Q2 2021 Terrascend Corp Earnings Call
Good morning, My name is Dennis and they'll be conference operator today at this time I would like to welcome everyone to chair since second quarter 2021 Investor call.
Joining us for today's call is Jason while executive Chairman keeps Jafar, Chief Financial Officer, and Ryan Macwilliams, EVP must east region will be available during our Q&A session, let's necessary reminded that certain matters discussed in today's conference call or answers that maybe given to your question says could constitute forward looking statements.
Subject to raise guidance is related to Joe sense future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed Jason MBNA and other periodic filings and registration statements. These documents may be actions have yet to see their database.
Sydney begin reporting results in U S dollars in the first quarter of 2021 and as a result, all figures in the prepared remarks are in U S dollars unless otherwise noted. Please note. This call is being today Thursday August 19.2021.
I would now like to introduce Mr. Jason While please go ahead Mr Weil.
Thank you good morning, everybody. Thank you for joining us today.
First one is established with pellets in a very short period of time as a leading multistate operator within the large and rapidly growing U S cannabis market.
Our strategy business model and focus have positioned us extremely well.
We continue to increase our scale in our existing markets, both organically and through M&A, while also continuing to evaluate entrants into new states.
Before getting into our second quarter financial results. This morning, we announced the signing of a licensing agreement with cookies one of the most recognized and highest questioning cannabis brands in the country to supply cookies branded products across the state of New Jersey and to bring cookies corners, a store within a store concept to each of our dispense.
In New Jersey.
This is exciting news and bolsters for Ross what was already a very attractive path forward for our business in New Jersey.
Our vision for tariffs then is to establish a leading presence in attractive states by going deep through vertical integration, great branding high quality products and leading execution.
Our agreement with cookies allows us to continue down this path, enabling us to further solidify our leading position in the state as it is expected to turn about used by the end of the year.
Now turning to a discussion of our second quarter results.
The second quarter of 'twenty, one revenue increased 72% year over year and 10% sequentially.
Adjusted gross margin and adjusted EBITDA margins were 61% and 41% respectively, maintaining <unk> position among the best in the industry on these important financial indicators Odisha.
Additionally, we continue to have one of the strongest balance sheets in the industry, especially relative to our size with over $150 million in cash.
In Pennsylvania, as we've mentioned on previous calls construction is well underway to further expand our cultivation capacity.
Our latest expansion plans are to add an additional 50% of canopy stays with the potential for a 60 plus percent increase in output at that facility.
The greater increase in output relative to canopy will be the result of COVID-19.
Burden lower yielding hybrid greenhouse rooms to higher yielding and higher quality indoor ballrooms.
The market in Pennsylvania remains very healthy with the recent headset data pointing to.
41% growth year over year for the period and continued sequential growth we are investing into this growth as we see great opportunity over a multiple year horizon.
This additional expansion is expected to be completed by year end and will be a key driver of growth for the company in 2022.
Related to this ongoing construction and expansion work in the middle of the second quarter, we began to see cultivation yields at our Fulton.
Facility impacted by this activity.
We experienced similar challenges in 2019 during one of our last major expansions and we were able to remediate the situation in relatively short order.
The team has been working on getting the yields back up to previous levels. While also working towards completion of the project.
Our recently acquired Casey our stores are performing very well similar to our other three apothecary dispensaries in Pennsylvania.
We have also made operational improvements to the acquired stores as part of our integration efforts, while we do not break out revenue per store Casey argued materially contribute to revenue during the quarter and growth was 10% in those three stores on a pro forma full quarter over quarter comparison.
We have a total of six retail locations now in Pennsylvania, and we fully intend over time to go deeper with the ability to increase our store base up to the state licensed maximum of 18 stores.
Turning to New Jersey, our second store in Maplewood opened in early May.
His story is built for volume with 660.500 square feet of space.
Space 15 point of sale registers and express pickup location.
And it is in a very densely populated region of New Jersey.
We estimate that dislocation can do 40 plus million dollars in revenue annually and an adult use program.
Given the limited number of dispensaries opening in the state, we expect each storm and especially those like ours located in densely populated regions of the state to perform extremely well and the soon to be implemented adult use program.
Also it's important to note that each of the three towns in New Jersey, where tariffs then.
<unk> already has or will have dispensaries.
That they have passed the Oregon list is protecting our continued operation and enabling our dispensaries to participate in the adult use market as well.
These same towns have also banned.
All other candidates are established guidance.
Therefore, it's harrisons dispense stories will be the exclusive cannabis establishment in all three of those towns.
This could change in the future, but this is an extremely attractive situations for us at this time.
Today I'm also excited to unveil the location of our third New Jersey, our dispensary, which will be in Lodi.
It's been one of the best locations if not the best in the state right now and in my opinion directly off of route 17, an I 80 dislocation has approximately 107000 vehicles that pass by per day.
For those who are fans of the Sopranos. Our location is right next to the famous bottom things.
This new location.
It was 5000 square feet with ample parking space.
For for parking as well as a drive through.
We believe that load I had the potential to deliver even higher revenue than our maplewood store.
By the end of this year, we will have to look for maplewood, unload I up and running in New Jersey.
140000 square foot cultivation and processing facility in the state is now fully operational and prepared to supply the market.
While new Jersey is an extremely attractive market for us we are seeing temporary market dynamics that we believe are related to the unique situation that exists in anticipation of the expected upcoming adult use transition in Q4.
For example, patients with a medical cannabis card are tied to a specific medical dispensary.
This uniqueness to new Jersey, specifically can create a longer sales cycle to attract new patient growth to new dispensaries. Additionally, new patient growth.
Has somewhat slowed with consumer anticipation of adult use in the coming months.
We believe that both of these dynamics are temporary and that once the state transitions to adult use which reached out by the end of the year it'll be a whole new ball game.
Furthermore, in anticipation of a dramatic increase in demand once adult use goes into effect.
We have made the decision to increase allocation of our own branded products to our own of Papa Terra and dispensary ahead of the anticipated demand surge to ensure that our own stores are fully stocked.
This decision will have an impact on ourselves in the second half of this year. However, it will result in future more profitable sales and will guard against the out of stock situations in our owned dispensaries.
I'm as excited about Pennsylvania, and New Jersey, but as I've never been in both high growth Limited license States I believe we will continue to grow and scale, our business and continue to own a meaningful market share.
In Maryland, with the closing of the H M. S acquisition earlier in the quarter. We are now focused on expanding our capacity in the state and the state to a scale, which will enable us to be a leading branded manufacturer.
We have taken over the business, we have implemented improved cultivation and processing techniques alone our own high quality strains and introduced our own brands.
Still early days for us in Maryland, we're already very excited about the future in this highly attractive market.
Turning to California, our stores experienced signs of recovery recovery during the quarter as commuters and tourists began to return to San Francisco.
That traffic has started to come back as an indication sales at our five a path to carry them.
Dispensaries in California grew 13% sequentially in Q2.
At our Berkeley location, specifically, we expect increased demand as students return to campus for the first time since that store opens in the middle of 2020.
That store in particular should see a notable pickup in sales we expect this to be a great location for us.
In Canada, the business grew sequentially driven by top selling flower skus that we've recently introduced including retro good grade Indigo days and secret address probes.
For example, retrofit them integrate days, we're number two and number four.
GAAP selling at three and a half Gram skus at the Ontario cannabis store for the quarter.
Our commercial focus and product portfolio are much improved and our cost structure is now aligned with all of the work that we did last year, we have expectations for Canada to continue to progress both on the top line.
And from a profitability perspective.
Subsequent to Q2, we made a decision to undertake a strategic review process to explore review and evaluate potential alternatives for our arise CBD business.
This business has not recently represented a material part of our strategy.
As a result, we will conduct this review with an eye towards focusing our efforts and resources on our core Phd businesses.
I would like to thank you Roz team for all of our efforts as we continue to work through this process.
In closing Harrison has established itself in a very short period of time, there's a leading multistate operator in the large and rapidly growing U S cannabis market.
'twenty 'twenty two is going to be a great breakout year comparison, our licensing agreement with cookies are.
New Jersey going adult use expansion in Maryland, and our luxury footprint in Pennsylvania will solidify parison as one of the leading and most profitable multistate operators in the U S.
I would now like to turn the call over to Keith to discuss the financial results for the quarter. Thank you.
Thanks, Jason Good morning, everyone. As a reminder, the results I'll be going over today can be found in our financial statements and MD&A on SEDAR.
In Q1, we transitioned our reporting currency to U S. Dollars. So all figures discussed this morning are in U S dollars unless otherwise noted.
Net sales for Q2 increased 72% year over year, and 10% sequentially to $58.7 million. This significant year over year growth was driven by 2020 division expansions in Pennsylvania, and California. The initial ramp up of both wholesale and retail sales in New Jersey.
Z their continued growth and ramp up of our three apothecary when dispensaries in Pennsylvania, and two newer locations in California, as well as the acquisitions of HMS in Maryland, and Casey are in Pennsylvania.
The 10% growth sequentially was driven by the continued ramp up of our New Jersey business. The two aforementioned acquisitions.
Some recovery of retail in California that Jason just mentioned and a strong quarter and Canada, all partially offset by the temporary yield declines related to our construction and expansion in Pennsylvania.
Regarding net sales by channel our branded manufacturing business was down 5% sequentially driven by the lower P. A yields while our retail channel grew 50% sequentially largely driven by two months of the KC our acquisition, but also by the 13% growth at our California store.
Ours and continued ramp up of our New Jersey stores.
Branded manufacturing with its healthier EBITDA profile represented 62% of our revenue mix for the quarter. This percentage continues to represent the highest mix in the industry and is a key pillar of our business model and strategy as a branded manufacturer first.
Adjusted gross margin for the for Q2 was 61% compared with 65% in Q1 note that adjusted gross margin is a non-GAAP measure, which excludes fair value of biological assets and other nonrecurring adjustments the 400 basis points of sequential decline in adjusted gross margin.
Was primarily driven by lower yields and P. A resulting in an unfavorable.
Unfavorable mix.
Relative.
Branded manufacturing relative to retail and lower absorption of fixed costs.
We have maintained our strong focus on cost control with SG&A as a percent of revenue at 25% for the quarter of 500 basis point decline sequentially, partly due to some one time costs in Q1, but also due to operating leverage.
Overall, we remain at or near best in class levels of SG&A leverage in the sector and our strategy to go deep build scale and leverage our cost structure teams and capabilities remains a central focus.
Q2, adjusted EBITDA was $24.3 million, representing a 41% adjusted.
Adjusted EBITDA margin and three X the adjusted EBITDA levels of Q2 of last year.
This also represents our third consecutive quarter with EBIT adjusted EBITDA margins above, 40%, which continues to place us among the best in the industry with this important indicator.
Net loss for the quarter was $23 million driven by a noncash loss on fair value of warrant liability of $20 million, a noncash $8.6 million impairment related to arise goodwill and intangibles and a 3 million unrealized loss on foreign exchange, primarily driven by.
Revaluation of U S dollar denominated cash in Canada related to our January equity raise.
Turning to the balance sheet, we ended the quarter with a very strong cash position of $154 million.
This level of cash balances among the highest in the industry, especially relative to our size and positions us well to further invest in the business both organically and through M&A.
In Q2, we generated $3.4 million in cash from operations, while capex spending during the quarter was two and a half million leading to a slightly positive free cash flow for the quarter, our third consecutive quarter with positive free cash flow generation.
Year to date cash from operations, perhaps a better indicator given the timing of tax payments in particular was almost $17 million.
During the quarter. We also made some significant payments related to M&A transactions.
We paid $22 million as part of the closing of HMS, and Maryland 20 million as part of the closing of <unk> in Pennsylvania.
And $30 million as part of the final Alero.
Earn out payment.
For the full year, we expect that our cash flow from operations will partially fund our organic expansion plans, while the cash on our balance sheet will continue to largely be used to execute on our M&A agenda.
Also of note. We recently, we received approximately $3 million of proceeds from warrant exercises in the quarter.
And over the course of the coming months, we expect to receive approximately $40 million of additional proceeds from warrants that will expire in January of 2022, and approximately $50 million of proceeds from warrants that expire in August of 'twenty two.
Lastly, before turning the call over to questions.
Want to take a few minutes to discuss our 2021 outlook.
As a result of what Jason outlined in Pennsylvania, and New Jersey, we are withdrawing 2021 financial guidance. This is primarily due to the temporary reduction in yields of quality flower caused by the ongoing capacity expansion in Pennsylvania.
It also relates to our decision to increase our allocation of branded products to our own apothecary in dispensaries in New Jersey in anticipation of increased demand and an adult use environment.
While more profitable in the long run.
Retail sales take longer to sell through when compared to wholesale sales.
When evaluating the potential of our dispensaries.
In an adult use environment, we think prioritizing our retail channel in a supply constrained market is the best path for building long term shareholder value.
For the second half of 2021, although we have withdrawn our guidance, we do expect to continue to deliver strong year over year growth in both revenue and adjusted EBITDA.
Finally, I am pleased to report that we are at the final stages of our work to convert from <unk> to U S. GAAP and are advancing in our preparations to become a U S. Filer at the end of the year.
This ends our prepared remarks, I'd now like to ask the operator to open the call for questions.
Thank you ladies and gentlemen, let me now begin to question and answer session should you have any questions. Please press star followed by one on you touched on cell.
You'll hear three don't prompt January question your questions be bulb in the order you received should you wish to decline from the polling process. Please press star followed by two if you're using a speaker phone. Please lift your handset before pressing any keys. We also ask that you limit your time to one question plus one follow up one moment for your first question. Your first question comes from Vivien easier.
With Cowen. Please go ahead.
Thank you good morning.
Appreciating that this might be hard to answer specifically, but order of magnitude is there a way for you guys to quantify what the yield disruption impact was Ted to your total company revenue are in U S revenue in the quarter.
Sorry, I was on mute Keith.
I'll take a stab at that.
Yeah, Hi, good morning.
That's one of the reasons quite frankly, why we why we decided to withdraw the guidance is is were assessing that but.
It started to occur in the middle of Q1 or sorry in the middle of it until the quarter in Q2 and.
And the team is already well in terms of getting the situation in hand.
And we expect that by by in the next couple of months next few months that we cycle through it.
And leading into 2022.
We're going to be ready to go with with the full expansion and looking forward to getting that new facility.
The new space in that facility up and running at the higher outputs.
Yes.
I would just add to that that maybe or what I would just add to that.
Actually.
There's always a lag in terms of flower that youre growing and then obviously by the time that it out but it turns into revenue.
How do the stores so there was actually.
There was a.
Decent sized impact in Q2.
And even though in Q3, we've already made substantial.
Progress.
We because of the lag we will actually see more of an impact in <unk> and.
In Q3 than we did in Q2.
Thanks for that call out that's very helpful from a modeling perspective.
Jason not not 92 questions together, but can you update us on where you stand on the CEO search.
Sure. We are still actively searching for a CEO as I've mentioned in the past, we don't feel like we're right.
It's fire drills or anything like that or there is a very urgent need in the in the near term, but we are still conducting that search and <unk> and we look forward to being able to share the results of that.
The coming months.
Understood. Thank you.
Thank you. Your next question comes from Matt Mcginley with Needham. Please go ahead.
Thank you.
In Pennsylvania, the yields declined there related to the construction disruptions in your customers sourced product from other suppliers and didn't seem to skip a beat why would they come back when you were in a better in stock position and a third in the fourth quarter, but like what would change with their needs.
Need to come back to you when you have a better in stock position given the I guess, they've been moved down in this quarter and like I said it didn't didn't skip a beat.
Sure I think just.
We've got a good time to introduce a Ryan macwilliams are our new EVP.
ETP in the northeast I think he could answer that question.
Yeah, Hey, Matt. Thanks, Jay So I think one thing that we can point to is that we've seen an issue very similar to this at the tail end of 2019 as we went through the first phase of expansion in the same facility.
And.
Since we've been such a large contributor to this wholesale market.
A known quantity a known entity with the current patient base in Pennsylvania, I think that.
When we come back online bigger and higher quality than ever that the same trend will continue like we saw it following the end of 2019 and that that construction project.
Yeah, and the thing that I would add also is that it's really only the impact that we felt was that was on the flower side.
It was not on the manufactured product side in terms of capes, and concentrates and and things like that.
No.
Yeah that that's how the business is has continued to be to be strong and we do believe when it when it comes down to what Matt I think yeah. It always comes down to if you can produce a high quality products you know theres no magic, if you produce high quality products.
Dispensaries are gonna or are going to are going to buy those products and <unk>.
The customers are going away.
We're going to buy them as well and pulp pull them through so we are you know in every market where.
Where we are.
We very strongly believe that the better our products are.
R and the higher the quality.
They are that they will likely continue to to gain share or in the case in the case of Pennsylvania due to take back that share.
Okay. Thanks for that Jason and then on the inventory.
To reconcile the comments on not having the inventory to sell in Pennsylvania, and then allocating more to your own dispensaries in New Jersey with the $23 million increase you had in inventory in the quarter and what you haven't topline issues related to supply constraints why would that inventory building at such a high rate I guess, Moreover, like how much of that inventory build that you saw in the quarter was actually.
In New Jersey versus building in other states.
Sure I'll take that Jason Yeah.
Yeah, when you when you Peel the onion on the inventory it's divided across.
Hugh.
The areas, but in Pennsylvania, the dynamic is that.
That's a lot more of the biomass.
As needing to get converted.
Two manufactured product formats, which is then you know a longer process and then a longer lead time to sell.
So that's sort of the dynamic in Pennsylvania.
And then in New Jersey, It's just like we said, we're we've made a choice to build.
Bill the inventory ahead of time in anticipation of adult use later in the year.
To make sure that our own stores are fully stocked.
So those are the two drivers for the two main buildups and I would say roughly.
A third and a third of each of those two and then there's a third.
Third.
Of purchases that we that we've made in Canada.
<unk> product and strains against the high selling skus that we've been taught that we talked about earlier.
Okay. Thank you very much.
Thank you. Your next question comes from Kennan Mackay with H E. B capital markets. Please go ahead.
Thank you and good morning.
Jason I'd like to just better understand the construction in Pennsylvania related delays is it a function of their equipment and supply delays and your action items to complete construction of the expansion as quickly as you could and that contributed to the disruption or is it.
Simply a case of construction is disruptive and these things happen and I'm just trying to unpack the actual construction related angle on this because we have seen a number of other players referencing.
Delays on sourcing and securing of key parts or components are there and our capacity expansion and the like could you sort of speaks to that so we can better understand the construction delay as it been healed in Pennsylvania.
Sure Yeah, I would not I wouldn't describe it as a construction delay we actually.
Have a.
We actually expanded the expansion.
In terms of.
I believe on last on the last call. We said we were going to we were undertaking a 30% plus expansion.
Our canopy and it's actually going to be more like a more like 50%.
That has not been delayed.
The issue that that occurs often when you tried to undertake a large expansion at a facility that is currently producing product is that just the addition of that construction.
The excavation of a of.
Of the dirt outside of the facility would be the.
The extra people that are that might be a in the facility things like that just that you are you end up by introducing.
More issues and more more potential issues.
You know into into the grow and that that's that's exactly our approach.
Exactly what happened to us in Q4 of <unk> of 19, when I believe we expanded our footprint at that time by Forex.
We ended up having the same.
But issues in terms of that current quarter sales thing is nobody was really a you know I don't believe we've recovered by analysts at that point. So nobody was really paying attention and then once we got all that straightened out.
You know it was it was off to the races. We believe that it will it'll be the same case here. It's just you know we think we're going to go through another another couple of months.
Uh huh.
<unk> some of our.
Some of these issues.
And and we've already made substantial progress. It's just that it shows up it's going to show up as a laggard.
In terms of but in terms of revenue.
But that's really the.
You know the sort of the bottom line on it it's not the it's not that the construction was delayed I would say at least relative to what we had disclosed it's actually ahead of plan and R. R.
Production is going to go up our output you go up even more than the 50% increase in canopy. Because we are also converting.
Some of these hybrid greenhouse rooms into indoor rooms, which will substantially increase.
Both the quality and the yield in those rooms.
Thanks, Sanjay and then if I could just switching to sort of a combined one on guidance versus Pennsylvania, and New Jersey stomach. So that's all the guidance essentially predicated on as you've discussed.
The yield challenges and in Pennsylvania.
Following market dynamics in Jersey could you speak to in Jersey.
You commented that you would should expect to see a recreational use sales late in the year can you just help us better understand that in context of the inventory build end market and the fact that those sales con commence until areas will provide.
There is sufficient.
Inventory and my apologies to supply the medical market do you actually still believe we get there in New Jersey. This year and how should we think about your positioning on the assumption that we'd do it sounds like things in New Jersey.
Tracking are tracking well, but I'd like to just better understand the new Jersey in the context of the evolving dynamics in New Jersey in the context of the constraints on adult use sales.
Beginning once a medical use has been covered.
Sure I mean that is a that's actually one of the.
The reason that we've been building inventory in Jersey.
We think that.
Once adult use kicked in that it's going to be a completely new jersey is going to be a completely different market and we think that we are going to have demand for pretty much for everything that we are currently.
Had in inventory.
Thats ready to go.
And whatever we're going to be producing on a run rate basis once once adult use.
Kicks in in the meantime, the dynamics are.
No.
Not a not great from in terms of as a as a medical market.
They are as we are as we mentioned earlier.
New patient.
Growth in the state has the growth has slowed down because because everybody's just waiting for for adult use I mean, you wouldn't you wouldn't believe how many calls are dispensaries got per day.
From people asking if if we already have.
Adult use in place and if they can if they can come to the store. So we think that there there's just sort of been a little bit of a natural lull.
In terms of new patient growth and then New Jersey has its own unique dynamic where when you sign up for a card you choose a specific dispensary to be your you know your main dispensary and that just results in a.
A little bit of a longer sales cycle for our dispensaries under.
Under medical because there were you know there are several other established the dispensaries.
Dispensaries that are that have been around for a while when people were already signed up with them.
All of that being said, we think we think that things are going to be.
Completely and you.
But it's completely different come adult use and that that demand is going to be.
It's going to be more than what we can that that what we can potentially supply and that's the reason that we made this decision to to.
To move towards a.
Having our brands be almost exclusively sold through our own stores, we want to we don't want to have any stock outs in our stores, we want them to be some of the best applied stores in the state and we think that these can be some of the best.
Revenue generating and profit generating stores in the country.
So while that serves to.
Sort of from a timing perspective move sales from the second half of this year into say the first and second quarter of next year, just because you know what.
The book of retail sales.
Patient.
It has to have to buy the product from your store to book a wholesale sell all you have to add there's a dispensary.
<unk> Pfizer products and put it out on the shelf. So it's really for us it's more of a.
Timing issue than anything else, but remember when you sell it as when you sell it through your own retail store youre getting the full retail price.
As opposed to the the wholesale price that you would sell it to another and other dispensary for us. So we just believe that.
Those will be higher quality revenues and we are willing to wait.
To be able to realize the higher quality.
Higher revenues and higher quality higher quality revenue.
Additionally.
Now that we have the cookies are agreement signed.
That that additionally, bolsters our confidence that are that we're going to be able to sell.
Everything and then some.
That we can produce.
We are actually.
Planning on a significant capacity.
Starting work on a significant capacity increase in new Jersey.
In the coming months.
Thanks for calling us asking that's great I'll get back in queue.
Thank you. Your next question comes from Eric <unk> with Craig Hallum. Please go ahead.
Alright, great. Thanks for taking my questions.
So I'm not sure. If this one is best for Jason Orion, but the Alere team was obviously a key area of strength for for tariffs and then with Greg now moving on.
How does that impact the growth teams in the northeast, which is departure of factor in those Pennsylvania yield declines and.
How does that.
Maybe impact your outlook for New Jersey, Maryland.
Sure I think I will let I think I'd like to let Ryan answer that question.
Yeah, Yeah. So to the question about how does it affect the yield declines I think that the.
Remaining team that we have in place specifically, our SVP of operations, Jason Morris, who has already been responsible for the New Jersey location to date and that's been such a successful production facility now his his reaches broadened to cover the entire north east So I only expect upside.
From there having this.
Promotion for Jason and expanded responsibility for the region.
Okay great.
And then just focusing on.
Pennsylvania, specifically, yeah, obviously, a key market for many msos here in.
No I understand that the clients sort of impacted your participation in the wholesale market for this quarter, but just any commentary on the competitive dynamics are unfolding in Pennsylvania, you know whether you're seeing.
A separate competition as it relates to quality or pricing, if you could kind of just.
If you have any comments on what you're seeing I mean competitive dynamics in the wholesale market in Pennsylvania, that'd be great. Thanks.
Yes sure Brian.
Yes, I got it so.
From a wholesale perspective theres really been.
Not too much change at all from a wholesale pricing perspective on the retail side, we've certainly seen as in any maturing retail industry or any.
State that's a little bit further advanced in Pennsylvania, as we've seen some more competition in terms of promotional activity and discounting, but but really.
We not not as much as I would have personally expected to see this far into the program. So we're very pleased with the continued demand that's out there and even as this additional capacity comes on from ourselves and others operating within the state I think theres still plenty of demand to go around.
Okay, great. Thank you.
Thank you.
Your next question comes from Pavel <unk> with Cantor. Please go ahead.
Good morning, Thank you.
Could you just give US a reminder, indicates your Pennsylvania business.
How much say back in the fourth quarter 2000, Twenty's first quarter can be one how much is really coming from greenhouse and how much indoor right. Because what we are hearing you said theres significant pressure on the lower end slot, what other marquee mainstream whats coming from greenhouse.
And of course, he's doing well because screening them just give US a reminder of where you were in it that's what makes I understand you're building capacity indoors, but just a reminder of what you're waiting to see what makes Viking the fourth floor, putting first thank you.
Okay.
Brian.
Yeah, So pablo.
From a from a product perspective, you know the majority of what we're what we have been historically.
Harvesting from the greenhouse has gone towards the extracted products. So.
We've had the the indoor expansion included on there, which has been the primary driver of our higher quality flower sales in flower availabilities since that first phase of the construction project was complete.
No.
In Q1 of 2020.
Yeah.
From a from a square footage perspective, its more in the AR.
And the range of.
Probably you know, 20% greenhouse, 80% indoor or something along those lines give or take.
Yeah.
Okay. Thank you that's helpful. And then just the second question regarding the cookies around Covid.
Talk about I don't know if you can comment on the economics I understand gross margins would be high in New Jersey, but you know if you can attain 20 point difference if you're selling your own branded product about the trade off you might have made between licensing from a kind of V go Tokyo smoke free that either organic brands, where school juice and also related to cookies well. It's a brand that we hear are known about.
It's a very very specific demographic right and I understand where your stores are located but I'm. Just wondering you know how that plays into all of these because one thing is to build traffic.
But I'm just kind of in Stanhope.
The rationale there we'd like specific brands. Thank you.
Sure I'll, let Keith Keith maybe you can talk to the margins and then all I can speak to overall in terms of why are we why we chose the cookies Brandon in its demographics.
Sure I mean, just really really quickly I mean without disclosing we can't disclose the exact economics, but it's a royalty arrangement. That's so there's there's a royalty fee, but but overall we feel like.
The boost that.
This deal is going to give us in terms of attracting.
More sales and more interest in everything through our stores, but then also across new Jersey.
The incremental margin dollars are definitely going to be better.
And of course, there'll be there'll be some percentage at some percentage that will be paid but overall, we expect our margins overall in new jersey to be great and and so this this this steel.
It's definitely going to be an add on positive benefit to us.
Yeah.
I think that yeah, we don't we don't see the cookies product so definitely in practically every market.
Across the U S sold at a premium to other products. So we don't see.
Even after the royalty that we're that we're paying them, we think that it is well worth it because we don't see it impacting.
Impacting our margins to sandy real extent.
In terms of appealing to a specific demographic.
First of all we want all demographics to come in our store. So if there's somebody else to two additional demographics that we wouldn't have done.
That's great.
I do you know I I my personal belief on cookies is that it is a you know.
One of them is the.
The top brand.
Across the whole entire United States I think there can be either the best brand if not sort of a yeah. The only brand.
So the opportunity for us to have cookies in New Jersey.
It is something that we were very excited about we've developed that really.
Our relationship with the team over there with our with burner them with the with Parker and the rest of the team.
And we think that this is going to be.
This is gonna be a brand that not only are we going to be able to sell practically everything that we can make but that's going to pull people into our stores.
We are planning on.
Exclusively selling the cookies products through our own dispensaries.
We think that will help drive more sales and our dispensary dispensaries for for other products and trying to drive more customers to our stores.
Overall.
And by the way and also on top of that yes.
Yeah sure no problem.
I was going to add is that.
On top of that they.
They do have best in class.
Genetics.
So we will be growing we've been working with them we have some.
We have a great team ourselves are in Jersey on the on the genetic side, that's been that's been hunting and popping seeds and and really.
Sort of.
<unk>.
<unk> been able to develop.
Excellent genetics of our own but the combination of the cookies genetics.
With ours, which where we will be launching we'll be launching some new jersey specific genetics that we've developed under the under the cookies brands.
The combination of of our genetics and there is I think we're just gonna be.
You know are really strong.
A strong competitor in New Jersey.
Thank you that's very helpful.
One more.
I think in the press release, you mentioned something about looking at the CBD business and maybe exiting that business could you just provide some context, because obviously, we've seen a number of other companies buying CBD assets and here you are exiting so tell us what you are seeing that maybe others are not seeing things.
Sure I'll answer that.
Oh sure.
So we didn't specifically say we are exiting the business Pablo but we did want to just be clear that we're evaluating our path forward for that business and so.
All options are on the table and we're going to assess that and there'll be there'll be new more further news in due course once we make any kind of a final decision.
Alright, thank you.
Thank you. Your next question comes from planned Mattson with Ladenburg. Please go ahead.
Yeah, Hi, Thanks for taking the question. So just looking past the short term issues, but Oh and you may have commented. This I missed the first few minutes of the call, but the adjacent curious about your.
Thought process on M&A, you have a healthy balance sheet still yet positive free cash flow in the first six months so.
Thoughts about like how pricing looks to you as the asset prices have come down a little bit.
And.
Just your thoughts on how aggressive you tend to be.
In the back half or beyond thanks.
Sure. Thanks Glenn.
So we are definitely we have definitely been very active on the on.
On the BD and M&A side.
We're working on.
Multiple deals on that front.
Valuations as you mentioned have definitely come down I believe that they've come down more than the than the public stock prices have come down.
The other public operators.
You know, even though our even though our stock is down substantially.
Substantially over the over the last several months and as you know in addition that pretty much the whole sector.
Its not like Theres, not very accretive deals out there to be had.
I've used in the past examples of Massachusetts, where.
Where multiples continue to go down because the dynamic you have in these limited license states.
In the east or the northeast is that there are relatively low caps.
License caps in terms of the number of dispensaries or the square footage of canopy. That's allowed by any by any one player. So if you looked at some place like Massachusetts, I believe all of the top 10 Msos.
Msos other than terrorists and are in Massachusetts, and most of them are already capped.
In terms of.
They can't go out and acquire anything else unless they're willing to divest something that they have and.
And that has just created a dynamic in states like Massachusetts and in other places where there are just there's there were no buyers left or there are you know, there's just less competitive tension competing.
Competing for for specific deals because.
As you know there are there are you just.
Lesser lesser less people and pay for them.
Like not.
Not to continue to mentioned, Massachusetts.
As an example.
We probably see at least two deals a week.
From operators in Massachusetts that or say, what we would call mom and pop, which just means not a public company.
Better Joanne you know typically that they're.
They're doing twentyish million dollars in EBITDA.
This year they.
Combing through some expansion and I think they'll do get a 40 or $50 million in EBITDA next year.
And those assets based upon.
Sort of the the most recent deals that we've seen out there those assets can be bought for you now for five or six ish times times EBITDA.
Cause of the simple fact that there are very few companies out there that can pull off 100 million dollar.
Dr.
So you know that's the dynamic that we're seeing in Massachusetts.
And and seeing in other states as well and if we wanted to you know if.
If it was just a matter of doing accretive deals.
We should have a whole lot of those deals done and in multiple states.
We have you know.
Pretty much for the for the last several years ever since we entered the U S. We've chosen to only.
Interstate if we think that we can be a dominant player in that state over the next 12 months to 24 months or so so we're sort of we're waiting it served us well up until this point to sort of wait and pick our spots and be picky because in the meantime.
Prices have gone down so we don't have any we don't have any formal we don't you know this is not a ego driven.
Driven.
Strategy or I guess, it's almost the opposite of an ego driven strategy for us.
We are you know.
We don't you know.
We don't measure ourselves by how many states, where and we measure ourselves by.
By our profitability and our ability to to win in.
In any given market and we just feel that if we stay more focused.
And we really set the bar very high other than just finding deals that are that are accretive if we set the bar really high and it's going to give us the best chance to win in the markets, where we are because we're not going to be a.
We're not gonna be too scattered.
Oh, great, that's our extensive answer and and and and you covered my potential follow up so thanks for the color just awesome.
Thank you. Your next question comes from Andrew <unk> with Stifel. Please go ahead.
Okay.
Hi, Andrew.
Hi, Good morning, Thank you for taking my questions.
Good morning.
Maybe expanding on on your on your cookies deal you know.
I was curious if you could give a little bit more color on.
You know.
Why did why did cookies decided to partner with you I mean.
And you know not necessarily the same that we've heard from other operators.
You know you guys are going to be the exclusive manufacturer and producer of cookies.
Mentioned today that cookies will only be sold in your stores you don't expect a wholesale it out so you get that full vertical integration margin there.
And on top of that.
Top of the store and the store as well on top of that you're you might even get some unique genetics.
Only sold in New Jersey, So to me.
This looks like an outstanding.
An outstanding deal for you and I'm, just wondering you know what.
Yeah.
You know from the part of tariffs and that burner and the team decided to partner with you in search of an exclusive fashion.
Yeah, well, thank you for that.
I appreciate that but you will see them see the merit in the deal and see that it's good that it's a good deal for for towers. Then I think it's also you know the fact is it's.
The best deals are the ones that are win wins I think it's a I think it's an excellent deal for cookies as well I think.
Attracted a partner in Parker.
From cookies to tariffs and.
And it's just the.
The fact that they.
They were out of our facility and saw it in New Jersey.
Brian mentioned earlier.
Jason.
Morris, who are who runs that facility has just built.
An amazing amazing.
An amazing facility on amazing workplace that place is spotless, you walk down the halls and you are.
At least you know we get we get comments every.
Every week from people, who took tourist that says, let's say that that is the key.
Cleanest.
And one of the best one facilities that they've ever seen.
The fact that and what I alluded to earlier about cookies is.
I believe that cookies is the strongest brand in the U S largely because their branding and marketing as you know I don't know if it my view.
Head and shoulders above up almost everybody else, but not only that it's because because their products and their genetics are the best in.
In the market.
And they really do value quality.
And they've had they've made multiple visits to our facility.
And just really.
I believe a root of trust that we were going to take the same care.
With their product that they would if they were if they were growing it themselves.
So you know not to.
Not to try to pump ourselves up too much but I really believe that that is the reason.
They are signed such an extensive deal with us because they know that theyre not going to need to worry about the quality of the product that goes out in the in the in these cookies bags.
At retail, it's going to it's going to reflect well on their brand and to help her and help further there their brand.
And sort of a recognition out there on the market that that are that their products and their genetics are our best in class.
Hey, Jason if I could just add one point on top of that which is also just the scale and the capability that we have.
In New Jersey, and also our plans to increase that scale. So that you know.
That's another major factor.
Absolutely you're right. Thank you for pointing that out and they are I will tell you that that partner.
Pacifically is off the charts excited about our Lodi location.
You know as we mentioned I believe earlier it is a pretty much a shares the parking lot with the with the bottoming of which.
Practically everybody knows from the AR from the Sopranos. It is a one of the highest I believe one of the highest traffic areas in the country with 107000 vehicles per day.
Driving right by our front door, you don't even know if you're driving a route 17, you'd already been need to pull that off on an exit and make any turns you pulled directly off of route 17 into our parking lot.
And burner.
Was was so excited.
That she started the textbook.
In the middle of that either a few weeks ago talking about.
All of the amazing things that we can do there and soprano.
Whether it's a surprise to us.
Pacific strains and and different you know the other thing that's great about cookies is it's not just about the not just about the flower and the other brands.
Cannabis products.
They have a full line of merchandise and clothing that does extremely well.
And we've even talked about sort of some soprano specific clothing lines and things like that I believe that.
That store is going to be.
One of the best one of the best Dispensaries in terms of sales and the whole entire country and that's.
That's something that the that the cookies folks are really really excited about as well.
Really appreciate that color and thanks for taking my questions I'll get back in the queue.
Thank you. Your next question comes from Andrew Semple with Echelon capital markets. Please go ahead.
Yeah.
Hi, there.
Hi, sorry, I got a fire alarm going off in the background. So.
There you go.
Could you, perhaps speak to the inter quarter dynamics at play in Q2 'twenty one.
When we last had the Q1 update in mid May the <unk>.
This was on a stronger growth trajectory than what was achieved are there any changes in the back half of the quarter.
Sure Keith you want to.
Yes sure.
Yeah sure Hi, Andrew.
Squarely the issue that we that we were referring to here where.
That's where the yield.
Impacts in Pennsylvania has started to impact us in the back half of Q2, so it's sort of lined up almost in parallel with.
The update that we were giving in in.
In mid May.
And then again also we started to see the dynamics in New Jersey, and sense kind of where the market is headed and adult use timing and all those things and also started to shift our approach there like like we talked about so those are the two key.
The dynamics in the back half of Q2.
Got you and just switching gears to New Jersey.
Just trying to still understand the narrative here.
Youre signaling that medical patient growth on the retail side was a bit slower than expected.
What it should have naturally, giving you some some incremental capacity for the wholesale markets.
But you're also signaling that you kind of had to dial back on the wholesale side to make sure the stores are adequately supplied.
So it sounds like you're moderating both the retail and the wholesale side for 2021.
Is the underlying strategy behind that to put it simply is that you want to build inventory for the adult use market. So so you're ready for day one of that program.
Yes, I would say that that's the strategy, we believe that once our based upon the location of our of our stores and the size of them and the throughput ability because two out of three of them are large stores with.
Hi, a number of point of sale systems, and we really think that we can.
We think that the we'd like for the only thing to limit the sales at those stores.
To be the how much throughput.
We can get there how many people we can get through the doors.
We'd much prefer that than than having our sales there'll be limited by the fact that we don't have enough product, especially now that we have now that we have the exclusive.
Yeah on the cookies on the cookies brand. So so that's really that's really the reason and the decision that we've made.
If we wanted to drive a whole lot of wholesale revenue in the in the second half.
This year in New Jersey.
We you know we think that that would be there that would be there for the taking especially as we get closer to adult to adult use implementation and.
Centuries dispensaries out in the state.
You know starting to stockpile product.
In anticipation of that but we have a we've made a conscious decision to forego that because we would you know I would much rather have.
$2 worth of sales are in January or February at retail than a dollar's worth of sales in November or December because I guess, we sold at wholesale.
And that's really going up part of the reason that we are that.
That we decided to withdraw the guidance is I don't even want anybody internally to be focused on trying to grab a dollar of sales.
You know in November or December.
When it goes.
Those dollars will be higher and of higher quality because they came through our dispensaries. If we if we wait for those sales to two.
To be pulled through by the customers.
Early next year.
Alright, and we think.
And just the only other thing to add to that is we.
We do believe that the market will be a it will.
It will be severely under supplied once.
Once adult use once adult use kicks in we are we're not sure that the Oh in terms of the way that the state is going to is going to implement.
The adult use program.
Not sure that it's just going to be applying to our approvals.
For everybody to just turnover from from <unk>.
Medical to adult use we think there's a chance that.
That the state will choose.
Which.
Companies have enough supply.
To meet their own medical patients demands.
And.
The ones that too they will essentially upgrade them to do adult use.
Licenses and.
Yeah. We are we think that since we are since.
Since we have some of the largest capacity in the state.
And we have high quality inventory of product.
You know waiting and ready to go we think that that's going to position us.
Really well in an environment where.
You know not all of the 10 cultivators and the state are necessarily going to be allowed to sell into the adult use market for the first several months.
Thank you.
Your next question comes from Noel Atkinson with Clarus Securities. Please go ahead.
Hi, good morning, Thanks for taking our questions.
First off just in New Jersey on your production expansion here can you give us a sense of the scale of how much you're expanding the canopy.
And the timeline to completion.
In New Jersey.
We are you know it's still a.
The earlier stages, we have not yet started started the expansion, but figure New Jersey allows a hunter or 50000 square foot.
Up to 150000 square feet of canopy that has a whole lot of canopy theres not theirs.
There's very few growers cultivators that I know anywhere that that are at that size and any you know in any one state.
But we plan on that.
We plan on getting there over time.
I would say that the expansion.
That we are currently contemplating I could start work on in the next several months would be.
The somewhere around a doubling of our current capacity <unk>.
Right now in the state.
So that's substantially yeah, we have a we have I believe the largest capacity if not right near the largest capacity in new Jersey right now.
And obviously, if we double it.
We will.
We should be an.
And even stronger entity in a stronger position, we're going to do it.
We're going to do it over time.
In terms of getting to the Fone hundred 50, we're going to do that over time, because as you all can see that there there are.
Complications that that sometimes arise when you tried to.
Hey, Todd.
Very large capacity increases at your facilities.
In a short period of time.
Yeah, that's what I'm alluding to obviously, the Pennsylvania, even there I think that this short term pain that we're going through.
Is going to really.
Really reward us well come next year, but in the meantime.
We're dealing with like we did in Q4 of 19, we're dealing with a sort of some of the headaches that come along with that with taking your capacity up by 50 plus percent.
Okay and then thanks.
My follow up just.
Following up on the prepared remarks that you guys provided are you expecting to achieve quarter over quarter growth.
Total revenue and adjusted EBITDA in Q3 from Q2.
Okay.
Yeah.
Sure.
Yes.
I can take that and again, we we withdrew our guidance no I know.
But but just directionally.
What we see is that is that Q2 revenue sorry, Q3 revenue will be similar levels to Q2.
There are some headwinds and some tailwind that we've kind of talked through.
Before picking back up.
Into Q4, as we cycle through the the yield situation in Pennsylvania.
And then on the on the margin side, we do too so those factors, we expect margins to.
Compress.
Q3.
Because again, we're going to continue.
Continue to were continuing to deal with this.
This quarter.
Then they'll begin to recover.
Back to near recent quarter levels.
Towards towards the end of the year, So that's kind of.
Broadbrush maybe to help.
You.
Kind of through what to expect for the rest of this year.
And again, we just want to we just want to reemphasize like we said that.
That overall.
This year as it is still a great year and the back half of the year, we will continue to grow revenue and EBITDA.
On a year over year basis, and we're really focused on getting ourselves set up well as we've talked here for this whole call and positioning us really well and in a strong way for 2022.
Okay, great and just for those of US that have covered you guys for quite a while it's nice to see California, and Canada coming back strong.
All done there.
Thank you. Thank you the only thing I would add to keith's comments on.
On Q3 in terms of.
But we're going to see.
Some margin compression there.
That's really how it mainly has to do with mix shift because you know the fact is that Pennsylvania wholesale.
As you know some of the highest margin or is the highest margin part of our business.
So.
With that big.
With the yield.
Issues that we've had and that's certainly going to show.
Show up in Q3 because of the ease.
Even though we've had improvements the revenue shows up on shows up on a lag.
The percentage of revenue made up by Pennsylvania wholesale will be smaller in Q3, and therefore, that's why that's why the margins will be will be lower.
Yes, thanks, Jason.
Thank you there are no further questions at this time Mr. Weil you May proceed.
Alright, well. Thank you everybody for for attending our call and we look forward to to speaking to you all next quarter.
Yeah.
Ladies and gentlemen. This concludes your conference call for day, we thank you for participating and ask could you. Please disconnect your lines.