TerrAscend (TSX:TSND) Q3 2026 Earnings Call

0:14 Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Terrasend Third Quarter 2026 Financial Results Conference Call. I will now turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications, for introductions. Please go ahead.

0:32 Thank you, operator, and good afternoon. Welcome to the Terrasend Third 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 fourth 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, including the expected contribution of the MRA's acquisition, The expansion of its cultivation capacity, the company's share repurchase program and capital allocation priorities, the company's plans regarding a potential uplisting to a U.S. exchange, and the expectations regarding regulatory reform, including rescheduling, potential tax relief and hemp regulation, and the potential benefits thereof.

1:28 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. The 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 CDAR+, and the company's website at terrasend.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.

2:14 A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in today's earnings press release and our quarterly report on Farm 10Q for the quarter ended September 30th, 2026, which you can find on the company's investor relations website or on the SEC and CDAR Plus websites. I'd now like to introduce Mr. Jason Wild. Please go ahead, Jason.

2:35 Good afternoon, everyone, and thank you for joining us. Revenue, gross margin, EBITDA, and free cash flow for the third quarter increased year over year. Revenue totaled $68.2 million, a year-over-year increase of approximately 5%. Gross margin for the quarter was 52.3%, compared to 52.1% in the third quarter of 2025. Our adjusted EBITDA totaled $17.5 million compared to $17 million in the third quarter of 2025. We generated $8.8 million of net cash from operations and $6.1 million of free cash flow during the quarter, marking our 17th consecutive quarter of positive operating cash flow and 13th consecutive quarter of positive free cash flow, representing an impressive 17.7% operating cash flow yield and 14% free cash flow yield.

3:30 These results reflect continued strength across our vertically integrated core markets of New Jersey, Maryland and Pennsylvania. In New Jersey, we closed on our previously announced transaction with Aunt Mary's, our fifth dispensary in the state, which generates over $10 million in annualized revenue and is immediately accretive on an EBITDA and free cash flow basis. We closed on Aunt Mary's in late September, and as a result, it only contributed marginally to revenue in the third quarter. In Maryland, we grew revenue both year over year and sequentially while maintaining strong margins. Pennsylvania, once again, was one of our strongest performing markets during the quarter, delivering substantial year over year revenue growth and margin expansion, driven by 12% same-store retail sales growth and a 31% increase in wholesale revenue.

4:26 Turning to our balance sheet, we ended the quarter with $42.5 million in cash. Our continued free cash flow generation, strong balance sheet and our ability to access capital through our term loan facility provide us with the flexibility to act on additional 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. There are exciting opportunities in the market today and we look forward to providing an update on them in the coming weeks. Next, I want to provide an update on regulatory reform.

5:12 As we have said before, we operate the business independent of regulatory reform and successful reform represents upside. The rescheduling of state-licensed medical cannabis to Schedule III earlier this year remains a monumental inflection point for our industry. The most immediate impact will be the elimination of the 280E tax burden on medical cannabis, which will materially improve profitability and cash flow generation, further strengthen our balance sheet, and lower our cost of capital over time. There also is the potential for retroactive tax relief, which could represent a significant upside opportunity that we do not believe is currently reflected in market valuations.

5:57 We continue to report our results that include the impact of 280E and anticipate further updates in the fourth quarter. On the broader rescheduling of cannabis, the DEA administrative proceedings continue. While this process remains ongoing and the time and outcome remain uncertain, nothing we have seen changes our view on the eventual result. As part of the medical rescheduling process, the DEA has been conducting onsite inspections of our facilities. We have completed numerous inspections and the process is progressing. We also see continued progress on other important fronts. Enforcement against unregulated hemp products continues to build ahead of the intoxicating hemp ban scheduled to take effect on December 11th.

6:46 As we have said before, the intoxicating hemp market is arguably our industry's largest competitor, and we look forward to serving those consumers as they return to the regulated market. We remain in active dialogue with the major U.S. exchanges and continue to take the necessary steps to prepare for a potential listing. On the M&A front, we are focused on disciplined, accretive acquisitions. As I mentioned, in September, we closed on end areas in New Jersey. The current environment continues to present opportunities, including distressed assets, both in our core markets and in select new markets. We have been patient and disciplined in these conversations, and I look forward to sharing an update in the coming weeks.

7:31 Regarding our share repurchase program, In August, we renewed and replenished the authorization for up to the lesser of 10 million common shares or $10 million of common shares for the period beginning August 24th, 2026 through August 23rd of 2027. During the quarter, we had 35 trading days in our open trading window. During that period, we repurchased 1,013,000 shares. We will continue to execute on the buyback program while balancing other capital allocation priorities, including growth investments, capital expenditures, and selected M&A. With that, I will now turn the call over to Ziad to provide an update across our key markets.

8:18 Ziad Ghanem Thank you, Jason. Let me walk you through our performance in each of our key markets this quarter, beginning with New Jersey. Despite increased retail competition and price compression in the state, revenue in New Jersey increased slightly year-over-year. Paracent maintained a leading position in New Jersey, gaining both sales and market share across our key product categories, reflecting the strength of our brand and the quality of our products. During the quarter, we closed on the Antenares transaction, adding our fifth dispensary in the state, and we are excited to welcome the Aunt Mary's team to the TerraSense family.

9:04 Each new door in New Jersey increases the utilization of our existing facility, leveraging our assets to benefit from the increased economies of scale, as well as increased vertical sales of our products. Our goal is to continue to increase our presence in the state through accretive acquisitions. Additionally, We are expanding capacity at our Boonton cultivation facility. We completed a major phase this quarter on budget and are conservatively planning for about 20% more greenhouse yield. This added supply will support our expanding retail base as well as our full brand portfolio from our growing line of premium solventless products to value-focused flour under our legend brand.

9:58 In flour, we ranked number three with 8.3% share. In vape, our market share continues to improve, and our Legend vapes remain the number one vape cartridge brand with 12.1% share out of 215 brands. Looking ahead, we remain focused on disciplined growth in New Jersey, including continued evaluation of capacity expansion at our Boonton cultivation facility and additional retail licenses as we work toward our long-term goal of maximizing our footprint in the state.

11:13 Turning to Maryland, the business performed well during the quarter. Revenue grew year over year, and gross margins were roughly flat. Our operation in Maryland is running at an annualized revenue level of approximately $75 million, with gross margins in the high 50s. After entering the Maryland market in 2021 through the acquisition of a small cultivation facility with negligible revenue, we acquired four dispensaries during the first half of 2023, just ahead of adult use implementation. Growing from virtually zero revenue to the performance we are now seeing consistently every quarter demonstrates the power of our vertically integrating operating model in the state with disciplined execution across both cultivation and retail.

12:08 On the brand side, we are seeing momentum across the portfolio. Across all categories, including flour, free rolls, and vapes, we have gained market share in the quarter. Additionally, new product launches have supported growth in Valhalla over the last two quarters, while our new kind tree and Tyson 2.0 edibles generated nearly an additional point of market share in the quarter. Looking ahead, we remain focused on improving efficiency, expanding our manufacturing footprint, and optimizing our cultivation and retail operations in Maryland. Moving to Pennsylvania, It was once again one of our strongest performing markets during the quarter.

12:56 Revenue grew 16.8% year-over-year, driven by 12% same-store sales growth and a 31% increase in wholesale revenue, while gross margins extended 800 basis points. Five of our six apothecarium locations ranked among the top 15 stores in the state. This marked our fourth consecutive quarter of sequential revenue growth and made Pennsylvania our fastest growing core market during the quarter. On the brand side, similar to Maryland, across all categories we have gained market share in the quarter. Additionally, we were among the first suppliers to introduce 100 milligram medical trophies, which has quickly become one of our best selling SKUs.

13:48 We also have gained market share in sublinguals with 21% share and five of the top 15 skews in the market are our Alera branded tinctures. Pennsylvania remains one of our most attractive near and long-term growth opportunities. Our fully built out, large-scale cultivation and manufacturing facility is operating at its highest utilization rate in years. with finished flour output increasing 68% year-over-year and additional capacity available to meet future medical and adult use demand. Turning to Ohio, sales grew double digits percentage-wise year-over-year as we captured consumers returning to the regulated market following the state's ban on intoxicating amp products.

14:40 Our strategy in this state is to build a scaled, High quality retail footprint through discipline, accretive acquisitions, and we are actively evaluating several opportunities. Overall, I am very pleased with our performance during the third quarter. Across our core markets of New Jersey, Maryland, and Pennsylvania, we demonstrated strong operational progress. During the quarter, we launched a substantial number of new products across our markets. Our focus on efficiency, disciplined cost management, and vertical integration continues to support consistent financial performance. We generate strong free cash flow driven by our high-quality brain portfolio, focus on product innovation, and best-in-class execution.

15:34 With no material debt maturing until 2028, our balance sheet remains a key strength and provides meaningful financial flexibility. Our improving fundamentals, disciplined M&A strategy, sustained free cash flow generation, and best-in-class sponsorship give me confidence in our ability to create long-term value for our shareholders in 2026 and beyond. With that, I will turn the call over to Eric to walk through our financial results in more detail. Eric?

16:08 Thank you, Ziad. Good afternoon, everyone. The results I will be reviewing today have been filed with both CDAR Plus and with the SEC, and all figures are presented in US dollars. Net revenue for the third quarter of 2026 totaled $68.2 million, compared to $65.1 million in the third quarter of 2025, representing year-over-year growth of approximately 5%. Retail revenue increased year-over-year, while wholesale revenue was essentially flat. Gross margin for the third quarter was 52.3% compared to 52.1% in the third quarter of 2025, reflecting a return to more normalized levels following an exceptionally strong second quarter. G&A expenses for the third quarter were $24 million, or 35.2% of revenue, compared to $21.3 million, or 32.8% of revenue, in the third quarter of 2025.

16:59 The increase was primarily driven by one-time transaction costs related to our convertible to venture financing and acquisition related professional fees, which are excluded from adjusted EBITDA. Net loss from continuing operations for the third quarter was $5.5 million compared with the net loss from continuing operations of $9.9 million in the third quarter of 2025. The improvement primarily reflects a $4.8 million gain on the fair value of derivative liabilities compared to a $700,000 loss in the prior year period. partially offset by lower income from operations and a higher provision for income taxes.

17:44 Adjusted EBITDA for the third quarter was $17.5 million, or 25.6% of revenue, compared to $17 million, or 26.1% of revenue, in the third quarter of 2025. The year-over-year increase reflects gross profit growth partially offset by higher operating expenses. Turning to the balance sheet and cash flow, Cash and cash equivalents were $42.5 million as of September 30, 2026. Cash flow from operations in the third quarter was $8.8 million, representing our 17th consecutive quarter of positive operating cash flow. Capital expenditures were $2.7 million in the third quarter, primarily related to ongoing cultivation and facility optimization projects.

18:29 Free cash flow for the third quarter was $6.1 million, representing our 13th consecutive quarter of positive free cash flow. During the quarter, we continue to allocate capital in a disciplined manner while maintaining a strong liquidity position. We expect mid-single-digit year-over-year revenue growth in Q4 2026. We also expect consistent strong gross margin performance. In summary, our third quarter results reflect continued operational momentum, improving profitability, and consistent cash flow generation. supported by disciplined cost management and a strong operating platform. And 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.

19:15 Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the store, then the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the store, followed by the number two. One moment please for your first question. And your first question comes from the line of Frederico Gomez with ATB Coremark. Please go ahead.

19:44 Good evening. Thanks for taking my questions. Congrats on the great quarter. I want to start by asking about Pennsylvania. Obviously very strong and impressive things for sales growth there. and Grove for the wholesale side. So can you talk a little bit more about what exactly is driving that? And then on the capacity utilization and the market expansion that you saw there, how much more can that facility take and what would be the potential upside to margins if you plan to ramp that up a little bit more? Thank you.

20:21 Thanks, Fred. Look, we're super proud of the work that we've done in Pennsylvania, both on the revenue growth and gross margin. When we look at both sequential growth and year-over-year, I mean, we've seen year-over-year growth of double digits, around 11.6% in our revenue, with improvement in gross margin. There's really not one magic bullet that is causing this. You know, we always talk about the combination of multiple differentiators that we have. It starts with the quality and the strength selections and the brand portfolio that we have. And the real judge on this has been the consumer, right? So the consumer continue to come back for more, continue to drive our verticality upward.

21:09 The fresh supply, most of our, all our inventory is not lasting from harvest to consumption. More than 60 days. So that freshness is helping. We launched new partnership with Tyson 2.0. We couldn't keep the product on the shelves. Again, the combination of outreach, marketing by our marketing team and the service and our retail stores have really given us that advantage. And we've had multiple quarters of that performance in Pennsylvania. But what's also unique in Pennsylvania, when you look at the average price at retail in the state, it has gone down. For us, it has gone up. And it's because of all those factors that I have described. Now, from a capacity perspective, we talked about Pennsylvania being our biggest facility, as big as all our facilities combined. We have added more capacity We are almost at 50% capacity, so we feel pretty comfortable without any CapEx expansion, without any CapEx need, to be able to flex up with that increase that we are seeing organically as medical program, but also we sit here prepared to be ready for adult use that is looking better and better with the change that we've seen with the trifecta politically that happened in Pennsylvania.

22:36 So capacity is not a challenge. We are excited to see more of that demand coming in, driven by organic growth, driven by adult use potential, and then the hemp loop that will be closing in December.

22:52 The only thing I would jump in and add, Ziad actually sold us short there a little bit. He said our business in Pennsylvania was up 11.6%. That was only at retail. and that was on the same store base, a figure of about 12% same store sales growth. But our wholesale, as we mentioned, was up 31% year over year and that ended up to 16 and change percent growth total in Pennsylvania.

23:15 How did I do that? Thanks, Jason.

23:17 No, you missed it.

23:20 Okay, appreciate that, guys. And then just a second question on Pennsylvania. You mentioned the potential for adult use, obviously. You guys have talked about M&A before, New Jersey, Ohio, but what about in Pennsylvania? You see opportunities there. Does it make you more bullish maybe to try to execute M&A, maybe more dispensaries, given that the outlook for adult use has potentially improved for next year?

23:54 Yeah, look, Fred, from an M&A perspective, we have shown that we have the ability and we have the muscles internally to acquire operating businesses, integrating them well, accomplishing the synergy, and driving growth in those. We said from an M&A perspective, we want to go deeper in the states that we are in, similar to what we've done in New Jersey, and then we're looking for the right opportunity in any state that we are in. That's Pennsylvania, that's Ohio. but also we're looking at new states whether it's new application or whether states that are just recently have gone through adult use or that are still medical. So we like Florida, we like Missouri, we like Ohio.

24:41 So we are having a lot of conversations. The one thing that we keep ourselves accountable for is to stay disciplined and to make the right deal at the right price that is immediately accretive to our EBITDA and to our cash flow. We swung and we missed in Pennsylvania. So we continue to look for opportunities that will allow us to leverage our facility and to grow our business and continue to improve our gross margin. We are convinced because of the opportunities that we are seeing and the conversations that we are having and the stage of the conversations that now after building the efficiency and have delivered on some of the strongest margin in the industry regardless of size that our company will look totally different in 2027 and we can't wait to share those news.

25:36 The only thing I would add to that, Ziad mentioned that we swung in this in Pennsylvania just to give a little more clarity around that. We were the stalking horse bid for a multi-store company I think we got paid a million or a million and change for being the stalking horse bid, but I think it also just speaks to our discipline. The eventual price was substantially higher than our original bid and we walked away from it. But I would say there's lots of other deals on the table and we feel increasingly I'm confident that we're going to deliver on some significant transactions going forward.

26:22 Thank you very much. Come back. Thank you. Thank you. And once again, if you would like to ask a question, simply press the star 1 on your telephone keypad. Your next question comes from the line of Kendrick Tyke with Canaccord Genuity. Please go ahead.

26:40 Thank you, and good evening. Last quarter, you guys executed a bit of a reset in New Jersey. I think certainly we're seeing the fruits of that in the current quarter. Could you remind us on what it is that differentiates your footprint being as cultivation forward as you are in each of New Jersey and Pennsylvania and how valuable those differentiator could be as we look to the evolution of the market here, the hemp ban, and the transition of sales back into the legal channel and your ability to capture that sort of an absolute and relative terms compared to some of your peers in these key markets.

27:22 Yeah, hey Kendrick. Look, we have the same playbook in all our states and the combination of the brands on our portfolio, the combination of the value brand and the premium brand, The response that we are seeing from our consumers, the loyalty and the increase in loyalty that we are seeing, the velocity that we are seeing in all our channels, retail and wholesale, have us convinced that we have the right playbook to deliver the best financials and we already bragged about this. I would say from a hemp perspective, we don't have to guess. We'll just look at a small case study that exists in Ohio.

28:09 We've talked to a lot of operators in Ohio and they've seen somewhere between 20 to 30 percent lift in the revenue. We're seeing a double-digit lift in only one store we have in Ohio. Look, Common Sense says this is a, those are products that have made humongous positive change to consumers' lives. Consumers have exited synthetic drugs that are sleep medication, anxiety medication, pain medication, and won their life back by taking a five milligram gummy in the evening. And by losing accessibility to the illicit market or to smoke shop or to the gas stations, they will have to find a replacement and we sit as an industry, us and our competitors, ready to welcome those consumers and give them better products, better experience, safe and tested products that will combine two industries that seem to be similar size and could eventually double the size of our industry.

29:19 Thank you. That's useful. And then just maybe with respect to New Jersey as well, could you just refresh us on sort of the cadence of new store openings? Are you seeing that Thank you for joining us.

30:02 and the impact that each company that we see on our own stores is depending where geographically those stores are. Early on, when we went from 17 stores to 100,150 stores, we've had plenty that came in around our stores and we've seen that hit at retail. We have managed to see increase in same store volume and we saw the benefit on wholesale as more stores open in different trade areas. But recently, that's something I'm super proud of with our team. Our biggest store in our retail network in Peaburg, the store that does north of 30 million, had a store that opened just A couple of hundred yards from our store.

30:56 In April, the soft launch happened. In May, the full opening took place, the grand opening took place. And our store, every month since, has not seen any impact on our revenue. and that is not by coincidence. That is by targeted approach and targeted pricing that we do store by store and the quality that I talked about that our consumers continue to show their loyalty. From an overall perspective, yes, the more stores open, the more penetration we have from a wholesale perspective and we continue to manage our capacity between improved capacity, improved verticality in our stores and then adding new doors in the state.

31:49 Thank you. And once again, if you would like to ask a question, simply press the star one on your telephone keypad. And I'm showing no further questions at this time. I would like to turn it back to Jason Wild for closing remarks.

32:13 Thank you. In closing, we often say that we aren't focused on being the biggest operator in the cannabis space. We're focused on being the best. For the last several quarters, we have driven top-tier profitability margins, even when compared to companies that are four to five times our size. Based upon the opportunities we're seeing in the market, we are super excited to show you what this business looks like in 2027 and beyond.

32:39 Thank you. Thank you and ladies and gentlemen this concludes today's conference call. Thank you all for joining. You may now disconnect.