Q4 2020 Harvest Health & Recreation Inc Earnings Call
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Good afternoon, and welcome to the harvest Health and Recreation Conference call to review fourth quarter, 2020 financial and operating results and discuss the company's performance outlook at this time all the triple.
On a listen only mode. The call will begin with prepared comments by management, followed by a question and answer session.
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Today's conference is being recorded.
I'd now like to turn the call over to your host Christine Hersey director of Investor Relations for harvest. Thank you you may begin.
Thank you good afternoon, everyone and welcome to harvest fourth quarter and full year 2020 earnings call on today's call, our founder and Chief Executive Officer, Steve White, and Chief Financial Officer, Debra Kelly today's discussion and responses to questions may include forward looking statements, which are subject.
Various risks and uncertainties that could cause our actual results to differ materially from these statements.
These risks and uncertainties are detailed in the company's reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including our annual report on form 10-K.
This report along with today's earnings press release, and Powerpoint presentation will be available under the investors section of our website.
Harvest assumes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise following today's call.
Throughout the discussion harvest will refer to non-GAAP financial measures, including adjusted EBITDA.
Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release, and SEC and SEDAR filings. Please.
Please note all financial information is provided in U S dollars unless otherwise indicated.
Now I'll turn the call over to Steve late harvest founder and Chief Executive Officer. Please go ahead. Thank.
Thank you Christine.
Afternoon, everyone and thank you for joining us.
I appreciate your continued support and interest in harvest from the opportunity to provide you with an update on the organization.
Over the past year, our company is sharpening its focus and we define key aspects of our strategy and how we most of their own success.
Top multistate operator in the U S. We have a unique opportunity to build a scalable and sustainable canvas business. During this time when the current patchwork of laws and regulations limit the number of competitors share in this rapidly growing industry.
We have worked over the past year to streamline our operations and deepened our footprint in our defined core markets, which offer fast and favorable returns.
Plan to use the returns from our investments in those markets as the foundation for future growth as we identify and in a new space that meet our criteria for capital allocation.
Each market that we have selected for significant capital investment has specific attributes that make the market attractive.
How do we identify which markets to pursue our preferred markets have several several trades from comments generally speaking they are walt populated state regulated markets with limited license structures that allow operators to enter organically through license awards or through acquisitions of existing assets.
All of our preferred markets allow us to build.
Significant scale to generate attractive returns.
States, such as Arizona, and Pennsylvania. This means building a sizable retail footprint supported by cultivation and manufacturing operations.
While in Maryland. This means building a significant wholesale operations enhanced by a few retail stores.
And Florida, all operators are required to be vertically integrated creating all products for sale internally.
These core markets also have the potential for significant future catalysts, such as an expansion to include recreational sales.
We are just starting to see now in Arizona being appropriately and well positioned in the medical market ahead of recreational sales had a meaningful impact on financial performance.
For years harvest has been winning licenses acquiring assets building operations, achieving greater scale and preparing for future growth opportunities.
In the past couple of months, we have started to realize the benefits of our preparation and foundational groundwork that we have laid out in Arizona since 2011.
As many of you know recreational cannabis sales began in Arizona in January 22nd.
Harvest is ready and able to begin serving adult use customers that all 15 locations on the first table launch.
Given the significance to harvest of the launch of recreational cannabis sales in Arizona I'd like to provide some commentary on the rollout before we review our fourth quarter results.
First and foremost.
I would like to thank our team at harvest for their hard work and dedication during this process.
Employees from all departments in the company came together and did a great job to make sure that the launch went smoothly.
In the months, leading up to the launch we completed some store renovations secured adequate product supply added an additional point of sale systems and new software to handle the anticipated uptick in transactions and customers.
We also hired and trained new staff to make sure that we're able to provide the same level of service to recreational customers that our medical patients have come to expect.
As the application window for recreational sales approached I asked our team to make sure that we'd be the first two recorder recreational sale in Arizona.
To make that happen starting on the data that recreational applications were accepted our team stayed up all night literally refreshing the department of Health services Web page to ensure that our applications are in <unk>.
Just in case, those approvals would come in on a rolling basis in the order that they were received almost all of our applications were submitted by $3 45, a M that morning.
And on that same day, all of our operational employees reported to work in our early.
<unk> with IP personnel deployed across the state to coordinate their applications from the newly required facility agent card program.
We made sure that all of our staff applied for the FAA cards required to serve recreational customers at the earliest possible time.
We have no idea how quickly the department of health services will evaluate and approve applications, but we made sure that our team was ready as soon as we received the Green light.
Once rec sales began our team did a phenomenal job managing crowds and influx of new customers, which was particularly challenging challenging given the safety protocols and additional restrictions in place due to COVID-19.
To best serve our medical patients. During this historic time, we established a separate lines at our stores.
For the online ordering and expressed in store pickup.
We are early success in the recreational market in Arizona to the entire harvest team from roads to the occasion and exceeded all expectations.
And what I consider one of the greatest compliments that an organization can receive a great number of our competitors duplicated many of our recreational processes.
For me our execution has been a significant source of pride.
Fully reinforces my belief that our team can replicate this success and build on our collective experience in Arizona and other markets that will eventually permit recreational sales.
As we predicted in sharp contrast to some other states that have experienced a SaaS transition to a lot of recreational sales the Arizona rollout has been relatively smooth.
Because of the maturity of the medical market.
The experience of the regulator and the thoughtfulness of the ballot initiatives.
This was the fastest it's new this launch that we've ever seen.
Now that we've been serving the recreational market for just over two months and Arizona I'd like to share a few additional observations.
But some of our peers have noted publicly the Arizona market has had strong demand since the launch of recreational sales.
We have realized a significant increase in revenue from our existing 15 locations in Arizona. This increase in revenue compared to the fourth quarter varies by location with stores reporting February increases between 45% and 248%.
In our February meeting average increase of approximately 100%.
We used February figures to exclude the impact of stimulus checks, which resulted in a bump in sales in mid March.
Most of our locations are serving fairly even balance of medical and recreational customers.
We have observed an uptick in the number of transactions at least each location, partly offset by a decrease in average order size.
The trends at the individual store level vary by location with some below harvest average medical stores seeing a significant pickup in traffic while other strong medical stores realized below internal average increases in sales due to recreational customers.
So far the increase in recreational sales is out past our prelaunch expectations.
And while our expectations have been exceeded increased demand across Arizona has resulted in some tightening of supply and higher pricing in the wholesale market.
To date, we've been able to secure ample product supply despite the dramatic increase in demand.
Overall, we've been able to provide our patients and customers with a wide array of products across all categories, which include edibles created specifically for the recreational market.
We expect pricing to return to normalized levels over time as the industry continues to ramp up supply.
We continue to evaluate the market and we anticipate the ongoing expansion of our own cultivation and manufacturing operations will partly reduce our need for third party products.
Longer term.
We continue to believe the best approach for harvest in Arizona as long with the most retail storefronts.
And by 2023, we will have 19 retail locations.
Which does not include any potential acquisitions or any additional licenses awarded in the underserved counties.
Building upon the market assumptions, we highlighted during the third quarter call. We now expect the ultimate number of retail locations to be roughly 169 stores.
That is comprised of 130 existing medical stores awarded dual licensure.
13 soon to be awarded licenses required in retail locations and underserved counties.
In 26, new social equity licenses, which can be issued once a new program was created.
Based on early data, we believe the Arizona market at maturity, we will exceed $2 $5 billion in annual revenues, which yields an average of almost $15 million in revenue per store.
We expect that the harvest owned and operated stores will perform above the average.
In fact, six of the 15 harvest stores, we're trending at or above that rate before we saw the impact of stimulus checks.
In contrast, with the more limited number of retail store fronts. The Arizona market allows for up to 338 off site cultivation and manufacturing facilities each with unlimited capacity.
For this reason, while we may experience some short term tightness in the wholesale market. We are confident that our retail investments will realize greater returns over the long term as the number of retail storefront remains fixed at a much smaller number.
As the Arizona market continues to grow and we continue to expand and further refine our processes to gain market share, we expect to deliver improving financial results from our home state.
While we are pleased to report that we are tracking ahead of our internal expectations. We have not seen any reliable market data that would indicate that the size of the total market. At this time, we're hopeful that reliable market data will be available by the time we were.
We report our first quarter earnings and net.
Now turning to fourth quarter results.
For the past year harvest has been executing according to its plan streamlining operations and focusing on building out assets in core markets in the fourth quarter, we realized continued revenue growth from existing operations attitude and retail locations.
Our expansion activity that cultivation and manufacturing facilities.
<unk> the divestiture of noncore assets raised capital through a bought deal financing and reduced our debt through repayment and conversion to equity.
During the fourth quarter, we also made progress in reducing our outstanding litigation, reaching settlement agreements with Devine holdings and with the minority owners of the interurban capital group.
As of the fourth quarter harvest has successfully transitioned from <unk> to GAAP accounting as required by its registration as an SEC reporting company.
This conversion marks an important milestone for our company.
Moving forward all resort all results will be reported in accordance with U S GAAP, which may make comparisons to prior results reported in <unk> less meaningful.
Fourth quarter sales of $69 $9 million, representing an 85% increase year over year, and a 13% increase from the third quarter.
Higher revenue sequentially was driven by growth in existing operations in our retail and wholesale business lines.
In October we opened two additional Pennsylvania locations, we can't fill in King of Prussia.
As part of our plan to improve our overall financial performance, we are actively managing our liquidity.
During the fourth quarter harvest completed a bought deal financing raising net proceeds of approximately $32 4 million U S dollars.
Harvest sold its interest in Arkansas, retail and cultivation assets, netting $12 $9 million from proceeds during.
During the fourth quarter harvest repaid $20 million in real estate financing and converted $19 1 million in debt to equity.
Harvest ended the fourth quarter of 2020, with approximately $78 million in cash and $265 million in debt.
We are actively working to address our 2022 debt obligations and we will announce any new financing arrangements. After they have been completed.
We have sufficient capital and service our debt in 2021, and we have the flexibility to accelerate or delay capital expenditures of their financial position changes.
We will make necessary adjustments to our plan to ensure that we meet our obligations while pursuing our growth objectives.
Turning now to recent developments.
Since the end of the fourth quarter, we have opened one additional retail location in Whitehall, Pennsylvania, marking our ninth harvest affiliated medical dispensaries in the state of Pennsylvania.
As I highlighted earlier in the call on January 22nd recreational sales commence that all 15 of our Arizona retail locations and our results to date have exceeded our prelaunch expectations.
On January 25, 2021, we announced the closing the sale leaseback transaction for 292000 square foot cultivation and processing facility intellectual Florida.
The property was sold for $23 $8 million, and we expect to receive up to $10 $8 million in reimbursement for tenant improvements.
On February 22021 harvest divested two medical dispensaries in North Dakota for an immaterial amount of cash.
This action is in line with our plan to divest noncore assets, where appropriate and redeploy resources into our core markets.
On March 15th Harvest announced the settlement of a dispute with Falcon International under the settlement terms harvest loans of 10% equity stake in Falcon and a 10 year warrants to purchase up to an additional 20% from the outstanding shares of profit.
Finally, with respect to the ongoing COVID-19 pandemic, we have been able to manage any challenges related to COVID-19, while following CDC guidelines for best practices.
All of our facilities have remained on line with modified operating procedures to safeguard employees patients and customers.
As we have highlighted before part of our strategic plan includes making targeted investments with fast and favorable returns in our core markets.
During the three months ended December 2020, we spent approximately $6 6 million on capital expenditures with the majority of those investments made in Arizona, Florida, Maryland, and Pennsylvania.
We expect continued strength in the Arizona market as new customers continue to learn about and embrace legal and regulated cannabis products. Our other three core markets all have future potential upside from recreational cannabis consumption.
In our home state of Arizona.
We will have 18 locations to serve both medical patients and recreational customers when our three additional stores are fully built out.
We will also have a 19th location starting in 2023, when our current licensing arrangement expires.
Those retail locations are supported by cultivation facilities in camp Verde, Mirage Phoenix and Wilcox.
And processing and manufacturing facilities in Flagstaff and Phoenix.
We are expanding indoor cultivation and processing at the Phoenix facility as well as greenhouse cultivation at Wilcox with new capacity expected to be completed during the first half of 2021. We've also started the process to expand our greenhouse capacity and temporary.
In Florida, we are expanding our cultivation capacity in two locations with new product and store openings coming in in market from 2021 and.
In Maryland, we currently have three open retail dispensaries, and a cultivation and processing facility.
Harvest is a net wholesaler in the state of Maryland with strong sales outside of our retail operations.
We are currently in the permitting process to expand our facility in Hancock, Maryland.
And Pennsylvania Harvest currently operates nine open retail dispensaries, and a cultivation and processing facility.
Our five retail licenses, allowing for up to 15 potential retail locations.
We are expanding cultivation and manufacturing operations to enhance margins and support the opening of additional retail locations in 2021.
Our focused strategy and commitment to investing in core markets is already contributing to our improved financial results.
We will continue to expand our operations in core markets and build a foundation for future growth. We look forward to demonstrating further progress on our plan over the coming quarters.
I would now like to turn the call over to Deborah to provide specific financial results and our future outlook.
Thank you Steve Good afternoon, everyone I'm going to provide an overview of our fourth quarter financial results and our 2021 outlook. Please refer to the traction Lee can slide presentation for full details.
Had a great fourth quarter building upon the momentum from our improved third quarter results. During the fourth quarter. We completed several key achievements, including realized continued revenue growth completion of a bought deal financing and divestiture of non core assets and repayment and conversion of GAAP.
For the fourth quarter revenue was $69 9 million, representing an increase of 85% year over year and 13% sequentially a.
Approximately 85% of our fourth quarter revenue was derived from our core markets, Arizona, Florida, Maryland, and Pennsylvania.
Revenue mix during the fourth quarter was 75% retail, 16% wholesale and 9% licensing and epic.
As of March 30th Harvest owned operated or managed 37 retail locations in five states, including 15 open dispensaries in Arizona.
Fourth quarter same store sales increased by 57% year over year for the 26 stores that were opened during both periods.
So the 34 stores that were opened in both the third and fourth quarters of 2020 same store sales increased by 7% sequentially.
During the fourth quarter, we realized a 12% increase in traffic and a 4% decline in basket size compared to the third quarter. This represents a return to more normalized consumer patterns as patients and customers visited stores more frequently and stacked up less during their store visits.
Gross margin during the fourth quarter was 44, 8% compared to 44, 4% in the fourth quarter of 2019 and 46, 6% during the third quarter of 2020.
The sequential decline in gross margin in the fourth quarter was driven by product and market mix.
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We remain focused on improving the profitability of our business and we expect our gross margins will continue to trend upward overall.
Fourth quarter, SG&A was $26 9 million or <unk> 38 percentage of revenue.
Quarter operating expenses included higher spending in preparation for the launch of recreational sales in Arizona and increase in professional fees and support relating to our U S Securities registration and conversion to GAAP and legal fees associated with the resolution of litigation and associated settlement agreement, we will continue to strive.
Ive to control cost moving forward as we scale our business and increased revenue, we expect SG&A as a percentage of revenue will decline over time as our revenue growth outpaces increases in expenses.
Net loss for the quarter was $5 2 million compared to a loss of $84 5 million during the fourth quarter of 2019.
Fourth quarter, adjusted EBITDA was $9 1 million under Ifr Ias accounting, our fourth quarter adjusted EBITDA would have been $16 4 million.
Turning now to our outlook, we are energizing, our 2021 full year revenue target of $380 million.
The 2021 revenue target includes continued growth driven by retail dispensary openings same store sales growth recreational sales in Arizona and expanded cultivation and manufacturing operations.
For the first quarter of 2021, we expect to report revenue of at least $87 million.
We expect gross margins to continue to improve overall with some quarterly fluctuations due to product and market mix.
Harvest ended the fourth quarter of 2020 with approximately $78 million in cash and $265 million in GAAP.
As of March 26th Harvest had approximately $92 million in cash.
Service for 2021 is approximately $49 million, including $10 million of convertible debt, which we expect to repay in equity.
Capital expenditures for 2021 are expected to range between $35 million to $45 million and may be expanded or accelerated depending on the availability of financing.
We estimate of 11 $5 million of our 2021 and capital expenditures are eligible for reimbursement by our financing partners.
With the addition of recreational sales in Arizona growth from new retail locations and expansion activities at several cultivation and manufacture factoring facility.
Back to realize improved financial performance in 2021, we're committed to making further investments in our core markets to build a foundation for future growth opportunities. We believe harvest is well positioned and we are very excited for the opportunity ahead with that let's open up the call for questions.
Okay.
If you would like to ask a question at this time. Please press Star then one on your telephone keypad.
Our first question is from the line of Aaron Grey with AGP. Please go ahead.
Hi, good evening, thanks for the questions and congrats on a strong into the year and start to the first quarter.
So.
My first question is regarding the full year guide so it seems to be based off a strong first quarter to $87 million.
And thats not including.
Adobe's fares on for three weeks.
And you had the Pennsylvania opening you only have a couple of weeks of that so off to a strong run rate for the second quarter that imply and for the back half of the year just seems like it's relatively modest sequential growth, especially given the expectations for additional stores coming online and cultivation. So let me just give some additional detail.
Regarding kind of the puts and takes behind that guidance. How many stores you have plan to opening and maybe timing of that help with the modeling. Thank you.
Sure happy to answer that question.
Have a great catalyst in Q1, with Arizona rack and data that we saw a much larger jump in sales between Q4 and Q1. It was about a 23% implied increase and with that uptick in revenue in the first quarter. It was primarily driven by the launch of Rec in Arizona, but in March. We also saw the influence of another round of <unk>.
Let's check so.
We currently have limited data to be able to determine what the steady state of future recreational sales will be and because of those factors. We're comfortable with the revenue target that we have given based on limited data that we have thus far.
Also keep in mind that our revenue target does not include any new acquisitions, our entrance into new markets.
And it's about a 64% implied increase over our 2020 $231 $5 million in revenue I'll have Steve go into detail on the store.
Store openings.
Starting I guess going back one step one of the things Erinn to keep in mind is that when you look at the investments that we made in 2020, a lot of those were in cultivation and manufacturing capacity, which are going to.
The returns on those investments are going to come in the form of higher margins rather than higher revenue in many instances.
In addition, what probably should note is a.
Flow is the fact that we also have made some changes to our licensing category.
We cancel the contract that was that fit in that revenue stream, resulting in lower revenue coming in 2021, but higher margins.
With respect to the second part of your question about number of stores.
B.
I mean, we haven't given.
Like are broadly a number of stores, we anticipate opening in 2021 and the reason we haven't done I haven't done that is we did a specifically by state.
So in Arizona, what we told you is three stores are coming online I can tell you one of them you should expect by the summertime.
The other two were really concentrating on finding the right locations and so our focus is on getting in the right places rather than getting them opened fast we don't have many more stores left to open in the state of Arizona.
In Pennsylvania.
Do have.
Six additional stores to open.
And one of our internally one of our operational focuses for the year is to make sure that we get open and operating as much as we possibly can in the state of Pennsylvania. So we'll be moving as quickly as we can there.
But we don't we don't have exact dates as to when we will get them open, but we are moving very quickly.
As it pertains to Florida, which is the other place where we have the ability to open additional stores.
What we've said is we've been making some investments in cultivation and manufacturing capacity and primarily what we need to do is make sure that existing six stores don't run out of product once we get to that place. We can comfortably open new stores, we do have additional capacity coming online shortly and we do expect store.
Our openings in Florida in 2021.
Thanks for that color.
Really helpful. And then just specifically on Arizona It sounds like.
It's been a strong start there above your own expectations.
You speak to some tightening.
High inventory levels, but it seems like you guys have been able to stock up ahead of that do you feel comfortable kind of being able to stay inventories for your stores.
Go ahead of your additional cultivation coming online or do you feel like that could tighten for you guys as well or do you feel like Youre comfortable meeting both the adult use and medical demand for your source.
Thank you.
What I would say is that this is a process that we've been planning for for for years.
So we've known for a number of months.
There was going to be a greater demand in the wholesale market and so as an organization. We took the steps necessary to ensure that we would have product available for customers and that we would not have interruptions at the retail level.
We haven't seen anything that would that would indicate that any of our planning along those lines was.
So we don't have an expectation that we will have that will be running out of any products.
Okay, great. Thanks, I'll pass it along.
Thank you Sir.
Your next question is from the line of Ken <unk> with ATB ATB capital market. Please go ahead.
Thank you and good afternoon.
Just with respect to the gross margin performance in quarter I Wonder if you could help us better understand whether that was purely a function of mix whether there was an increased promotional activity ahead of recreational use them in January and just better unpack if possible. The gross margin not just performance in call. It typical.
With respect to your comments looking to the first quarter and increases just trying to tease the noise out of that gross margin number in the fourth quarter.
Sure. So we still expect gross margin to improve over time, but there may be variations in our margins from quarter to quarter due to product and market mix as you saw in the fourth quarter as more of our cultivation facilities come online. We expect our gross margin percentages will increase and as we said.
And the last.
Our goal is to have our gross margins in the high 40, <unk>, 50% range.
Thanks, Kevin and Steve if I could just on Arizona, some great talents from other useful insight.
Yes Kelly.
It's already a very readiness has been a long time in.
The banking fee for you and the team and I know that the data doesn't exist with respect to Arizona again give us your read on whether it was sort of success in cotton and the numbers I've seen was just how big that Leslie so in the market or whether you think that you would just back much more ready than that.
While it's just you'll read.
I'll take on share share positions in and what you saw on the ground in terms of readiness I mean is there any as you where do you see a bunch of competitive scrambling, how should we think about that how should we think about sort of the takeaway from youll readiness versus market readiness and the read through from that for the year.
Thanks, Ken It's a good question I wish that I could give you market share information.
But we don't we don't have it in Arizona, yet we've seen.
Some in from some sales information published but we immediately you by looking at that as an accurate so from that we can't figure out what our market share is so what we have to go on is largely anecdotal.
I can tell you that based on there were a handful of operators in the state of Arizona that were two different degrees prepared for the transition.
For us internally it was it was a.
Something that we identified very early on in the process before.
But we knew that for this calendar year, one of our biggest drivers as an organization was gaining.
<unk> gaining market share during that transition.
So we are we made some estimates about how we thought the market would develop where we can tell you is we're ahead of those estimates what I can't tell you is whether or not that's because the market is just way better than we thought it would be or free just way outperformed our peers.
Anecdotally I think.
There are.
I'm confident in saying that we have done very well relative to the rest of the market.
We know in a number of stores that we have tested our throughput capacity. So you can't do much better than that.
That's great Steve and thank you for that and I've got from squeezing one quick related question here.
So looking from a landscape and as well as you know, Arizona your position in Arizona, you will sit again market a flow of beta shift there as well when you. If you had an incremental dollar to deploy today do you think that Arizona with watching him off the market has got ahead of itself from that it wouldn't be what you'd be spending that money if you could.
In other words, just half profit do you think that valuations have become for those who are trying to play catch up.
Yes. So your question specifically relates to the M&A environment in Arizona on whether or not it's too expensive to buy here.
And my answer to that question is.
In situations, where everybody knows that something is for sale it gets too expensive.
And so for us it's.
We're back to the price, where we have to be.
We have to outwork people and do more creative in order to find good deals.
We do think that there are opportunities for continued expansion in the state of Arizona, but.
If if what we see as a process whereby everybody is bidding and asset up net amount of process that we're going to successfully participate in and so we would look to deploy dollars those.
Those types of dollars in other places.
Thank you, Steve and congrats on the tank volume at that.
Thank you Sir appreciate it.
Your next question is from the line of Matt Bottomley with Canaccord Genuity. Please go ahead.
Good afternoon, Stephen that Brian Thanks for taking the questions just going back to the market share commentary.
You may even be likely don't have this data, but I thought I'd just throw it out there if.
If theres any other color you can give us when we size the market I think most.
<unk> reports I've seen pegged a mature market at somewhere north of $2 billion and.
And change do you have any idea if your market share is under or over performing your proportionate share of current retail and any other color on how you think thats.
<unk> out in the beginning of record.
So so.
Can't answer, but here's the best I can do to answer that question. So.
So we have the.
We anticipate that the market will continue to grow over time and net of maturity it'll be about a $2 $5 billion market.
We know that when something.
Two months into the process and so we're not near maturity at this point.
But nearly half of our stores are performing at what the market average will be at maturity.
That would tend to suggest that we are outperforming the market unless we're just all wildly wrong about the size of the Arizona market.
So I'm trying to be a bit reserved in my comments related to it because I don't have good market data.
We are.
We are very excited about how we have started.
In the Rec market here in Arizona.
Okay. Thanks Thats helpful.
And then just another question on Florida and apologies. If this was implied in some of the commentary, but I'm just trying to ascertain if are you currently before completing the index was various expansion projects that you outlined are you currently supply constrained for your remaining stake stores or are you able to open a few incremental locations.
Using your current bill given that its force vertical integration.
We are supply constrained and so our existing six stores when they have additional products they performed better than when they don't and so we do at times run out of product.
So for US we could open more stores, we have the sites available to us but.
We believe that the prudent thing to do is build up that capacity. So that the stores can actually perform well once they're open.
Got it and just one more quick one from me on the profitability going into fiscal 'twenty one here.
Yes, 13% EBITDA margin for Q4, so clearly the mature.
Landing spot for that I'm happy to hear your.
Your commentary on where you think that might be over the longer term.
But certainly it would be somewhere much higher than 13%. So can you give us any color on where that's tracking maybe.
Maybe any sort of goalpost in the next quarter on that $87 million and then.
Maybe not trying to twist your arm to give us a number for the full year, but maybe at maturity once you.
Your current platforms ramped up where do you see that mature EBITDA margin going some of your peers have guided to over 40% others have been more conservative and sort of the mid 30% just curious where you think that falls.
So we haven't provided EBITDA or EBIT margin guidance at the company level or by the state but.
We can generally say is that we expect to realize much higher operating leverage in our Arizona operations because of the.
The throughput of that revenue using the same footprint and infrastructure.
Okay. Thanks again guys.
Thank you Matt.
Your next question is from the line of Michael <unk> with Piper Sandler. Please go ahead.
Good evening. Thank you.
Yes.
Just wanted to get a little more sense of how much of an impact you thought stimulus checks had I know for the rec.
Medical comparisons it makes sense to try to exclude that but how much of a bump are you seeing there is there anything you can try to quantify.
Thanks, Michael.
It's not something that frankly, we're not prepared to quantify it at this time, because I don't know that.
Im not sure that we've seen the end of the impact of it and so.
Our hope is that when we have our Q1 call in May we can talk in more detail about what that what that bump looked like it was definitely noticeable.
And is.
It looks like it may there may still be some remnants from them.
Okay Fair enough that's helpful and just on Florida can.
Can you give us a sense of.
Is there an optimal scale just to kind of.
From either a margin perspective or just to.
<unk>.
Product availability.
Do you feel like.
Are you there yet or how far away is that.
Yes, there is an optimal scale and we're not there yet.
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So we.
We would need we would need to continue to make investments as we are in our cultivation and manufacturing capacity and then when we think about scale and we think about operating leverage and it also means continuing to add as we make those investments continue to open up additional storefronts and net market right now.
Our footprint in that market today, we have six open stores. They are supply constrained so were not at optimal at this point.
And do you have a sense of how far away from that you might be.
I don't know frankly, I don't think anyone's reached optimal optimal is.
Florida is a market where you can go you can just keep going deeper.
So it is a place where you would until you outstrip the patient growth or customer growth. Once you have recreational sales. We just don't we haven't seen what the limits are.
So we haven't seen optical yet, but it's a really big market, that's growing very very quickly.
Okay, great. Thanks, so much.
Thank you Sir.
Thank you. Your next question is from the line of Craig here from eight capital. Please go ahead.
Hi, good afternoon, and thank you for taking my questions.
Had a follow up question with regard to Arizona and with respect to what you've seen in Q1 to date did you add any of his throughput restrictions in our stores.
The results of health and safety measures for COVID-19, and as we continue to see reopening can you discuss what the Arizona landscape looks like.
Today on what's expected in Q2.
Regarding what you might be able to accommodate.
Throughput and whether that might put them greater stress on supply.
Thanks for that.
Thank you for the question so.
In short I think the safety protocols associated with COVID-19, do affect throughput just because you are spacing people out of the way that you wouldn't otherwise do in and.
In a non pandemic environment.
We don't know when I mean, obviously in the state of Arizona.
The governor has.
Eliminated masked mandates across the state.
We as an organization. However, we're going to continue to follow CDC guidelines. So that today does not affect us as an organization.
I don't know when we will get to the point, where we can stop following.
Some of the protocols that we currently have in place.
But I am I can confidently tell you that when that does happen, we can push more customers through the stores.
Understood. Thanks for that and then just.
Switching gears for a second here you mentioned that in 2021 outlook does not include.
Any upside for M&A I'm wondering if.
Given the amount of organic growth initiatives that you outlined an investment from your current portfolio for the year.
Is the company looking at anything perhaps more from a greenfield perspective.
Getting exposure in states that it's currently not in or potentially looking at any.
Right.
Applications for some other states on the horizon, what's the focus look like.
Over the next couple of months here when you look at that portfolio. Okay. Thank you.
You bet.
The focus is relatively narrow I mean, there are states that we have not made it a secret that we would be interested in that fit our criteria for capital allocations and replaces we think that we could make investments and see fast and favorable returns.
We have looked at different opportunities and some of those states, but to date, we haven't seen anything that would afford us.
An opportunity to intelligently enter into a new state, but it is.
Something that we do continue to evaluate but it would have to be a situation where the opportunity looks.
Good is one of our current board.
There are four core market states.
Understood. Thanks for that color that's it from me.
Thank you Sir.
And your next question is from the line of Andrew partner with Stifel with GMP. Please go ahead.
Hi, Thanks for taking my questions and congrats on the great outlook here in Arizona.
You guys covered a lot here and I apologize.
If you guys had mentioned some of these some of these things I had some technical issues and dropped call but.
And Arizona.
Were there any kind of.
Product quantity purchasing restrictions.
And price.
I know you mentioned that you've tested the throughput of your stores and without the safety protocols, you could increase throughput but.
I'm wondering if on top of that.
Traffic throughput is there was there any kind of.
Limit to how much.
Customers could purchase and.
The market continues to.
Rollout here.
If there were restrictions on that when do you think those restrictions would be alleviated.
Or potentially higher basket sizes could result.
Thank you under the the restrictions on purchase sizes or amounts or those that are mandated by the state. So we have harvest haven't hasn't created any additional restrictions on our customers be the recreational.
Or record or medical.
Those restrictions are two and a half ounce limit for medical patients.
And a one ounce limit for recreational patients five grams of which can be concentrated.
So I don't those are not those things are set in.
The initiative and so those things like the licensing regimes are not going to change.
Okay, Thanks for that and.
And.
I don't know if youre, providing this kind of color, but are you able to quantify the production expansions.
That is currently ongoing in your core states.
Yes.
We have said is that we have.
So in Arizona, and I can kind of.
Run through them, we haven't given actual square footage or canopy size increases, but we are expanding our indoor capacity in Arizona, our greenhouse capacity in two locations.
We are currently.
Expanding capacity in two locations in Florida, which includes greenhouse and indoor.
We are.
Currently expanding our indoor capacity in the state of Pennsylvania.
And in Maryland, We've just started the process the permitting process to expand additional indoor capacity there.
Okay great.
And.
Maybe one last thing turning back to Arizona.
Could you give any color in terms of.
Auto purchases.
Do you guys have any kind of statistics on that from.
What you've seen so far and potentially what you guys could see.
Going forward.
So Tim.
Typically speaking when recreational sales start Q&A MST you the bulk of those purchases come from people within that state.
Typically it's difficult to do a good job to educate tourists about the opportunity to purchase candidates, especially if they come from places.
Where they can't do it.
That probably and so the short answer your question is I don't have any specific statistics, but what I can tell you is.
As we are starting to see additional tourist traffic in the state of Arizona is we've started to open up more and more we will continue to see more tourist traffic with.
But as a percentage of the whole early on in the program that is typically very slow.
The outlier that we've seen historically has been Illinois.
Where they saw a much higher percentage of <unk> in those outer state is generally drive across the border to purchase because they can't in their home States. If you look at Arizona and its proximity to other states. So youre not going to have Californians drive in Arizona to purchase cannabis or Nevada.
The only place where you would see that opportunity as people from new Mexico, or folks who come to Arizona every year for spring training or any of the other things that people come forward, but so far we don't we don't have a lot of data about where our customers are coming from so we're working on the assumption that the bulk of them are local.
Thanks for that color.
Thank you for your question and your final question is from the line of Russell Stanley with Beacon Securities. Please go ahead.
Thanks for thanks for taking my question just following up on Arizona just wondering.
Beyond the purchase limits that you that you.
You referred to what are you seeing from the standpoint of the consumer behavior amongst adult use custom.
Customers compared to medical consumers and I am asking more around.
The lessons learned around product preferences and price points.
How might that inform our product selection pricing strategy going forward.
So there is a couple of general observations, we can make keeping in mind that our sample size is really really small at this point.
And so overall, what we're seeing is they spend less than our medical patients.
And Thats the biggest difference that kind of it's not it's not a significant difference, but it is very obvious enough in the data that we're collecting.
As far as product mixes and things of that nature. It really does vary wildly by location and so we're going to do a little work before our next quarterly call to see if we can.
Understand a little bit better what some of those patterns look like but right now the data that we're seeing is there's a little bit all over the place.
Understood and just my second question around Maryland.
What kind of.
Wholesale penetration do you have now the third party dispensaries there.
Might revisit booking for a force retail location there.
So on Maryland, we have historically sold to most dispensaries in the state of Maryland.
And so we are now.
We've shifts.
<unk>.
Cultivated product and manufactured products all over the state of Maryland.
We are looking and we Furthermore, we everything that we produce whether it be cultivated manufactured we saw very quickly which is why we're undertaking the current expansion.
With respect to the opportunity to add an additional retail license.
We didn't mentioned it on today's call because we've mentioned it before and we've been we haven't.
Net of subsequent announcements.
So it is something that we continue to look at it as an opportunity for us.
But it's gone slower than we originally anticipated, but it is ultimately going to it will ultimately be true I think that we will have.
For retail facilities in the state of Maryland, I, just don't have a good idea of when and where that port location will be.
Understood. Thanks for the color.
Thank you Sir.
And we have no further questions at this time I would now like to turn the call back to management for closing remarks.
So there will be no closing remarks, thank you for.
For joining us.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Okay.
Yes.
Thank you.
Okay.
Okay.