Q1 2020 Earnings Call
Afternoon, and welcome to the harvest, helping Recreation conference call three do first quarter 2020 financial and operating results and discuss the company's performance outlook.
This time, all participants will be in listen only mode.
Oh, we'll begin prepared comments by management, followed by a question and answer session.
Ask a question in the press Star then one on your telephone keypad to withdraw your question. Please press Star then to.
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Today's conference call is being recorded I.
I would now like to turn the conference over to your host Kristine Hersey director of Investor Relations for harvest. Thank you may begin.
Thank you good afternoon, everyone and welcome to harvest first quarter 2020 earnings call.
Today's call, our founder and Chief Executive Officer, Deep White, and Chief Financial Officer, We all Jackie.
Earlier today, we issued a press release announcing our results for the quarter ended March 31st 2020.
The press release and a Powerpoint presentation are available on the company's website and filed with the Canadian Securities Exchange and feed our.
Before we begin I'd like to remind you that the comments on today's call will include forward looking statement, which by their nature involve estimates projections goals for cap and assumption and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those.
Expressed in forward looking statement.
Certain material factors or assumptions were applied in drawing a conclusion or making a forecast in such statements.
These forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events.
We undertake no obligation to update or revise any forward looking statements whether as a result of new information.
Sure events or otherwise, except as required by applicable law.
Additional information about the material factors and assumptions, forming the basis of the forward looking statements and risk factors can be found in the company's filings and press releases with the Canadian Securities Exchange and see dark.
During today's conference call harvest will refer to certain non I FRS measures do not have any standardized meaning prescribed by I FRS, such as EBITDA and adjusted EBITDA.
It's hard to find in the earnings press release, we issued earlier today.
Reconciliations the IRS measures are contained in a press release in our filings.
Please note all financial information is provided in U.S. dollar unless otherwise indicated.
I'll now turn the call over to Steve White Harvest founder and Chief Executive Officer. Please go ahead.
Thank you Christine.
Good afternoon, everyone and thank you for joining us.
Appreciate your continued support and interest in harvested the opportunity to provide you with an update on organization.
The past few months of presented a number of opportunities and challenges as there's always the case in our exciting and rapidly evolving industry.
Last call I referenced a number of times that we have a plan to return to profitability that we would execute that plant.
Like everyone else as a company we have been tested by a pandemic.
We have the we have to modify our operating plans to ensure employee safety, while maintaining business continuity and providing continued service to the patients to customers who rely on harvest as an assumption service provider.
All of this comes at a time when par capital market conditions remain tight and we deal with a host of obstacles that we've come to accept as normal course of business for the U.S. kinda soon.
Once again I would like to thank our employees for their continued dedication as we navigate various challenges they face operating in an emergency emerging industry and in the wake up to cope with 19 outbreak.
And they always do our team has met the challenges wallboard.
Working tirelessly, while moving toward our primary organizational gold returning to profitability.
Very proud of the way our organization has performed in the past few months and I remain highly confident that our team will continue to step up and rise to any occasion as we continue to build a profitable company.
Our people are critical component of our success and essential to profitability.
In addition to tell successful execution of our plan requires bouncing revenue growth and cost reduction efforts, while me managing liquidity.
During this call will address first revenue second costs third liquidity and fourth briefly touch upon developments since our last call in April.
Overall.
Hi, I'm pleased to report that our recent performance is tracking according to our plan. Despite all the disruptions that have come up in the past few months.
So, let's first talk about revenue.
Our first quarter sales of $45 million, representing 134% year over year increase in a 19% increase from last quarter.
Hi revenue was driven by growth in existing and newly acquired operations.
So let's talk for a minute about growth from existing stores.
For the 10 stores that were opening Q1 or 2019 same store sales growth year over year increased by more than 30% as one of the oldest operators in the U.S. cannabis industry. Some more comp stores have been operating for many years. Despite the long operating history for our stores, we are still realizing growth in our retail base.
First quarter revenue included partial quarter contributions from newly opened dispensers, and Arkansas, and Michigan and three acquisitions.
As acquisitions include Arizona natural selections in urban capital group, and frankly, a lot ops unless the high times transaction closes prior to June Thirtyth second quarter results will reflect full contributions from those acquisitions and the Arkansas store.
Or dispensary little rock, Arkansas outperformed our original expectations with stronger than expected sales since opening in early February.
While we're no longer pursuing large transformational M&A deals, we expect to realize revenue growth through increased sales in existing stores opening up new stores cultivation of manufacturing expansion and small opportunistic tuck in acquisitions, we remain focused on pursuing profitable growth.
So, let's turn to our second topic costs.
As we detailed in our last call toward the end of 2019 harvest began to concentrate on operations and expansion in core markets streamlining the business for greater efficiency and implementing cost controls designed to realign the expense structure with revenue growth expected from the core business.
Last week.
As part of our ongoing efforts to rightsize, our organization, we took the difficult but necessary steps towards continuing to reduce our ongoing operational expenses.
Which included the reduction of personnel across all levels would be organization.
We estimate that these actions combined with extensive cuts to operational expenses implemented to this point. During 2020 will result in annual cost savings of $24 million.
We believe we have the opportunity to further reduce our operational expenses. Our plan calls for the continued examination of organizational and operational footprint adjustments as necessary to return to profitability.
And as we've said before we remain committed to rightsizing infrastructure and expenses to more closely match, our near term anticipated growth trajectory.
Improving quarterly trends underscore the considerable progress we've already made under plan to return to profitability over the past few quarters on an absolute basis revenue and gross profit or increasing while overhead is decreasing resulting in improved adjusted EBITDA.
We are focused on continuing to deliver improved results as we work to increase scale inefficiencies and realize the benefits of operating leverage in our business model.
As such.
We're on track to be adjusted EBITDA positive in the second half of 20 Tony.
Turning to the third topic liquidity.
Despite challenging capital market markets conditions harvest raised $41.3 million and death and $59 million an equity during the first quarter harvest ended the first quarter 2020, with approximately $82.5 million in cash and $290 million and debt.
As of May 15th after paying down some debt and making cultivation of manufacturing investments in Florida, Maryland, and Pennsylvania, we had approximately $70 million in cash.
Our capital requirements for the remainder of 2020 include operational expenses debt service and capital expenditures.
Our debt service for the remainder of the year as approximately $40 million some of which we have optionality to extend and which we expect to be partially offset offset by incoming capital estimated between 10 and $30 million, which includes the collection of notes receivable, new and extended financing arrangements.
Divestitures of non core assets.
Capital expenditures for the remainder of the year are expected to range between 10 and $30 million. In addition to the $15 million spent during the first quarter.
We have the flexibility to accelerate or delay capital expenditures as our capital position changes and we are actively managing our liquidity and we will make necessary adjustments to our plan to ensure that we meet our obligations, while still continuing to pursue profitable growth.
Lastly.
We have had a few developments at harvest since our call in April Besides the cost reductions. This cost reduction efforts already discussed we have started permitted customers to return to select retail stores, and we announced the plan divestiture of select California assets the high times holders.
Since our last call in early April our facilities have remained online with modified operating procedures to safeguard employees patients and customers.
To this point, we have not experienced any significant disruptions to our supply chain or our operations last week, we were able to resumed in store purchases with appropriate social distancing measures in place at our retail dispensers, and Arizona, Florida, North Dakota and enough in California.
We continue to monitor the impacts of cobot, 19, and economic uncertainty on sales trends.
And we'll provide updates when it is appropriate.
As we focus on our core business and returned to profitability. We are exploring divestiture of some noncore assets were practicable subsequent to quarter end, we announced the plan divestiture of 13 retail retail assets in California to high times Holdings for total consideration of $80 million comprised of $5 million in cash.
Cash $7.5 million notes.
And $67.5 million and preferred stock.
The plan divestiture includes a combination of operational retail dispensers and licenses.
As we highlighted on our last call. We believe the targeted investments in our core markets will result in fast and favorable returns expanding existing operations in key states allows us to achieve scale within those markets, resulting in greater efficiencies and improved financial performance.
Such capital expenditures in 2020 are primarily slated for our four key markets with approximately 80% of schedule investments occurring in Arizona, Florida, Maryland, and Pennsylvania.
Each of our core markets or medical markets with limited license regulatory structure structures continued patient growth in future potential upside from adult use consumption consumption when it is permitted.
Our home state of Arizona is one of the fastest growing medical markets and as you us.
The number of qualified patients is over 3% of the population and still growing surpassing all original market projections.
We have the largest retail presence in the state with 14 open retail response rates, which are supported by cultivation facilities, Cadforty, Phoenix, and Wilcox and processing and manufacturing facilities in Phoenix and Flagstaff.
We are expanding cultivation and processing operations in Arizona to supply our retail stores with more internally produced product.
Which will enhance our margins improved financial performance in the state.
We could potentially add additional retail locations given the strength of the current market and potential upside from the expected rollout of adult use kevin's consumption in 2021.
The Florida market has been particularly strong since the start of flower sales in the first quarter 2019.
Patient growth year to date is over 13%.
In Florida, we operate six open retail dispensers, an indoor cultivation of processing facility and a secure outdoor cultivation of processing facility.
Product from cultivation expansion at the end of 2019 continues to ramp resulting in higher sales and margins at our retail locations.
We plan to begin another cultivation expansion in 2020 with new product to store openings coming into the market in 2021.
Maryland has been a solid limited license medical market for several years in Maryland. We currently have three open retail dispensary is under cultivation and processing so.
Harvest is a net wholesale or the state of Maryland was strong sales outside of our retail operations.
We anticipate further expansion of our cultivation of processing operations in 2020 to supply our own retail locations and support overall continued market growth.
Given the strength of the market, we would potentially add another retail location apparel and reaching the maximum before dispensers allowed by state regulations.
The Pennsylvania market has experienced rapid growth in a supply constrained.
Harvest currently operates five open retail dispensers in Pennsylvania.
And the recently acquired cultivation and processing facility ready.
Harvest satisfy retail licenses harvest or harvest affiliates have.
Five retail licenses, allowing for up to 15 potential retail locations, we are expanding cultivation and manufacturing operations to alleviate product supply constraints enhance margins and support the opening of additional retail locations 20 and 2021.
We remain confident in our belief that investing in markets with favorable regulatory frameworks unlimited licenses to operate afford the company the best opportunity It returned to profitability in the near term.
We are on track with our plan to pursue profitable revenue all right sizing our business.
We look forward to demonstrate a view further progress with respect to our overall plan to return to profitability.
As our business scales, we plan to provide additional disclosures, which we believe will further and form our stakeholders about our ongoing operations future prospects, we value and appreciate your support harvest.
We remain very confident about the long term trajectory of the industry and we believe harvest will continue to navigate near term challenges as they present and continue to be a strong as focused operator in the U.S. cannabis industry.
With that I'd now like to turn the call over to Leo who will discuss our financial results and guidance.
Thank you Steve.
First quarter revenue was 45 million, representing an increase of 134% year over year and 19% sequentially.
Revenue growth was driven by the addition of newly acquired dispensary as well as growth in our existing operations approximately 80% of our first quarter revenue was derived from our core markets of Arizona, Florida, Maryland, and Pennsylvania.
Revenue mix during the first quarter was 68% retail, 14% wholesale and 18% licensing and other.
Gross margin before biological asset adjustments during the first quarter was 40.6% compared to 42.3% during the fourth quarter.
Gross margin is an important component of our returned to profitability. So I'll add additional color on our margin performance.
Consistent with the revenue next results for Q1, we had three lines of business, which each contribute differently to our margins our largest and most consistent component of revenue is our retail business margin or margins in our retail business are in the range up to 40% lower 50% can we expect those margins too.
Improve overtime as we increase retail presence in stage, but higher margin opportunities as we leverage more of our internally produced product and as we continue to focus on reducing costs.
Our licensing margins can vary significantly depending on the nature of the contract.
Our wholesale business margins vary based on product mix and market.
The Q1 margin change from Q4 was driven by less favorable wholesale next partly offset by improved retail margins.
We remain focused on expanding the most profitable components of our business and we expect our margins will continue to trend upwards overall with some quarterly fluctuations due to mix end market changes.
Net loss for the quarter was 20 million compared to a loss of 88.9 million during the fourth quarter of 2019.
First quarter adjusted EBITDA, excluding the impact of biological asset adjustments was negative 3.9 million an improvement compared to fourth quarter adjusted EBITDA of negative 6.8 million.
The sequential improvement was due to a combination of revenue growth and additional reductions in operating expenses.
Harvest ended the quarter with 36 open dispensers up from 31 at the end to fourth quarter.
Subsequent to quarter end the retail location of Michigan was closed as of May 15th 2020 harvest open owned operated or managed 35 retail locations in seven states, including 14 open dispensers in Arizona.
Harvest owned operated toward manage dispensers exclude licensing arrangements other service agreements and select assets held for sale.
Turning now to guide we are targeting full year revenue of approximately 200 million in 2020.
The revenue forecast includes continued growth driven by retail dispensary openings same store sales growth and new and expanded cultivation and manufacturing operations.
We expect continued adjusted EBITDA margin improvement due to increased scale in overhead absorption as well as ongoing cost reductions we're on track to achieve positive adjusted EBITDA in the second half of 2020.
Forecast for 2020 assume no meaningful impacts or disruptions to our operation as a result of Corbett 19 pandemic beyond the new protocols and say cards already implemented throughout the company.
In some areas regulatory approvals permitting inspections may be delayed to the due to additional birds placed on regulatory bodies by coded 19 pandemic.
As Steve indicated earlier in the call we're committed to returning to profitability through a combination of targeted investments cost reduction measures and divestitures of non core assets.
We remain optimistic about the long term prospects for the industry and our company.
We believe harvest is well positioned to weather the short term market challenges and will emerge as a stronger company.
With that let's open the call two questions.
As a reminder to ask a question going to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from the line of Aaron Gray with Alliance Global Partners. Your line is open.
Hi, good evening and congrats on the improvement in the quarter.
Yes.
So first question for me is just on the overall guidance just could you offer some some of the underlying assumptions in that.
First of all does that include some of the sale that you're going have in terms of the California divestitures out within the 200 million.
And then how best to think about.
Expectation in terms of incremental store openings, you know within that 200 million our guidance and then how to think about.
The sequence of that quarter over quarter. Thank you.
The 200 million revenue is our target for the entire year 2020 that does include all of the existing operations that we have in place today, we do acknowledge that there are a degree of uncertainty.
With the economic impact consumer behavior that being said.
We do have a handful of stores that we do expect to open in the second half this year and that is included in the 200 million.
Okay, great. Thanks, that's helpful.
Then just another question on Florida, specifically.
Steve You mentioned earlier in terms of expected expanded cultivation both in 2020.
As well as you know 2021.
Could you talk about the degree of that basic pension rabbit relative to what you have today and you know some more color. When you expect that to hit the PM now would that be more more before Q in terms of 2020 or when do you expect that it's kind of comment in excipient out maybe helpful. Thanks.
Yup.
Yes happy to help on allowance, so with Florida, specifically, what I would recommend is powerpoint presentation that's available.
On our Investor presentation site has specifics around each of our core markets specifically in Florida, we have total capacity or total square footage of 115000 square feet.
In addition to that in our Gainesville property, we have 0.2 acres of secure outdoor in a thousand of of.
Square feet of processing facility.
The last one facility is being built out we have the first phase of growth said that is contributing flowers to our stores. This year. The next phase of growth primarily contribute two additional power and additional store growth starting in 2021.
Hi, great. Thanks, I'll jump back in the Q.
Your next question comes from the line of Kendrick team with Ultra Corporation. Your line is also.
Thank you and good afternoon.
If I am just follow up on the revenue outlook of some 200 million could you provide some indication on how we should think about the sensitivity given your range of capital expenditures for the rest of the air of 10 to 30 million.
You can just give us some indication on potential sensitivity, though how to better handicap the revenue guidance in the context, the capital expenditure got vehicle.
Yes, a couple of key points around our capital expenditures first about 80% to those capital expenditures are targeted towards ARPU or key markets, Arizona, Florida, Maryland, and Pennsylvania.
In addition to that although we have we are our capital investments will depend in part on the projects and the stage reopening post coded and the permitting associated we expect roughly.
50% or more to be in cultivation assets.
So so in total the majority of our Capex there will be some benefit to 2020.
But really it sets us too.
We believe it such as well to 2021 of beyond to read most of those cultivation rewards.
Thank you, Okay, that's great and just.
On the Q2.
<unk> outlook, you highlight as well to the full revenue contributions from Amazon natural entitlement Franklin et cetera is there any way you could also help us handicap the materiality advise contributions all or even just provide some color as to the sort of evolution through twentytwenty, how you expect us to eat that overall ramp.
But also be useful.
Yes, the two to two key concepts there first.
We won't comment on a specific store or a specific acquisition and that being said in total for Q1 approximately $4 million of revenue came from the act they completed M&A transactions and the new organic stores that came online.
The second key piece of that is a portion of that revenue.
Could potentially go away with the successful closing of the high times deal.
Thank you and just on that high times, They look quick final and for me.
We saw the extension to June 5th yet.
On that potential capital raise from Mesa thing I have seen multiple extensions on this has that extension impacted any of your thinking that hasn't changed the risk profile of this transaction how comfortable you with that any color there would be ready useful and I'll get back in queue. After that thank you.
Yes the.
The extension of their reggae offering does not affect the closure of the expense of the transaction unsold teams from both organizations have been working.
Regionally to actually rock that transaction up.
In the extension should have no impact.
Yes, Thanks, Dave.
Thank you.
Your next question comes from the line of Graham Krugman with eight capital Your line is open.
Hi, good afternoon, and thanks for taking my questions I just wanted to follow up.
Regarding the question that was asked earlier on in 2020 revenue outlook I just wanted to confirm.
Whether that does or does not include any contribution from assets that are expected to be divested in California at a high times. Thanks.
Great and it's a great question and I want to reiterate that's a 200 million dollar total revenue is our target for the year.
And we looked at multiple scenarios on that.
And there is a degree of uncertainty again around the economic impact in consumer behavior and specifically to.
The potential closing of the high tends transaction.
That being said, we believe that 200 million is a good targets.
Given that those variables and we'll be able to provide more traction once once in one or more of those transactions close.
Okay. So is it fair to say in other words that there's a potential scenario, where if high time doesn't close within 2020, there's a pathway to 200. If it does you can take the capital that comes in their direct that other states that fuels a pathway to 200 capturing that.
Fairway.
That is fair.
Okay. Thank you Ben the other question I had is.
Seeing some of the other earnings reports roll off here seems like there's looking generally like strong sequential growth into Q2. Despite the operational challenges you might have had in terms of adapting things for cobot 19. So I was wondering if you could give any sort of color on how things have trended to date in the core markets into Q2.
And if you've thought of any sort of quantification.
Of where things might have been potentially if we didnt see an impact from call but.
Steve do you want to take that one or should I take that one yes.
Good question. The so first of all we havent seen any supply chain or significant disruption store operations due to the coated.
Pandemic, we did see I think we outlined previously we did see sales spike in mid March.
In April what we saw was.
And the impacts as has been widely reported by our peers. The arrival of stimulus checks did have an impact on sales.
As did the Ics.
Normally expected bump in sales that you get from for 28.
April.
We haven't.
Done any analysis about whether or not.
Perry covert to non co the best see thus far.
But otherwise we have seen is a consistent demand for the product we have seen some increase in basket size.
And.
As a slight decrease in the amount of times, if you'd want to show to the store.
We're waiting to be impact.
As we open.
Some of the retail stores and allow foot traffic back into them.
We don't have enough data yet to draw any conclusions about the impact.
Okay. Appreciate that color there and then my last question you mentioned a potential divestiture of noncore assets.
So just you know with respect to.
Those potential transactions can you give any color context in terms of how robust the market.
For those assets are looking right now given the uncertain outlook.
Because of covert 19.
And just generally we've seen a narrowing of the focus of many operators in the space to focus on some core markets. So just wondering what.
What the discussions have been Mike and.
Potential pathways to actually crystallizing the transactional.
Graham It's a great question, it's a hard win for us to answer because we've never been in a situation where fielding offers for an asset.
And so we don't have a lot of historical context about what that looks like I can tell you.
You know we've identified our core markets.
We do have assets that lie outside of those core markets and we have had.
What we consider a healthy number of conversations about some assets that we would be open to divesting at the right price.
Okay. Appreciate it thank you.
Yes.
Your next question comes from the line up Matt Bottomley with Canaccord Genuity. Your line is open.
Yeah. Good evening, everyone. Congrats on the quarter first question I, just want to get a bit of a reconciliation on the dispensary count.
Going forward given some of the announced deals previously and they're closing so you had 35 in the quarter. How many of those are in California that will be disposed of I have the number at about four and then what exactly with respect to have a hard currently exists in California in Iowa as well.
I can take that.
Bill.
[music].
So with that 35 that we have that we reported that excludes the have a hard locations of which there's three in California.
So the so.
You want to clarify that.
Second of that 35, there are two operating stores today within that number that are operating in California under the harvest brand that would be part of the transaction with high times.
The the high was stores specifically there were two stores in Iowa.
That were operational at the time, we close the.
Urban capital group transaction.
Those stores were underperforming we recommend their closure and.
CG team executed on that.
Okay that that helps title together can you also give a little bit of color as much as you can on how those three or four policies out in front of me ANS stores.
Contributed versus sort of your average portfolio of the other 10 or 11, you had before they do they outperformed to underperform is everything kind of group together.
In an average that way.
Yes, those those eight what I can share as those operational the three easy enough stores are consistent with our Arizona market.
Okay, Great and then lastly, just with respect to.
The deal with with high times, just any more color on on the actual plan for those perhaps docs what their liquidity our is.
And what that might sort of turn into in the next.
Six month two year.
Sorry, I just want make sure I understand the question what was that a question on.
The the deal itself or what those assets are doing much from make sure I understood. The question, yes, more up more on the asset side with respect to the component the consideration that wasn't the pressure.
Yeah. So so we're not going to comment again on any specific M&A transaction or any specific store what I, what I have shared though is in Q1.
Between all of the M&A activity and the additional store the organic store that we brought on line.
Total of 4 million, what's contributing in revenue in Q1, a portion of that is related to the assets that are that are part of the high times proposed transaction.
Okay. Thanks again.
Your next question comes from the lineup Pablo Sonic with Cantor Fitzgerald. Your line is open.
Thanks, and good afternoon, everyone look they have been to a general question, but when you do go you are forced to the states I find that in relative terms you don't have a little scale like even already so on a write off of your business.
I understand you know five 6% of liquidity based on just a couple more stores. Then we go to Florida married on this has been the are you having little skill either versus your competitors. So how should we think about that and used to get the will should do everyday in the back half, but how high can margins be if you're on a scale disadvantage or that's the wrong way to think of.
It is because these foreign markets, maybe shorter supply on the streets would like margins. We continued to be pretty we're just going to understand that because.
Well, we tried to think of how should trade them, when we should and things like that.
Killed matters.
Got you lack scale in uniform strategic markets, even going to help with that thanks.
Steve you want to me take that one or would you like to.
Uh huh.
Yeah, all right. So as we laid out in our Investor presentation again, when we look at our four key markets first of all in Arizona, We at 14 stores in Pennsylvania, we have five stores.
In Florida, we have sex.
In Maryland, we have three today and we have the rights for.
To open one more if we choose to do so within Pennsylvania, the five stores, where the rights to increase that to a total of 15 and in Florida as its effectively on limited.
And we have in within Arizona, we have the option.
To open.
Within our existing licenses at least an additional stores we choose to.
And then there's some M&A tuck in transactions that still remain.
In terms of scale.
It's really more up I would argue about having access in Pennsylvania, and Florida to cultivate a flower product. There is a limited supply or the case of Florida. There is no wholesale supply under current state rules.
So you have to produce it yourself to be able to support the stores.
We are making those investments we have made those investments in Florida and are already producing.
Quality indoor flower that started to.
Before sale in our stores towards the end of Q1 on and we're increasing that capacity in.
Dania, we closed our transaction for Franklin Labs, and we now have that cultivation facility.
Under our umbrella in Oregon, and are able to support our stores with higher and more quality flower.
In Maryland is a little bit different because we did update the cap on stores there.
But it is a very strong wholesale market and we've been successful in that market on the wholesale basis in terms of scale I would argue that on a store by store basis.
We.
Our able to capture the margins assuming that we have access to that spyware and we do not expect there to be material variance based on whether there is.
The existing five stores in Pennsylvania or until it's built out to 15. The primary driver is going to be access to flower to be able to support those stores with with.
Additional.
Higher margins based on the internal sales of home grown product.
Thank you that's really helpful. In just just two quick follow ups.
Is there any significant difference between the force to the state into so how they'll 40 does have reacted to colby the into so well.
Streak since and regulations, just announced on you know, what's going to change and how that could evolve over the next few months for those 40 states give us any big difference on the second question unrelated indication they see just section why.
Revenue from that and sexual will not be reporting on the topline I believe it will be as fee income. If you could just give some color about that thanks.
Sure Steve you want to take next overseas.
Oh, yes, they become with piece and then and then Leo can respond to the second question for those key markets. We haven't seen any material differences in how the regulators have reacted to.
To the covert crisis in each and every instance regulators have responded quickly with efforts to attempt to allow businesses to continue operating while keeping you know employees, a patients and customers and the community say so all of them have done a very good job within the.
Legal frameworks with that they've been provided.
You haven't seen in those cases things, where where you had actual shutdowns or anything like that so those cases and those four states. They responded similarly.
Got it.
Right and then.
Yeah, Let me, let me follow up them with the in urban capital and then revenue recognition. There. So revenue from dispensers, we operate which include the Sthree in California is fully consolidated.
In addition to that we provide services to the five Washington, Dispensers, and we receive service fee revenue, which is included in our licensing and other revenue or licensing and other revenue is about 18% of our total.
Sales and is a material component and is recognized as revenue as such.
Let's go thank you.
Your next question comes from the line of Robert taken with Stifel. Your line is open.
Hey, guys. Thanks for taking the questions.
Well I got to ask this on the on on the on the guidance I mean.
Look your your Q1 revenue run rate as the 180 billion. If I back out you know number or close to the 4 billion or the contribution of stores and acquisitions, it looks like roughly 9% to 10% organic growth the quarter.
And you mentioned and I do beginning same store sales for legacy stores, 30% like why is this the 200 million number not higher it seems that you know organically you're growing better than that.
Some contribution from acquisitions like the coming in can you just give a bit of explanation there.
Rob It's a great question and thank you for asking that again for the third our full year revenue target of 200 million first it's important that we are acknowledging there there are uncertainties.
Yes, primarily from the economic impact of coded and then and and honestly the consumer behavior, given unemployment rates to date I would say, we have not seen material negative impacts Steve talk through kind of the puts and takes but overall we're on track we don't know with certainty.
Whether that'll continue either case for the balance of the year, how we do have healthy.
Comp store growth as Steve mentioned, our 10 stores that were open for the entire quarter were in excess of 30%. We do you anticipate having additional stores a handful of stores come online in the second half of this year.
And then we may some of that revenue that we had in Q1.
We're successful at the high towns transaction or any other potential divestiture of noncore assets.
May decrease the revenue a bad but we feel confident given all of those variables that 200 million is the best information that we can provide you and two other stakeholders.
Okay fair enough.
Maybe if you can give us.
On an update on on how you're looking at about the you know the rollout of stores in Pennsylvania, clearly a very good market to be with and now you're vertical there. How quickly can you make use of those the 50 licenses that you have.
Yes, great question, so when it when I mentioned the handful of stores that we that we plan to open this year, Pennsylvania is one of the markets where.
We have the rights to a total of 15 or or three per each of the five licenses and we and some of the stores that are in our Q are in that market.
Okay, but do you guys can't give us a any kind of cadence or maybe some target for end of year, yes.
So again I think the were at 35 today and we have plans to open a handful has how best I would say that I think from our prior earnings call.
We're hesitant to be hi to be shooting for an objective of store count.
When at the end of the day profitability and cash flow are hard to things that that we need to be focused on and we are focused on and we don't want a store count number.
To take priority that ranking.
Okay.
Another one of its that it is.
The the partnership with cookies and in Arizona.
How's that gone so far is that.
Is it getting significant traction on are you baby.
I think some customers in that state the to the comment to harvest stores the to get that product I think its exclusive right.
Therapy deal as far worse.
Sure.
So the relationship with cookies and Arizona as has been one that we've been pleased with today.
The as you as you can imagine genetics that they produce our desirable and we have in some instances the particularly when you hold events right. So we had an event for example in are temporary store, where one of the b.
The.
Principle of cookies appear and and.
Japan sign autographs took pictures.
We certainly saw lines around the building when he was there.
And so we've been overall very pleased with the relationship.
It's it's one that we like it also one view if you're familiar with that branded as they also have a relationship with.
Some of the have a heart stores in the state of Washington.
Okay, great well, hopefully that'll certainly well a indirect market contact there so that looks good. Thanks.
Thank you Robert.
Again, if you would like to ask a question press star one on your telephone.
Your next question comes from the line of Russell Stanley with Beacon Securities. Your line is open.
Good afternoon, Thanks for taking my questions.
First around the same store sales number thanks for providing that just wondering if you can you break down the drivers as to whether it was more transaction volume or or an increase in ticket sizes that drove that number year over year.
Yeah, the euro failure.
Sorry.
Okay, that's sort of at the same store sales of 30 of of greater than 30% and that again thats. The 10 stores that were open for the entire quarter.
This year versus last year in Q1.
It's actually a very even in healthy split between both were seeing increases in average order size and we're seeing increases in transactions.
Great and.
Just wondering on Arizona.
I think.
Over the last week, the Supreme Court, I guess decided against allowing the use of the.
Digital on a signature gathering, but I believe the initiative has something like 100000 more signatures any actual threshold I guess those need to be validated. So I guess I'm wondering do you feel comfortable that that's enough of a buffer to.
To secure a spot or where are you out there are you still pursuing additional signatures. This point.
So it's a great question and B.
Initiative in Arizona is really critical for harvest.
In something that we were very much looking forward to and we've spent.
Time and resources, ensuring the houses.
As you know there.
Colin pandemic caused.
An issue.
With.
Social distancing and so it made it very difficult to collect features for four.
Decision.
Others.
We joined the lawsuit with a couple of other initiatives that lawsuit was intended to see the ability by candidates due to get signatures collected in online rather than actually going out into the community.
Recently, the Supreme Court ruled that we were not entitled to do that.
In the time since we filed that case the.
And the reason that we were involved agreed to be a plaintive is because we did see.
Cree and how quickly we're gathering signatures now understand that we were well over the limit that we need we want to be well well over that one to withstand any challenges to the validity of some of us.
Since the time that ruling or since the time filing about lawsuit.
Arizona has started to open back up and we have seen a dramatic increase in the <unk>, the pace at which signatures or being gather.
So we're very comfortable that we will have more than enough signatures well before.
The deadline to turn those.
That's great. Thanks for that that's excellent color. Thank you.
Thank you Ross.
Okay.
Your next question comes from the line of Jesse Pit luck with Cormark Securities. Your line is open.
Hey, good afternoon, just a follow up on the commentary about the same store sales growth first I'm. Just wondering if you would have that number on a sequential basis and if you don't or can't provide that can you just kind of comment on the drivers quarter over quarter in terms of I, just kind of basket sizing in traffic trends.
Yes, so we haven't provided the quarter over quarter, but the 30% year over year is consistent and we're seeing that.
If you take that annual number and do the math, you're going to zero in on on the quarter over quarter pretty quickly and we are consistently seeing a growth for both the average order size and transaction, so thats going to be similar.
Okay, and then just on the the 24 million of annual cost savings and the initiatives that you kind of done to achieve that should we expect to see kind of the bulk of all that work.
Surface in Q3 are there other puts and takes that might delay some bladder call some of it more forward.
Yeah, Great question, so so with the Ti cost reductions.
So first of all I want to clarify that that that is what has been implemented on a year to date basis. So some of that is reflected in Q1 I would say the vast majority of it however.
Was effective as of side, just about a week ago.
With that you with the changes and that will that will effectively take hold I would say some of it in a partial month of May and June and beyond there are some components of it.
For contractual reasons or other.
Won't take effect until later this year, but in aggregate the 24 million it of annualized savings.
As is the number.
Thank you I'll pass the line.
Thanks, Jeff.
Your next question comes from the line Cheryl Olivier with appearance either your line is open.
Hey.
Sure I'll here sorry.
No go ahead.
Yes, just wanted to get a little bit more color yes.
Sorry about that and just can you guys just tell us why like any why the growth rate sequentially would change.
Much between Q4 to Q1 versus Q1 Q2, what reason it would change significantly.
Given you've highlighted.
You know as check and other.
Tours reopening.
Yeah, I think that the the key changes from from Q4 Q1, and then Q1 to Q2 is that in Q1, we had roughly about $4 million of contribution from M&A activity and organic sites coming online.
And so so thats definitely a step up.
Versus the core quarter over quarter.
Well, we do not expect to have at this time any.
Additional openings in Q2.
From from either M&A organic.
I think the other piece to keep in mind is.
If the transaction with high times closes before the end of June.
A portion of that revenue that was that was already recognized in Q1 will not exist for the entire quarter of Q2.
What's the right way to think about sequential growth.
The business.
Yes, so we're at 45 in Q1, and we're targeting 200.
For the full year.
Matt So second quarter I'm, not asking I read your numbers I'm asking about second quarter.
Yes, and in our guidance is for the full year, we're not providing guidance on the specific quarter.
We expect the business to grow in the second quarter.
We expect our business to continue to grow up through the balance of the year, yes.
Got it and then of the incremental growth can you just talk about I know you guys highlighted getting EBITDA positive.
In the near term just.
Curious the incremental revenue growth from Q1 to Q2.
Or throughout the rest of the year what the.
What the incremental drop down to the EBITDA.
Line is.
Have you can grow five or 10 million sequentially, what that means for EBITDA.
Yes, Sir so we're not giving specific guidance on EBITDA other than we do anticipate that we are will be positive EBITDA and we will transition to positive EBITDA in the second half of this year.
Okay that doesn't really answer my question.
The incremental EBITDA drop down on incremental dollars or revenue is what.
It varies by business segment. So what we have disclosed is our margins on retail are generally in the high fortys to the low fiftys and so incremental revenue generated from a retail segment will have a higher flow through then revenue generated from the other business segments.
Okay. So the incremental EBITDA contribution goes up as revenue goes out from here.
Correct.
Thank you.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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