TerrAscend Corp. (TSND) Earnings Call Transcript & Summary

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the TerrAscend Second Quarter 2026 Financial Results Conference Call. I would now like to turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications for introductions. Please go ahead.

Thank you, operator, and good afternoon. Welcome to the TerrAscend Second Quarter 2026 Financial Results Conference Call. Joining us for today's call is Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Executive Officer; and Eric Jackson, 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 2026 and for future periods, including the third quarter of 2026 and the estimates and assumptions relating thereto, the company's expectations regarding its growth prospects in new and existing markets such as Ohio and New Jersey, its M&A strategy, the company's share repurchase program and capital allocation priorities, the proposed share consolidation and special meeting of shareholders, the company's plans regarding a potential uplisting to a U.S. exchange and the expectations regarding regulatory reform, including hemp regulation and the potential benefits thereof. 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 appears under the heading Risk Factors in the company's Form 10-K filed with the Securities and Exchange Commission and other filings that the company makes with the SEC from time to time, which are available at sec.gov, on SEDAR+ and the company's website at terrascend.com. The forward-looking statements in this call speak as of today's date, and the company undertakes no obligation to update or revise any of these statements. Also during the call, the company may 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 10-Q for the quarter ended June 30, 2026, which you can find in the company's Investor Relations website or on the SEC and SEDAR+ websites. I'd now like to introduce Mr. Jason Wild. Please go ahead, Jason.

Good afternoon, everyone, and thank you for joining us. Our second quarter revenue, gross margin and adjusted EBITDA increased sequentially and year-over-year, exceeding our expectations. Revenue from continuing operations totaled $67.1 million, representing sequential growth of 2.4% and year-over-year growth of 3.3%. Gross margin for the quarter was 54% compared to 52.8% in the first quarter of 2026 and 51.1% in the second quarter of 2025, reflecting continued strength and operational efficiency across our vertically integrated Northeast markets. Adjusted EBITDA from continuing operations was $17.7 million, representing a margin of 26.3% compared to $17.4 million and a margin of 26.5% in the first quarter of 2026 and $16 million and a margin of 24.6% in the second quarter of 2025. Our Q2 adjusted EBITDA from continuing operations represents 11% year-over-year growth. We generated $7.4 million of net cash from continuing operations and $5.7 million of free cash flow during the quarter, marking our 16th consecutive quarter of positive operating cash flow and 12th consecutive quarter of positive free cash flow. Turning to our balance sheet. During the quarter, we completed an oversubscribed convertible debenture financing, raising $21.8 million in aggregate gross proceeds. Of that amount, $11.1 million was used to retire existing higher interest convertible debentures with the remaining proceeds available to support accretive M&A. This financing retired our near-term convertible debt, reduced our blended interest cost, and extended the maturity of our convertible debentures to 2031. Separately, the strength of our operating and free cash flow generation allowed us to repay an additional $10 million on the principal of our term loan during the quarter. Our continued free cash flow generation, strong balance sheet, and our ability to access additional capital through our term loan facility provides us with the flexibility to act on attractive opportunities. We intend to put our capital to work through accretive acquisitions in markets where we already have scale and operational infrastructure, providing increased vertical revenue and further operating leverage. Next, I want to provide an update on regulatory reform. We are encouraged to see the momentum we described last quarter has continued to build. The rescheduling of state licensed medical cannabis to Schedule III represents a monumental inflection point for our industry. The most immediate impact has been an elimination of the 280E tax burden on medical cannabis. This change will materially improve profitability, further strengthen our balance sheet and will lower our cost of capital over time. There is also the potential for retroactive tax relief, which could represent a significant upside opportunity that we do not believe is currently reflected in market valuations. Since our last earnings call, the DEA held its formal hearing on the broader rescheduling of cannabis. For the first time in decades, the federal government presented affirmative science-backed testimony that cannabis has an accepted medical use and the DEA itself served as a proponent in support of rescheduling. While the ruling has not yet been issued, and we do not know the timing or outcome at this stage, based on what the administration has promised and delivered to date, we are confident that we will see further progress from here. We are also seeing momentum on other important fronts, including the SAFE Banking Act, which was reintroduced in both chambers of Congress with bipartisan support. While timing and scope of further changes remain uncertain, we operate the business independent of regulatory reform and successful reform such as this represents upside. We believe the full rescheduling of cannabis will position TerrAscend to uplist to a major U.S. exchange, and we are currently in active dialogue with the NASDAQ and NYSE and are taking the necessary steps required to meet all listing requirements. As part of this process, we have a special meeting of shareholders scheduled for August 24. At the meeting, shareholders will be asked to approve a proposed share consolidation. On the M&A front, our philosophy remains unchanged. While the current environment presents opportunities, both within our core markets and in select new markets, we are focused on accretive acquisitions and have been disciplined in passing on acquisitions that did not meet our investment criteria. I would remind investors that our patience has been prudent and valuations across the board have continued to trend in our favor. Before I hand over the call, I'm pleased to share that we have appointed Ziad to our Board of Directors. Ziad has been a strong leader and contributor to our strategy since joining our team, and the Board and I look forward to his continued insights and guidance. With that, I will now turn the call over to Ziad to provide an update across our key markets.

Thank you, Jason, for the confidence you and the Board have shown in me. Let me walk you through our performance in each of our key markets this quarter, beginning with New Jersey. New Jersey performed well during the quarter with revenue increasing 1.7% sequentially, led by continued strength in our retail business, while wholesale revenue remained essentially flat quarter-over-quarter. Gross margins remained strong at 58.5%, reflecting the benefits of our vertically integrated operating model. At the state level, TerrAscend maintained a leading position in New Jersey with 7.2% market share driven by gains in both sales and market share across our key product categories, thereby demonstrating the strength of our brands and quality of our products. Kind Tree, Legend, and Valhalla all delivered another strong quarter. Legend is now the #4 brand across all product categories in New Jersey, while Kind Tree remains one of the state's leading flower brands. We also continue to hold top 5 market share positions across several of our largest categories, including flower, vapes, pre-rolls, and extracts. At retail, all 3 Apothecarium locations ranked within the top 20 to 25 dispensaries in the state with 2 improving their rankings quarter-over-quarter. Together with Union Chill, we have strengthened our position as the highest-grossing retail in New Jersey. During the quarter, we announced an agreement to acquire ownership in our fifth New Jersey dispensary, Aunt Mary's. On closing, Aunt Mary's is expected to be immediately accretive on an EBITDA and free cash flow basis. Looking ahead, we remain focused on growth opportunities in New Jersey, including expanding capacity at our Boonton cultivation facility and evaluating additional retail expansion opportunities. Turning to Maryland. The business performed well during the quarter with both revenue and gross margin improving sequentially and gross margins exceeding 60%. These results demonstrate the power of our vertically integrated operating model in the state with disciplined execution across both cultivation and retail. Despite changes in the competitive landscape following adult-use legalization, we continue to grow profitability and cash flow. Our retail footprint also remained among the strongest in the state with 2 of our 4 Apothecarium locations ranking among Maryland's top 10 dispensaries. On the brand side, we are seeing strong momentum across our portfolio with Kind Tree, Legend, Valhalla and TYSON 2.0, all contributing to growth during the quarter while bringing to market new product innovation to support retail and wholesale. Our vertically integrated platform, established brands and operational discipline position us well to maintain growth and profitability in the state. Moving to Pennsylvania. It was once again one of our strongest performing markets during the quarter. Revenue increased approximately 3.8% sequentially, driven by growth across both our retail and wholesale businesses. This marked our third consecutive quarter of sequential revenue growth and made Pennsylvania our fastest-growing core market during the quarter. Our retail operations performed well with 5 of our 6 Apothecarium locations ranking among the top 15 dispensaries in the state. We are generating industry-leading revenue per store in Pennsylvania, reflecting strong retail execution and high demand for our products. On the brand side, Kind Tree and Legend maintained leading market share positions in flower, vapes, and extracts, while we consistently strengthened our overall portfolio throughout the state through the release of new or improved SKUs. Pennsylvania is one of our most attractive long-term growth opportunities. We have a fully built-out cultivation and manufacturing platform to scale with no meaningful incremental capital investment required to support future growth. We brought additional cultivation capacity online earlier this year in Pennsylvania with product reaching the market during the second quarter. That capacity supports growth in both our retail and wholesale channels while positioning us well for the increased demand we expect under eventual adult use. Turning to Ohio. RATIO is now fully integrated into our operations, and we are beginning to realize the benefits of that integration. As Jason mentioned earlier, our M&A strategy remains unchanged. We will pursue disciplined, accretive acquisitions that leverage our existing infrastructure and operating platform while expanding our retail presence over time. We believe this disciplined approach will drive improved utilization, operating leverage and profitability in each of our key markets. Overall, I'm very pleased with our performance during the second quarter. Across our core markets, we delivered profitable growth while maintaining strong gross margins, consistent adjusted EBITDA and positive operating and free cash flow. We are pleased with the foundation we have built, bolstered by our strong fundamentals, leading retail and wholesale assets in key high-quality markets, a target M&A strategy, no material debt maturing until the second half of 2028, consistent positive operating free cash flow generating quarter-over-quarter, representing an impressive 9.9% free cash flow yield in Q2, best-in-class sponsorship and a strong leadership team. We are in the best position in our company history to capitalize on both industry and regulatory developments while continuing to create long-term value for our shareholders. With that, I'll turn the call over to Eric to walk through our financial results in more detail. Eric?

Thank you, Ziad. Good afternoon, everyone. Before I turn to the numbers, I want to take a moment now that I have my first full quarter as CFO behind me. When I joined, I spoke about what drew me to TerrAscend from the outside. Now that I'm a part of the team, it's clear that our results aren't an accident and passion, discipline, and growth mindset are key catalysts that show up throughout the organization. Passion is evident in the level of care displayed creating high-quality products and first-class patient and customer experiences, which you can see in our consistent sales strength. Discipline is not just a talking point here. It is how the business is run. Over the past quarter, I have witnessed it in the rigor around margin management, capital allocation, and in the way our teams execute across our core markets. Growth mindset is clear and shows up in a company-wide drive to get better every day, demonstrated by our near industry-leading adjusted EBITDA margin and cash flow generation. These factors give me real confidence in what we can build from here. With that, let me walk you through our financial results for the second quarter. As a reminder, the results I'll be reviewing today have been filed on both SEDAR+ and with the SEC, and all figures are presented in U.S. dollars. As a reminder, all financials discussed reflect results from continuing operations. Net revenue for the second quarter of 2026 totaled $67.1 million compared to $65.5 million in the first quarter of 2026. Retail and wholesale revenue both increased sequentially, reflecting broad-based demand across our core Northeast markets. Gross margin for the second quarter was 54% compared to 52.8% in the first quarter of 2026. Sequential performance reflects continued strength across our core Northeast markets. G&A expenses for the second quarter were $22.9 million compared to $21.5 million in the first quarter, reflecting certain onetime costs as well as further merit-based investments in talent. Net loss from continuing operations for the second quarter was $10.1 million compared with a net loss of $6.8 million in the first quarter. Adjusted EBITDA for the second quarter was $17.7 million or 26.3% of revenue compared to $17.4 million or 26.5% of revenue in the first quarter. Turning to the balance sheet and cash flow. Cash and cash equivalents were $42 million as of June 30, 2026, compared to $39.1 million as of March 31, 2026. Cash flow from continuing operations in the second quarter was $7.4 million, representing our 16th consecutive quarter of positive operating cash flow. Capital expenditures were $1.6 million in the second quarter, primarily related to ongoing cultivation and facility optimization projects. Free cash flow for the second quarter was $5.7 million, representing our 12th consecutive quarter of positive free cash flow. During the quarter, we continued to allocate capital in a disciplined manner while maintaining a strong liquidity position. Similar to Q2, we expect Q3 year-over-year revenue growth of 2% to 3%. We also expect consistent strong gross margin performance. In summary, our second quarter results reflect continued operational momentum, improving profitability and consistent cash flow generation, supported by disciplined cost management and a strong operating platform. We look forward to sharing continued progress in the quarters ahead. This concludes our prepared remarks. I'll now turn it back to the operator for questions.

[Operator Instructions] Your first question comes from Frederico Gomes of ATB Cormark.

Congrats on the great quarter here. I want to ask about the gross margins, quite impressive sequential improvement. And I'm looking at your filings and you guys are disclosing the gross margin per -- I guess, per state, which thanks for that. I appreciate that. And how much of this is, I guess, your own strategy? And how much of it is an improvement in broader market conditions? That's the first question. And secondly, it seems like Pennsylvania, you guys have expanded margins quite substantially year-over-year. How much more room do you think there is for gross margin expansion in that state?

Yes, Fred, thank you. Ziad here. Look, on the first part, is that the environment in the market? Or is it our strategy? Look, when I look how some of our competitors are performing in some of the states that we are in and when I compare our -- not only margins, margins, revenue and market share in our core market, Pennsylvania, New Jersey and Maryland, I've always said there's not one magic bullet that gets you there, but we have a combination of things that have really shielded us from some of the headwinds that exist in the market, especially the price compression. You said we broke down the states. And while Maryland and Pennsylvania saw increase in gross margin, both sequentially and year-over-year, New Jersey was has grown sequentially slightly down year-over-year, but I call New Jersey a bigger success than the other because that gross margin of 58.5% in New Jersey came in on a 20-plus percent price compression over last year. So it's really mainly, I can attribute it to the outstanding job that the team has done. It's starting by the quality. Look, we always and all of us like to brag and talk about our quality and our brands. But the real judge for the quality and the brands is the consumer. We look at our consumer retention. We look at our consumer acquisition, and we continue to see our foot traffic increasing, our basket size maintaining and the consumers are rewarding us on this. I went to every store with Jason in Pennsylvania. The #1 complaint we heard from all 6 stores is we can't keep our own brands on the shelf. And that has allowed us to increase our verticality by -- depending on the state, somewhere between 2% to 7%. So the combination of all those is what really has caused this. As far as the room that we have in Pennsylvania, at the beginning of the year, we shared that our gross margin will continue to be between 52% and 54%. I look at the remaining of the year, and I'm highly confident that we'll deliver the same numbers. The 2-point spread is because of a few variables, inventory and pricing pressure, a one store competition that is more robust than other. But the real number that we focus in and we reversed that P&L, we look at the free cash flow from its adjusted EBITDA that we will deliver the mid-20s, 25% to 26%, driven by 52% to 54% gross margin.

I appreciate that color. And then I guess just a second question here. If you could comment more broadly on the M&A pipeline? Has it improved since the, I guess, the medical rescheduling and ahead of the potential adult use rescheduling that we're expecting? And are sellers maybe waiting for the final ruling to decide what to do? Have multiples changed in any way or any other changes you've seen to that M&A pipeline?

Yes. Look, we'll focus on us and the partnership we have with FocusGrowth, our lender. We don't call FocusGrowth our lender. We call them our partners because together, we're constantly looking for opportunities where we can bring in accretive deals that we can buy a combination of cash and equity. And we can really structure it in any way better than anybody out there, especially with our balance sheet that allows us to do that. How the sellers are behaving? Look, that's from realistic, no way to make a deal that are still thinking they could get 7 to 8x EBITDA to some that are in the 3 to 4x EBITDA that are and will be highly accretive. Now we are not happy that we only closed on Ratio, Union Chill, and we're waiting for Aunt Mary's. We're happy with those 3 deals, but we're in constant conversations, and we're open and our phone is available for anybody who is willing to tuck their business into a highly efficient operation with a share -- stock currency that is ready for re-rating, we're ready to talk to anybody.

Your next question comes from Kenric Tyghe of Canaccord Genuity.