TerrAscend Corp.

Good afternoon. My name is John, and I'll be your conference operator today. At this time, I would like to welcome everyone to TerraCents' first quarter 2025 financial results conference call. Joining us today is Jason Wild, Executive Chairman, Thea Ghanem, President and Chief Executive Officer, and Keith Stouffer, 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 2025, and statements and assumptions relating there to the company's ongoing cost reduction efforts and productivity gains. and the company's expectations regarding its market opportunities, Midwest expansion, and M&A strategy. The expectations regarding regulatory reform and the potential benefits thereof, each forward-looking statement discussed in today's call is subject to risk 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 appears under the heading risk factor in the company's Form 10-K with the Security and Exchange Commission, or the SEC, and subsequent SEC filings, which are available at www.sec.gov on CEDAR Plus and the company's website at www.terrasend.com. The forward-looking statements in this call speak only of today's date, and the company undertakes no obligation to update or revise any of these statements. During today's 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 for Form 10Q from the quarter ended March 31, 2025, which you can find on the company's investor relation website or on the SEC and CEDAR 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.

Despite a challenging industry environment, revenue performed in line with our guidance, while gross margin and EBITDA margin outperformed our expectations during the first quarter of 2025. While first quarter revenue totaled $71 million, a 4.5% decrease sequentially, as expected largely due to seasonality, gross profit margin expanded to 51.8%, a 160 basis point improvement sequentially. We continue to generate productivity gains and cost reductions in our business. Over the past year, our gross profit margin has steadily increased each quarter from 48% in Q1 of 24 to 51.8% in Q1 of 25. G&A expenses decreased by an additional $1.6 million in Q1, following a $3.6 million reduction in Q4 of 2024, reflecting ongoing G&A reduction efforts to reduce G&A by $10 million year-over-year in 2025. As a result of these efforts, the first quarter we generated adjusted EBITDA of $15.3 million. positive operating cash flow of $8 million, and positive free cash flow of $5.5 million. This marks our 11th consecutive quarter of positive operating cash flow and our 7th consecutive quarter of positive free cash flow. Key drivers of this performance have been our growth and margin expansion in the Northeast. In addition to driving the performance of our existing business, we have been focused on the aggressive pursuit of M&A's. For several quarters, we have highlighted bolt-on acquisition opportunities and possible transformational deals that we are actively pursuing. We believe that Terrasem's targeted approach has put us in a differentiated position to invest in the best geographies and assets at attractive valuations, while others are capped in many of the most attractive states and have turned their focus inward. During Q4-24, we announced the signing of a definitive agreement to enter Ohio, our sixth U.S. state, with the acquisition of Ratio Cannabis, a well-situated and profitable dispensary. We closed on Ratio this week and are fully integrating this dispensary into our existing operations. Our goal in Ohio is to assemble a leading retail footprint by acquiring high-quality stores at the right price, just as we did in Maryland. This will allow us to leverage our existing infrastructure and SG&A to drive higher profitability. In New Jersey, we have expressed our interest in expanding our retail footprint in order to extend our leadership position. Earlier this week, we announced a definitive agreement to purchase Union Chill dispensary, which will bring our total number of dispensaries in the state to four, subject to regulatory approval. Union Chill is a strong performer, generating more than $11 million in annualized revenue. Upon closing, this deal will be immediately accretive to EBITDA and cash flow. We plan to vertically integrate as soon as possible, which will further enhance margins, provide our full array of state-leading products and brands to local consumers, and enhance our leading market share position in the state. We are evaluating multiple additional opportunities in New Jersey and have a robust pipeline, which we continue to work through in a disciplined manner. As we sit today and based upon our discussions, we anticipate that by the end of 2025, we will sign multiple additional transactions in the state. On the topic of regulatory reform, we are closely monitoring the developments at both the federal and state levels. The federal regulatory environment seems to be showing some signs of positive movement, but as we've mentioned many times, we have operated and will continue to operate our business independent of reform. In Pennsylvania, we continue to see progress related to the possible passage of an adult use bill. We support the introduction of this bill as it marks the first milestone towards adult use approval. We will continue to work closely with the legislators across both aisles to refine the bill to its end state. When adult use occurs, we will be prepared to meet the increase in demand as we were in New Jersey and Maryland. Additionally, as previously mentioned, in December, oral arguments were held at the U.S. Court of Appeals for the First Circuit in the David Boies lawsuit against U.S. Attorney General Merrick Garland, which seeks equal treatment for legal state-regulated cannabis businesses. We look forward to sharing further updates as they become available. In summary, as I said before, the cannabis industry is still in the early stages of its development. While Terrasend has only been operating in the U.S. for about six years, our company has made significant progress in many facets of our business. For anyone who has been following the cannabis industry for the last few years, it's obvious that the pain of the capital markets has spared no one. However, I would like to highlight where I believe Terrasend is differentiated. Number one, we have a pathway to growth organically and through M&A due to our deep presence in our existing markets and a wide open map for further expansion. Two, we have demonstrated consistent delivery of positive free cash flow for seven consecutive quarters. Three, we have demonstrated operating efficiency by expanding gross margins by 380 basis points over the last five quarters while reducing operating expenses. Four, we refinanced the majority of our debt clearing the way through 2028. Five, we own $150 million of our own real estate and have no material sale leaseback obligations. And finally, last but not least, we have a capable management team that has been in place working together for several years now. In August of last year, we announced our first ever share repurchase program for up to $10 million worth of stock. Considering the improved performance of our existing business, strength in the balance sheet, $150 million of old real estate with no material sale leasebacks, approximately $30 million in cash, the potential for Pennsylvania to convert to adult use, and multiple attractive acquisition opportunities, we believe that our equity is significantly undervalued. In March, we repurchased our shares during the 15-day open trading window and within the daily purchase restriction limits. We will continue executing on this buyback program while balancing this with other capital allocation priorities, including growth capex investments in both Maryland and New Jersey, as well as further acquisitions. With that, I'll now turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello, everyone. Let me walk you through our performance in each of our key markets this quarter, beginning with New Jersey. In the first quarter of 2025, we maintained a leadership position in the state, according to BDSA. Our retail revenue was down sequentially, mainly due to seasonality, remained healthy in the state despite new retail door openings in close proximity to our stores. According to LitAlerts, an independent market measurement source, all three of our apothecary and retail locations in New Jersey ranked in the top 10 out of over 200 dispensaries now open across the state in terms of total units sold during the first quarter. While wholesale revenue declined quarter over quarter in New Jersey, our core metrics remain healthy. Penetration rate and average order size remain stable while we continue to have a leading market share position and are selling to an increasing number of doors across the state. The quality and consumer appeal of our brand is driving this leading market position and with our brand's ranking among the top three in flour, vapes, edibles, and concentrates categories. Quarter over quarter, sales trends remain positive in virtually all categories with the fastest growth and market share gains in extracts and edibles. Our extensive product portfolio in these categories continues to attract consumers as we deliver strong value and performance across multiple price tiers. Earlier this week, we executed a definitive agreement to increase our store count in New Jersey to four with the acquisition of Union Shelf, a high-performing dispensary generating annualized revenue of over $11 million. Upon closing, we expect to quickly integrate this location into our operations and vertically integrate in order to efficiently capture the full synergies of this opportunity. Longer term, our goal is to acquire up to six additional dispensaries, extending our retail footprint to ten in the state. This retail expansion would further increase our leadership in New Jersey, give us additional scale, and lead to improved margins and profitability as we vertically integrate each new store. Expansion of our cultivation and manufacturing capabilities at our Boonton facility is well underway and proceeding according to plan. This expansion will provide us with additional flower capacity and the ability to offer a broader product portfolio as well as enable us to supply additional stores. The edibles manufacturing expansion is now nearly complete while we expect to complete the cultivation expansion part of the project in the third quarter. Turning to Maryland, our success story continues in this state. As a reminder, we entered the Maryland market in 2021 through the acquisition of a small cultivation facility with negligible revenue and then acquired four dispensaries during the first half of 2023. We further strengthened our market share in the quarter, increasing our share from 5.2% to 5.9%, and are now only 1.4 market share points away from the number two position in the state. We are laser focused on achieving this goal over the course of this year. Drilling a bit deeper, we gained significant market share in the quarter across all five product categories. flour, vape, edibles, extracts, and pre-rolls. In the quarter, we improved to a virtual tie for the number three market share position in the flour category. In edibles, we now hold the number six position with the top three players all having lost market share in the quarter. In extracts, we grew 19% quarter over quarter, and in pre-rolls, we grew 22%. During the first quarter of 2025, despite seasonality, retail revenue increased slightly quarter over quarter, while wholesale revenue increased by almost 9%. Total revenue in Maryland across both channels increased sequentially for the fifth consecutive quarter to an annual run rate of nearly $75 million. Our verticality and increased additional efficiencies have allowed us to expand our gross margin from 25% in 2023 to the high 50s in the first quarter of 2025. Remember, all of this progress is despite having just entered the Maryland market upon adult use conversion less than two years ago. To meet the consumer demand and expected growth, we extended cultivation capacity by an additional 50% at our Maryland facility. We expect our first harvest in June. In Pennsylvania, with a backdrop of a mature medical market, we continue to build strong momentum driven by innovation, the strength of our brand, and our team's in-market execution. During the quarter, we were the fastest share gainer in the state. We increased our market share by 38% quarter over quarter to a number seven position, according to BDSA. This is an extremely strong showing, considering several of the other leaders in the state operate three times more dispensaries than Teresa. During the quarter, our market share increased to 5.1% as compared to 3.7% in the fourth quarter of 2024. We have strong momentum and are less than one share point away from a top five position in the state. We already hold top three positions in both the extract and tincture categories. We also hold a number five position in edibles, with strong momentum to move into a top three position driven by innovation behind our Valhalla brand. Retail revenue was steady sequentially as productivity per store continues to be healthy. Wholesale revenue increased 9% quarter over quarter, driven by demand of our value-oriented legend brand and our expansion into the edibles category earlier in 2024 with our Valhalla brand. As many of you know, we have a fully built-out large-scale cultivation and manufacturing facility in Pennsylvania, with no need for additional investment. As the prospect of adult-use launch becomes greater, we have plans in place to bring on currently unused capacity and will have it ready as needed in response to the increased demand resulting from adult-use implementation. And lastly, in Michigan, our priorities remain to improve operational efficiency and drive gross margins. Earlier this week, We announced our entry into Ohio with the acquisition of Ratio Cannabis. Our goal in Ohio is to assemble a leading retail footprint by acquiring high-quality stores at the right price, just as we did in Maryland. This will allow us to leverage our existing infrastructure and SG&A to drive higher profitability. In closing, we continue to make solid progress in the first quarter of 2025. Our business has remained steady due to our strong leadership team and dedicated workforce, robust business fundamentals, a targeted M&A strategy, no material debt maturing for the next several years, consistent positive operating and free cash flow quarter after quarter, and best-in-class sponsorship. Based on all of this, I remain confident in our outlook for the rest of 2025 and the future. I would now like to turn the call over to Keith to provide a financial update.

Thanks, Riyad. Good afternoon, everyone. The results that I'll be going over today have already been filed on both CDAR Plus and with the SEC, and all results that I will reference today are stated in U.S. dollars. Net revenue for the first quarter of 2025 totaled $71 million, a 4.5% decrease sequentially, as expected, largely due to seasonality, compared to $74.4 million in the fourth quarter of 2024. Retail revenue decreased 6.4% sequentially, and wholesale revenue was flat. Pennsylvania and Maryland retail sales were flat to slightly up sequentially, while seasonal declines occurred in Michigan and New Jersey. In wholesale, sequential growth in Pennsylvania and Maryland was offset by a decline in New Jersey. Gross profit margin for the first quarter was 51.8% compared to 50.2% in the fourth quarter of 2024 and 48% in the first quarter of 2024. The quarter-over-quarter 160 basis point expansion was driven by improvements in Maryland, Pennsylvania, and Michigan, while New Jersey remained relatively flat quarter-over-quarter. While discussing gross margin progress, I would also like to take a moment to discuss the tariff climate as it relates to our business. Being a US-based cultivator and manufacturer, Only 6% of our input costs are derived from procuring select packaging and vape hardware from outside of the US. We have been proactively evaluating our sourcing strategies for several months as they relate to these materials, and we expect any continued tariff dynamics to have an immaterial impact on our business. G&A expenses for the first quarter were $26.4 million, compared to $28 million in the fourth quarter of 2024. G&A expenses decreased by an additional $1.6 million in the first quarter, following a $3.6 million reduction in the fourth quarter. This continued G&A expense reduction over the past two quarters reflects our ongoing initiatives to optimize G&A, which we expect to reduce by $10 million year-over-year in 2025. GAAP net loss for the first quarter of 2025 was $12.3 million, compared to a net loss of $30.2 million in the fourth quarter. Adjusted EBITDA for the first quarter was $15.3 million, or 21.6% of revenue, compared to $15.1 million, or 20.3% of revenue, in the fourth quarter. The sequential improvement in adjusted EBITDA margin was primarily driven by gross margin expansion and lower G&A expenses. Turning to the balance sheet and cash flow, cash and cash equivalents were $29.4 million as of March 31, 2025, compared to $26.4 million as of December 31, 2024. Cash flow from operations in the first quarter was $8 million, compared to $9.7 million in the fourth quarter of 2024. This represented our 11th consecutive quarter of positive cash flow from operations. CapEx spending was $2.5 million in the first quarter, mainly related to expansions at our Maryland and New Jersey facilities. The 50% expansion of cultivation in Maryland was completed in April, with first harvest expected in June. Also, the expanded edibles production in New Jersey was completed in early May. The final project, which is still underway, is an enhancement of our greenhouse cultivation at our New Jersey facility. This portion of the project is expected to be completed in the third quarter of this year. Free cash flow was $5.5 million in the first quarter, compared to $5 million in the fourth quarter of 2024. representing our seventh consecutive quarter of positive free cash flow. During the quarter, we distributed $700,000 to our New Jersey minority partners and paid down $1 million of debt. In August of last year, we announced our first-ever share repurchase program for up to $10 million, demonstrating our confidence in Terrasense's future and our commitment to enhancing shareholder value. In March, we repurchased our shares during the 15-day open trading window and within the daily purchase restriction limits. We will continue executing on this share repurchase program while balancing this with other capital allocation priorities, including growth CapEx investments in both Maryland and New Jersey, as well as attractive acquisition opportunities. Looking ahead into the second quarter, We anticipate revenue to be flat to up low single digits sequentially, gross margin to continue around 50%, and further G&A expense reduction quarter over quarter, as we continue to realize the savings from our ongoing initiatives, which we expect to generate $10 million in savings for the full year 2025. In summary, our first quarter results reflect another period of steady revenue performance that was in line with our expectations, gross profit margin higher than we anticipated, and continued G&A expense reduction quarter over quarter. Driven by strong gross margin performance and lower G&A, we outperformed our expectations and adjusted EBITDA margins. In addition, we have now delivered our 11th consecutive quarter of positive cash flow from operations and our 7th consecutive quarter of positive pre-cash flow. We look forward to sharing our continued progress on the business during our next quarterly call. This concludes our prepared remarks, and I'd now like to turn it over to the operator to start questions.

Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. And if you wish to ask a question, please press star, then the number one on your telephone keypad, and wait for your name to be announced. Once again, star and 1 if you wish to ask a question.

One moment, please, while we compile the Q&A roster.

We now have our first question, and this comes from Frederico Gomez from ATB Capital Markets. Your line is now open. Please go ahead and ask your question.

Thank you. Good evening. Thanks for taking my questions. Congrats on the great margins there for the quarter. First question on Ohio, you closed the position there this week, but you announced it originally last year. So just curious, has anything changed in that market in terms of valuations since you announced the position last year? Are you maybe seeing better deals today than you were back in November?

Fred, thanks for the question and for the confidence here. You know, we had Zach in Ohio today meeting the team and checking on them and telling them about Terracin and our culture. We have monitored that store throughout the process all the way to closing. We're still happy with the performance of the store. The store continues to perform extremely strongly and is gaining momentum. We will bring more benefit to the store. So as far as other deals, we're still looking for the right acquisition at the right price in the right area in order to accomplish the equation that we will accomplish with this store, both on EBITDA level and cash flow.

Thank you.

And then second question, just on Michigan. You mentioned that your gross margin improved in Michigan. We know that it's a very – one of the most challenging markets in the U.S. We see a lot of press compression. So I'm just curious what drove that improvement. And your plans for Michigan, I know that in the past you talked about scaling up operations in the state, maybe through M&A. So I'm just curious if that's still the plan. Thanks.

Hi, Fred. It's Keith. We've just been very focused for a while now on continuing to plug away and improve our cost structure. And that's ebbed and flowed over the quarters. We've had some quarters where we've stepped back a little bit in gross margin. Q4 to Q1, we happened to take a step forward and realize some cost reductions, which drove the gross margin in Q1. So really, it kind of ebbs and flows, and we've been oscillating in and around in the 30s, kind of mid-30s, sometimes up high 30s, and sometimes low 30s. And we just, our focus remains continuing to, both on the cost of goods side and on the operating expense side, really just optimize that business. And it's It's been challenging, quite frankly. It's been challenging, but that's been our focus, and we're not quite ready to say we would expand until we have a better level of confidence that we're on solid ground.

Okay. Thanks for that. I'll head back to you.

Thank you. And the next question comes from Andrew Sample from Bentham Financial. Your line is now open. Please go ahead.

Good evening. Thanks for taking my questions and congrats on the Q1 results here. Just first question on the gross margin profile in the business. Do you think you can hold on to some of the gross margin profiles you've seen in Q1 for the balance of the year? Keith, I know you're just saying that there's some ebbs and flows to, you know, some certain business segments. So on the consolidated level, how are you feeling about holding on to some of those gains that we saw in the Q1 period?

Yeah, that's – hi, Andrew. That's a great question. First of all, we're really happy with the progress we've made over the last five quarters now. We started – 2024 at 48% gross margin. And for five consecutive quarters, we've increased that number. It really kind of comes down to, it's really multifaceted. We have our state lineup. Maryland, first and foremost, has really been the driver. We've highlighted that we've improved our gross margins in Maryland from the 20s when we started out there, and now we're in the high 50s. So we're really proud of that performance and everything the team's done there. And there are really multiple drivers there. We started at zero verticality when we acquired the four dispensaries, and now we're up to sort of our ideal levels of 50% to 60% verticality, so that clearly drives gross margin. We've expanded utilization at our facility, and like we said on the call here, we added the four additional grow rooms in 50% capacity. So as we absorb more fixed costs in that facility, that drives our margin as well. PA, we've improved. And so various layers of improvement there. And then to your question, I can't promise that we can sustain 51.8. We're really happy with the 51.8 in Q1. We do feel like with the mix of the states and the dynamics and all of our initiatives ongoing that we should be able to stay in that plus or minus 50% range. And again, that could vary by quarter, but that's kind of our outlook for the rest of the year here.

Great. Good to hear.

And then maybe just on capital allocation, just was looking for some commentaries. Hoping you can explain how you tend to balance share repurchases versus acquisition and some consolidation opportunities you have in front of you. If you could share how you prioritize between those two capital allocation opportunities.

Yeah. Hi, Andrew. Keith, again, I'll take that, and Jason might want to add in. So, we do have some CapEx projects that we're completing, like we mentioned. The four rooms in Maryland is largely complete. We still have some payments that need to be made against that. The edibles area in New Jersey that Ziad mentioned is almost complete as well with still some payments to be made there. And then the third CAPEX project is the greenhouse enhancement in New Jersey. So there's about 10 million or so of CapEx projects that we have budgeted in the cash forecast. And then we have ongoing M&A activity that may, in some cases, require some cash. So we have to make sure we have that allocated for as well. And then we do have our share buyback program. And we kind of picked up the pace there in the 15 trading days of March, like Jason and I both said in our prepared remarks, and are prepared to continue to even possibly further pick up the pace there in the buyback, especially given how things have been trending in the stock price. Jason, I don't know anything to add to that. I think that's right.

I mean, we're trading, we've got $180 million in cash and real estate. And the company, I think, as of the close, had under a $145 million market cap. So we think that our stock is very, very compelling at this point. And we only had a short period that we could buy in the last month of last quarter, but we'll have a larger open trading window this quarter and definitely are going to execute on it.

Great.

That's helpful, Collar.

I'll get back to you and to Q. Thanks for taking my questions.

Thank you.

Thank you. Once again, for those who want to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. Star and one if you wish to ask a question. And the next question comes from Yuan Kang from Canaccord Genuity. Your line is now open. Please go ahead.

Hi, good evening. Thank you for the question. This is Yuan Kang on behalf of Map Autumn Leaf. So my first question is about the brand strength that you're seeing across your operational footprint. Obviously, the market is becoming more commoditized and saturated every day. And so I just wanted to ask how have you differentiated your brands to stand out in front of the customer base? And if you could speak to specific elements like pricing strategy, product quality, or any unique marketing strategies that you guys have embarked on that have helped your case here.

Thanks. Hi, this is Ziad. Thank you for the question. Over the last few years, we have focused our efforts from seed to sales on multiple initiatives that will result at the end to give better quality and better brands to our consumers, both in our own retail and at wholesale. On the Cox side, we have improved our strength selections. We have maintained our brand standards. and we have really developed a very strong supply chain that is governed by an ERP that will allow us to plan way in advance what the need of the consumer is and also will allow us to represent our brand and really target and segment our customers without having blank discounts. This is one of the reasons why our gross margin maintained for the last five quarters the way we've seen We've also, through our brands, we're able to acquire and retain customers and reduce their visits to the dispensaries. By putting better quality in bigger packages, we reduce the trips of our consumers, therefore decreasing the poly shopping from different dispensaries, and we're seeing that in our VIP customers. So all this has really resulted in the retention and the acquisition that we've seen. and has really helped our gross margin, the consumers continue to tell us they want the best quality at the best value with innovation and good speedy service. And I'm so proud of the team because our quality continues to tell the story. The value of this quality is great, and the innovation and putting new products to attract and maintain those customers has been great. I've shared in my prepared remarks in Maryland, for example, the market share that we are winning is driven by the brand and by the quality.

Got it. Thank you.

If I could just add one more. It's more regarding your capital allocation plan and growth strategy going forward. Amidst your M&A conversations, I'm curious if you guys have ever pondered on the opportunity to enter the hemp-derived space, just because, you know, it's been a topical initiative for a lot of the peers in space. So, yeah, I wanted to ask how you guys are thinking about that market today and if there's any one way for you guys to enter it anytime soon.

Yeah, Joaquin, on hemp... We continue to watch very closely. We've done a comprehensive review to understand that industry better, to understand the fragmentation of this industry. We cannot really assess the impact of hemp on our businesses because the states that we are in are not as impacted as states like Texas and Florida. We acknowledge the size of the market. We also recognize the possible risks if the regulations change. as it relates to the farm bill. So we continue to watch and evaluate different entry strategies, whether we enter at the farm level, at the co-packing level, et cetera, et cetera. We feel like we have ample expansion and growth opportunities within our own core business where we can best allocate our capital and resources versus doing it in hemp today.

Thank you for the caller. I'll hop back into the queue.

Thank you. Once again, for those who want to ask a question, please press star and one on your telephone pad.

Star and one for questions. And no further questions at this time.

I'll hand the call over back to Jason Wild for closing remarks. Please go ahead, sir.

Thank you, everyone, for attending today's call. We will see you again in August. And for the TerraSend team, I just wanted to say thank you to all of you, from the bud tenders to our cultivation team, all the way to the executive team. Because of your relentless effort and passion, TerraSend will continue to get stronger, and we will be there to write the mid and later chapters in the story of this industry. Thank you.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.