TerrAscend Corp.

Good evening, my name is John and I will be your conference operator today. At this time, I would like to welcome everyone to TerraSense first quarter 2024 financial results conference call. Joining us for today's call is Jason Wild, Executive Chairman, Ziad Ghanem, President and Chief Executive Officer, and Keith Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook, including the company's expected financial results for the second quarter of 2024, and estimates and assumptions relating thereto, and the company's expectation regarding its new market opportunities like Ohio, the benefits of the company's tax refund claims for past years, the expectations regarding regulatory reform and the potential benefits thereof, 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 of future performance. Additional information regarding these factors appear 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 our quarterly report on Form 10Q will for the quarter ended March 31, 2024, which you can find on the company's investor relations website or on the SEC and the CDAR 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. We're pleased with how 2024 has started. Net revenue was in line with the guidance we provided during our year-end conference call in March, while adjusted EBITDA and cash flow exceeded our year-over-year growth and margin expectations. Net revenue for the quarter totaled $80.6 million, an increase of 16.1% year-over-year, and adjusted EBITDA from continuing operations totaled $16.2 million, an increase of 33% year-over-year. representing a 20.1% adjusted EBITDA margin compared to 17.6% for the same period the prior year. Our focus since 2022 has been on cash flow generation, and I am gratified to see how this measure has vastly improved. We generated sufficient cash in excess of our accrued taxes in the quarter, including the uncertain tax position related to 280E taxes. We delivered our seventh consecutive quarter of positive cash flow from operations, totaling $13.3 million, compared to $10.5 million for the same period last year, and another quarter of positive free cash flow of $10.5 million compared to $8 million a year ago. Our improved margin profile and cash flow generation during the first quarter of 2024 was due in large part to continued improvement in each of our core markets and steps we took last year to substantially pay down our debt and materially lower our interest expense. We're actively in the process of exploring additional opportunities to improve our balance sheet and are well underway in a competitive process to refinance a substantial portion of our debt. We have seen significant interest in this process from both existing and potential new lenders. Also, with the recent news regarding the DEA's decision to reschedule, additional potential lenders have emerged, and existing lenders have become more constructive on the sector, given that the rescheduling would eliminate 280 taxes and dramatically improve net income and cash flow. We will continue to advance this refinancing process to a close and will provide additional updates as appropriate. Regarding M&A, on our last fall in March, we disclosed our intention to enter new states such as Ohio. With a population of approximately 12 million and adult use implementation imminent, we think this market has substantial growth potential and presents operational synergies with our current footprint. We mentioned our intention to enter the state before the start of adult use. The state has been moving very fast to implement the program, and we still have every intention of entering as expeditiously as possible. The state is moving faster, so we're moving faster. Entrance into this new market and potentially other Midwest states will allow us to leverage our existing Michigan infrastructure in a similar manner to how we quickly and efficiently integrated Maryland into our Northeast infrastructure last July. This would leverage our SG&A in the Midwest and has the potential to make both Michigan and other new Midwest states more profitable for us combined rather than as a standalone entity. We're in active discussions with multiple parties across multiple states, and we expect any acquisition to provide immediate cash flow. We can't wait to share further details on this when erect. 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 TerraCent becoming more Not only one of the best, but also one of the biggest. I look forward to sharing more on this as appropriate in the weeks and months ahead. From a federal perspective, I'm optimistic that there are multiple potential paths to cannabis reform, and we're not solely relying on Congress to take action as we have been in the past. The recent news that the DEA is moving to reschedule cannabis to Schedule 3 is a groundbreaking event for Terrasen and the entire cannabis industry and its stakeholders. This will result in the elimination of punitive tax treatment and will likely enable greater access to capital at a lower cost. Overall, rescheduling will be a significant step towards leveling the playing field for the industry. The bottom line is we just want to be treated like every other business and the equal tax treatment that rescheduling would bring is a substantial milestone towards accomplishing this goal. To that end, A federal judge in Massachusetts recently agreed to hear the David Boies lawsuit seeking equal treatment for cannabis businesses. The oral arguments are scheduled for May 22nd. We have been a foundational supporter of this lawsuit, and this represents positive development in the process. Additionally, last quarter, based on legal interpretations, we changed our tax position as it relates to 280E applicability, and we expect refunds totaling approximately $26 million. In closing, we're pleased with our first quarter results. We have the right team, high-performing assets, strong cash flow, and ample greenfield opportunity to pursue additional growth. 2023 was about operational excellence and strengthening the foundation. 2024 is about expansion by capitalizing on the current environment and entering into attractive states on accretive terms, which would not have been possible two years ago. Now I'll turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello, everyone. We have a strong start to 2024. Let me walk you through how we perform in each of our key markets. Starting with New Jersey, this continues to be our largest and most profitable market. Since commencing operations in the state, we have consistently maintained a top three market share position, according to BDSA data. As the market has evolved, similar to Q4, our revenue mix has trended proportionately towards wholesale versus retail. Last year, wholesale revenue doubled from Q2 to Q3, then grew another 25% in Q4 and remained strong in Q1. We have maintained strong gross profit margins, EBITDA margins, and cash flow in New Jersey, largely due to high cultivation yields and product quality, our low-cost structure, an efficient retail labor model, and Terraten's leading brand and retail experience. We are exploring opportunities to expand our retail footprint in New Jersey under state legislation that enables existing operators to take stakes in up to seven additional social equity qualifying dispensaries. These discussions remain active, and we see the potential to increase our retail store count in New Jersey, which would further increase margin and profitability. Turning to Maryland, Retail revenue remained stable while wholesale revenue grew 22% sequentially. We are still in the early innings of the adult use program in Maryland, and we expect to continue to grow our wholesale sales as we ramp up our capabilities and provide a full product assortment into the market. In fact, we just recently completed an extension doubling our cultivation capacity with first harvest expected mid-year. Gross margin improved quarter over quarter as we increased our yield, rent production of our manufactured goods, and increased verticality in our four Maryland dispensaries. We expect further gross margin improvement in this market throughout this year. With our state-of-the-art cultivation facilities and four retail dispensary locations, we believe Collectively, we have one of the highest performing retail footprints in Maryland. With the upcoming grand opening later this month of our Parkville location to a new, larger storefront and higher traffic retail center, we expect to solidify our retail position in the States. In Pennsylvania, I'm really proud of the results that our team has accomplished. We experienced a seasonal decline at retail. Wallfare revenue grew both sequentially and year over year at rates of 23% and 80% respectively. This strong growth speaks to the caliber and breadth of our products and brands. For example, our Legend and our Valhalla Edibles brand were key drivers to this performance with 10% and 54% quarter-over-quarter growth respectively. we have reduced our inventory position and are more effectively balancing our supply with demand. In fact, lower inventory levels and higher demand for our products has enabled us to operationalize additional growth in the quarter. As we stated before, we consider Pennsylvania to be a large market opportunity for us, particularly as the state prepares for adult use. During the first quarter, Pennsylvania's governor, Josh Shapiro, formally called on lawmakers to follow other states' leads and finally legalize adult use in the state, endorsing support for an expedited adult use cannabis program by January 1st, 2025. With a population of 12 million, Pennsylvania is expected to become a $2 billion plus adult use market by 2028, according to BDSA. And lastly, in Michigan, our main focus is on improving operational efficiency and driving gross margins to establish a solid foundation from which to expand. In Q1, we once again achieved our goal of 40% gross margin. Retail sales declined sequentially due to expected seasonality as we had previously communicated. As the second largest cannabis state in the nation, With over $3 billion in annual sales, Michigan remains a top priority for us. Today, we have 19 retail locations, soon to be 20, with the planned opening of our second location in Detroit scheduled for Memorial Day weekend. We are actively pursuing opportunities to go deeper in this market. As Jason noted, Midwest states like Ohio represent an attractive opportunity to leverage our Michigan corporate infrastructure to drive improved profit margins and cash flow. In summary, I am pleased with our progress across all of our geographies, which drove solid first quarter results. We expect to achieve even greater success over the course of 2024. I would now like to turn the call over to Keith to provide a financial update.