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The amount of unsold inventory building up in the vaults of government wholesalers and Canadian licensed producers is “scary” said Michael Nashat, CEO of TerrAscend Corp.

“Provinces have about five months of inventory of dried flower, and nine months of inventory of oils. LPs internally have… months of unfinished goods, versus what the current sales are,” Mr. Nashat told Cannabis Professional in an interview on Monday.

The lack of sell-through is already beginning to show up in industry earnings. On Monday, TerrAscend joined the chorus, announcing that it would miss its revenue targets for the quarter and the year, largely due to poor performance in the Canadian market.

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TerrAscend now expects to report roughly $26-million in Q3 sales, which is $4-million short of consensus estimates, according to S&P Global Market Intelligence. The company also withdrew its $141-million revenue guidance for the year.

TerrAscend’s revenue projection cuts are in line with expectations from Bank of Montreal analysts Tamy Chen and Peter Sklar, who said in a note on Monday that they are expecting sell-in from LPs to provincial wholesalers to decline 20 per cent quarter over quarter. “The potential upside to this forecast would be if some LPs are able to “stuff” the channel in September,” wrote Ms. Chen and Mr. Sklar.

“If some of the larger LPs are limited in how much they can sell-in to provinces in September, an alternative would be the LP-to-LP wholesale market. We believe investors would attribute lower value to revenues from this channel, but we believe more LPs are now looking to this market, which creates a more challenging environment for LPs that generate most of their revenues from LP-to-LP sales,” the analysts wrote.

TerrAscend, which has a mid-size cultivation and processing facility in Mississauga, began shifting away from the Canadian market last November, when it re-listed on the Canadian Securities Exchange and restructured Canopy Growth Corp. and Canopy Rivers Inc.’s investments in the company so that it could start buying U.S. assets.

Since then it’s made several U.S. acquisitions, notably The Apothecarium, which owns three dispensaries, a cultivation facility and a processing facility in California, and Ilera Healthcare, which owns a cultivation facility and dispensary in Pennsylvania.

Increasing clarity on the poor health of the Canadian recreational market has encouraged the company to speed up its shift towards the U.S., Mr. Nashat said. TerrAscend will still run its Mississauga facility, but will put most of its energy and capital towards the U.S.

"I do think Canada is eventually going to be there… But the reality is if we can’t be profitable, we can’t continue to hire people and we can’t keep investing in a market where if we don’t see changes soon, it’s going to be tough for a lot of people,” Mr. Nashat said.

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His biggest concerns are a lack of retail stores and impending oversupply as more mega-greenhouses come online. (Aphria’s enormous Double Diamond facility, for one, was finally licensed on Friday).

“There’s 250 LPs licensed, 89 of them are authorized to sell to provinces, there’s 500 dispensaries, so that means there’s like five or six dispensaries per LP. I come from the pharmacy world, and I look at this kind of like generic companies... There’s 9,000 pharmacies in Canada and like 30 generic companies,” he said.

Because TerrAscend’s Mississauga facility has European Union Good Manufacturing Practice (GMP) certification, Mr. Nashat expects all of the company’s Canadian cultivation will be sent to Germany where prices and margins are better.

The price per gram in Germany is between $6 to $8, he said. “And the reasons why that’s attractive for companies in Canada is that we don’t have to do any marketing or any advertising or have any shipping costs.”

That compares to sales prices of $4.80 to $6 per gram for final packaged products in Canada. “But then I have all the marketing costs and all the brand costs on top of that," Mr. Nashat said.

TerrAscend still plans to sell extract products in Canada, and will buy flower wholesale from other producers. Margins for these products will likely improve as wholesale prices come down; in the past four months, the price of wholesale flower has dropped more than 30 per cent in Canada, Mr. Nashat noted.

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In addition to the new revenue guidance, TerrAscend announced several management changes on Monday. Jason Ackerman, the former CEO of online grocer FreshDirect, was appointed to the company’s board of directors and named executive chairman, and Heather Molloy was promoted to chief strategy officer. Matthew Johnson, who was the TerrAscend’s president, departed after only 11 months with the company.

TerrAscend’s share price slumped 8.3 per cent on Monday.

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