in Maryland, and successfully listing on the TSX. We grew net revenue 28% year-over-year to $317.3 million, achieved gross margin of 50.3%, and delivered adjusted EBITDA from continuing operations of $68.8 million, an increase of 77% year-over-year. Generating positive cash flow is also a major priority for us. In 2023, we generated positive cash flow from continuing operations of $31.1 million and positive free cash flow of $23.4 million. This was the first time in Terrascent's history that we accomplished these two financial milestones. Our efforts to transform our balance sheet in 2023 contributed to improved cash flow generation. From its peak in late 22, we substantially paid down our debt while also materially lowering our interest expense. Federally, we are awaiting updates regarding the DEA's response to the HHS Schedule III recommendation, which could present significant opportunities for U.S. cannabis operators. We remain optimistic about the potential benefits that rescheduling could bring to cannabis companies if approved. including tax relief leading to significantly greater profitability and cash flow, increased access to institutional banking and lending, and an overall decrease in the cost of capital. At the state level, the governor of Pennsylvania has been increasingly vocal about endorsing an adult use program and requested legislators to put a bill on his desk by June 30th with full adult use rollout scheduled for January 1st, 2025. Pennsylvania represents a very large market for us with a current medical market size already over 1.2 billion and an adult use market expected to surpass 2 billion. We are vertically integrated in the state with our largest cultivation and production facility and a six-store retail footprint that's ready to successfully capitalize on an adult use rollout just as we did in New Jersey and more recently in Maryland. Regarding taxes, after initiating a comprehensive evaluation in early 23 and based on legal interpretations, we have changed our tax position related to the applicability of IRS Section 280E, which will result in amended returns and expected refunds of approximately $26 million. Keith will provide a more detailed update on this topic. As it relates to our debt that matures at the end of this year, we've been working through a competitive process which includes both existing and potential new lenders and are pleased with the discussions thus far. Just as we accomplished to date, we continue to have a goal of reducing our interest expense. We expect to have further news to report on this front by our next earnings call. While we continue to focus on driving operational excellence within our current business, we have been evaluating many compelling M&A opportunities in recent months to add best-in-class assets at very attractive multiples. These opportunities include going deeper in states where we operate, where licensing limits allow, and also wider by adding additional states to our footprint. The environment for cannabis operators continues to be challenging with punitive taxes, high debt loads, and challenging capital markets conditions. This has led to a multitude of opportunities to acquire assets in many of the most attractive states at terms that are wildly accretive and that would have been unheard of two years ago. We like to say that we have a wide open map, meaning we have ample greenfield opportunity of attractive new markets to enter. This is a huge advantage versus our competitors who have reached their caps in many of the most attractive and profitable states. We expect that this will continue to drive a higher rate of growth and improve margins in our business, just as it did for us in 2023. As an example, we entered last year with zero retail presence in Maryland and were able to acquire some of the most attractive dispensaries in the state at favorable terms and with a limited competitive tension from other bidders. Just as we were focused on hitting the four dispensary cap in Maryland prior to adult use, we now have our sights set on entering Ohio prior to their commencement of adult use. With a population of approximately 12 million, we think the opportunity in Ohio is substantial. Compared to 9 million in New Jersey and 6 million in Maryland, employing our adult use playbook in Ohio could result in an even larger business for us relative to Terrasen's other top-performing markets. We plan to leverage our Michigan corporate infrastructure in a similar manner to the way we integrated our Maryland assets in our Northeast infrastructure last year. This would leverage our corporate SG&A in the Midwest and make both Michigan and Ohio more profitable for us together than either would be on a standalone basis. We are in active discussions with multiple parties in the state to ensure that we have the ability to enter the Ohio market in time for adult use via an accretive transaction. We would expect any acquisition to provide cash flow immediately. The additional benefit of our ample greenfield opportunity is that it has allowed us to explore larger transformational deals. In the past, I've said that we are focused on being the best, not the biggest. But as we have engaged in discussions on these potential transformative opportunities, I now see a path to Terrasen becoming not only one of the best, but also one of the biggest. I look forward to sharing more on this as appropriate in the coming weeks and months ahead. In summation, I'm extremely proud of what our team accomplished in 2023. It was a monumental year for Terrasen. We grew our business to new levels at the highest rate amongst public companies in the industry. We strengthened our operational performance. We blazed a new trail by being the first plant touching U.S. operator to list on the TSX. Played a leadership role in the case filed against the U.S. Attorney General. We went deeper and vertically integrated in Maryland. We reduced our debt and interest expense and we became significantly cash flow positive for the first year in our history. Now I'll turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello, everyone. I share Jason's enthusiasm regarding our performance in 2023 across virtually all measures. This is a reflection of our operational excellence, our attractive lineup of states, the strength of our brand, the quality of our products, and the retail experience. Let me drill down deeper as to how we achieve these results within each of our key markets. Starting with New Jersey, this continues to be our largest and most profitable market. With strong momentum, robust margins, and increased footprint opportunities due to state program regulatory changes, this state remains a key market for us. In the fourth quarter of 2023, while the number of retail store openings has accelerated, according to recent BDSA data, Tarasand has improved its market share position to a virtual tie at number two with a 17.5 percent share compared to a number three position in the third quarter. Naturally, as the market has evolved, our revenue mix in the state has increased proportionally towards wholesale versus retail. On our last call, we talked about our wholesale business in New Jersey doubling Q3 versus Q2. In the fourth quarter, our wholesale business once again grew an additional 25% quarter over quarter and more than upset the retail decline, resulting in sequential growth in total for New Jersey in the quarter. We have successfully maintained high gross profit, EBITDA margin, and cash flow, predominantly due to our high cultivation yields, low cost structure, and leading brand and retail experience. We also have an opportunity to expand our retail footprint in New Jersey under state legislation that enables existing operators to take stake in up to seven additional social equity qualifying dispensaries. This is a key focus for us, and we have been very active in discussion. Given our cultivation capacity and operational efficiency, we believe the potential to increase our retail store count in New Jersey from three to 10 will further increase margins and profitability. Turning to Maryland, the state launched its adult use program in July and is expected to reach $1.7 billion by 2027. We became fully vertically integrated in anticipation of adult use, and today we are operating with a state-of-the-art cultivation facility and four retail dispensary locations, which we believe collectively are among the highest performing retail footprints in Maryland. Our Q4 retail revenue in Maryland remains strong. We are also near completion on the relocation of our Parkville location to a new large storefront and conveniently located near the White Marsh Mall, a high traffic retail center. While delayed from our original Q4 2023 plan, We expect to be operational at this location in early Q2 of this year. In the fourth quarter, gross margin in Maryland declined compared to the previous quarter. In December, we experienced cultivation challenges related to equipment malfunction, which led to a crop failure. We changed SOPs and reframed our team members. I'm happy to report that our recent harvest have surpassed our standards across yield, THC potency, terpene levels, and flour quality. However, the product output from that incident led to higher discounting and therefore a negative impact to gross margin in the fourth quarter. Maryland gross margins in the quarter were also impacted by temporary underabsorption of fixed costs in non-flower production due to scale up in this area of our facility. We are increasing output of non-flower products to meet our growing wholesale business and our increased verticality in our four dispensaries. The increased output is expected to partially improve margin in Q1 and more fully absorb fixed costs into Q2. In Pennsylvania, both retail and wholesale grew revenue for the second consecutive quarter. The team has done a great job optimizing within a relatively mature medical market. Our legend brand, which we introduced into the Pennsylvania market earlier in 2023, continues to perform well. Our Valhalla Edible brand has also performed well in this newly allowed product format, which was approved for the sale in the state in early 2023. We have reduced our inventory position and more effectively balanced our supply with demand to the point where we now have activated additional grow room to meet the current demand. As we have mentioned, we believe Pennsylvania is a large market opportunity for us and adult use appears to be on the horizon. Pennsylvania has a population of 12 million and is expected to become a $2 billion adult use market by 2028, according to DBSA. Governor Shapiro recently voiced his endorsement for an expedited adult use cannabis program by January 1st, 2025. We applaud his support for the cannabis industry. And lastly, in Michigan, we have focused our efforts on operational efficiency to drive gross profit margins above 40%, thereby enabling us to achieve EBITDA profitability. Gross margin has improved from 28% in Q2 to 36% in Q3 to 40% in Q4. However, in order to achieve this margin level, we had to stay disciplined on discounting and promotion, which caused us to walk away from lower margin revenue. As a result, retail revenue declined sequentially while wholesale remained relatively stable. Michigan remains a top focus of ours since the state is the second largest candidate state in the country with over $3 billion in annual sales. Today, we have 19 retail locations, soon to be 20, with the planned opening of our second location in Detroit happening this month. We are also actively pursuing opportunities to go deeper in the market, which will further leverage our SG&A. As Jason mentioned previously, Ohio also presents an attractive opportunity to leverage our Michigan corporate infrastructure to drive improved profit margins. In closing, I am thrilled with the progress we have made across all of our geographies, which led to our record performance in 2023. And I am more excited than ever about how we have positioned ourselves for even greater success in 2024. I would now like to turn the call over to Keith to provide a financial update.