Q4 2021 Terrascend Corp Earnings Call
Ladies and gentlemen, thank you for your patience. Please do not disconnect. Your conference call will begin momentarily. Once again. Please could you just standby do not disconnect. Your conference call will begin momentarily. Thank you for your patience.
[music].
Good afternoon, everyone and welcome to <unk> fourth quarter 2021 conference call for the three months period, ending December 31st 2021 listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward looking statements.
That are subject to the risks and uncertainties relating to <unk> 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 in person annual information form and other periodic filings and.
Registration statements.
These documents may be accessed via SEDAR database I'd like to remind everyone that this call is being recorded today Wednesday March 16, 2022, and I would like to turn the conference over to Jason Wild Executive Chairman. Please go ahead Sir.
Thank you.
Afternoon, everybody. Thank you for joining us today.
I'm so proud of the hard work by the entire terrorists and team in 2021, which has us well positioned for the explosive growth, we expect in 2022 and beyond.
The huge strides we made at our Pennsylvania cultivation facility have resulted in the highest quality flower we have ever sold in this market, allowing us once again to recapture a top three market share in the state.
In December 2021.
We are eagerly awaiting adult use in new Jersey at our wholly sorry and are fully prepared to meet the tsunami of demand that we expect.
Additionally, we completed our acquisition of gauge last week, which gives us a leadership position in yet another multibillion dollar market with the ability to extend their brands beyond Michigan.
Before I provide an update on each of the states in which we operate I would like to welcome Ziad got them, our newly appointed President and Chief operating Officer.
<unk> joins our team along with several other recent additions, including curricular Qatari SVP of marketing.
Charles No Sir SVG, a sale at Jared Anderson SVP of finance and strategy.
I would also like to welcome. Our newest addition to the board of directors Cataract Jaguar.
He is a priority for tariffs and to attract diverse talent necessary to build this company for the future and I think that all of these new team members exemplify our efforts on that front.
At this time I would like to turn the call over to <unk>, who brings nearly two decades of experience in large scale scale health care services cannabis pharmacy and retail operations to power said, well he will manage and oversee all operations.
Ed.
Thank you, Jason and good afternoon, everyone.
A pleasure to be here today participating in my first garrison earnings call.
I'd like to briefly take few minutes to introduce myself to everyone on the call and share what attracted me to the cannabis industry and to Tencent.
As Jason mentioned I am a pharmacist by training and my career has been centered on health and wellness.
Having spent nearly two decades at health care services companies, including global Drugstore chain Walgreen.
Walgreens Boots Alliance, where I spent 17 years and built expertise in operation.
D G and innovation most.
Most recently I served as president all markets parallel multistate cannabis operator in the U S.
My progression from pharmacy to the cannabis industry was natural.
Throughout my career I have witnessed firsthand.
Patient.
Friends and relatives struggle with the opioid epidemic destination chased.
I have interviewed talked with.
Just as individuals from all walks of life.
We have struggled with depression.
PTSD insomnia, and so many other diseases and I have seen lawmakers.
Except for our community and business leaders win.
When their lives back by replacing up to five net product sales with chase candidates product alternatives.
When I looked at the cannabis industry.
Also saw your industry that is growing fast.
It's highly regulated and complex and became convinced that my experience in the first 20 years.
My career will allow me to bring meaningful contribution to the industry throughout the entire value chain.
I was drawn to the opportunity of dose and for multiple reasons.
Allow me to share the top III.
First the portfolio stage, whereas terrace, James already has a presence.
All have attractive growth opportunities, which includes the impending adult use in new Jersey, and down the road, Pennsylvania and Maryland.
This growth in the northeast.
Coupled with the acquisition of gauge.
The leader in Michigan.
Has the company well positioned for growth.
And our leadership position in the cannabis industry for many years to come.
Second the strong balance sheet, coupled with the opening of snap for us to be selective and continue targeted and calculated and then a opportunities.
Finally, and as importantly.
The backing of the GW fund and the benefits that this will continue to bring to us and both in the short and long term as we continue to grow.
I spent time with adjacent daily.
And I witness the benefits that she brings us with his team regularly as we constantly come across different opportunities.
I hope I have very specific goals for the company that I divide in four main buckets those are team members.
Customers.
Financial performance.
Growth.
From a team member perspective, we will build a diverse and engaged workforce.
With patients and customers, we will focus on how to serve them with best in class quality.
Customer service and.
It competitive and diverse product portfolio.
From a financial perspective.
We'll execute on a clear strategy with specific success metrics that will allow us to deliver strong financial performance for our shareholders.
Lastly, with growth, we will continue to stay disciplined on our strategy and capital allocation.
We will continue to grow organically into attractive states in which we currently operate and enter a new stage.
Tractive M&A opportunities.
I really look forward to meeting with everyone in the future.
I will now turn the call back to Jason Jason.
Thanks, <unk> and welcome again to <unk>.
Before getting into our operational and financial results for the fourth quarter and full year 'twenty. One we are pleased to have just completed the acquisition of gauge I believe they are bumps the best operators in the country with one of the best brands and I am more excited than ever about this combination.
Gauge provides us entrance into Michigan, the third largest U S market estimated at over 2 billion in sales annually.
Really important is the unlimited license structure with no caps and Michigan.
Which is a very.
Very beneficial to the larger operators in the state and gives us the opportunity to expand our footprint quickly given our scale and resources versus our competitors.
<unk> facilities are amongst the best IFC.
Not only in Michigan, but anyways.
Tension to detail and pristine operations falls very much in line with our culture.
Culturally.
This acquisition will provide <unk> with access to gauge it sought after brand.
<unk> proprietary library of genetics as well as gauges exclusive licensing partnerships in Michigan with cookies slang worldwide Blue River pure beauty and Khalifa crush.
Our combined company now operates seven cultivation facilities, including three in Michigan. In addition to gauge is nine contract reps.
Additionally, we now operate a retail networks expected to reach over 40 stores by the end of this year.
This includes 25 currently open dispensaries across five states and Canada with gauge operating 11 dispensaries in Michigan and one cookies branded Dispensary recently opened in Toronto. In addition to tower sense 13 store footprint in key markets, including California, New Jersey and Pennsylvania.
Yes.
For the year ended 2021 gauge delivered unaudited record revenue of nearly $100 million with gross margins continuing to improve sequentially from 26% in Q1 to 34% in Q2.
37% in Q3 and 46% in Q4.
This significant expansion into Q4 was primarily driven by the introduction of gauge branded dates as well as a higher mix of gauge grown flower relative to contract around and third party flawless.
This impressive sequential gross margin expansion led to an inflection in adjusted EBITDA from negative in Q3, so slightly positive in Q4, which is expected to continue to expand in the coming year driven by the continued gross margin improvements that I mentioned, along with operating expense leverage and other.
Central synergies as part of the combination.
<unk> financial position is healthy with $45 million in cash and equivalents at year end 2021.
This strong balance sheet combined with ours physicians, Paris, and with the financial flexibility to execute on our growth plans.
Integration is well underway and we look forward to updating everyone. As we continue to make progress in Michigan.
I would like to now discuss the substantial progress we made across each of our states over the course of the year.
Starting with <unk> I.
I am pleased with the significant improvements we made at our cultivation facility and our recovery in market share.
The upgrade to our facility is complete and we are seeing significantly improved quality.
I know that we disclosed at our Q3 call that we were already producing the highest quality flower. We have never produced at that facility and I am proud to say that this improvement has continued throughout Q4 and all through Q1.
This higher quality product is resonating with patients as well both within our six operating dispensaries across the state footprint at wholesale.
As a result, we have captured top three market share in the state for the month of December 2021, increasing over 400 basis points from November .
Not only have we successfully reactivated more than 50 dormie doors during the fourth quarter, but auto replenishment from those doors has also been strong indicating robust sell through.
The quality and potency of our product is what is driving this momentum.
Top flower Skus had been recently ranked among the top three highest potency flower skus.
Any dispensary on any dispensary.
Yes.
While we maintain.
Our.
While we maintain the high quality of our current strengths and genetics portfolio. We are also very excited to be on the verge of introducing new genetics for the market. Following the open genetics window in December of 2021.
We will go from having some of the oldest genetics in the state so having the newest and in our view the most desirable diverse and proprietary genetics independent Sylvania program.
The first of these new high quality strength is being harvested as we speak and is expected to be available for sale in early Q2 with more strength to come soon.
The fact that we have regained the significant level of market share prior to the launch of these new strength as our Pennsylvania team very excited about the potential for further market share gains in the coming months.
Overall, the market in Pennsylvania remains competitive with patient <unk> flattish at the number of dispensaries nearing to stay a little bit.
Patients are getting more sophisticated in this market and in every market across the country and they are demanding increasingly higher quality products.
We think that our focus on quality.
Key driver of our increased market share going forward.
We believe that this is a marathon not a sprint.
We are heartened at the best products win.
I am thrilled with the decision we made last July to reset our cultivation facility.
While it was that easy to sacrifice significant short term revenue.
So our long term quality and in retrospect. This decision was a no brainer.
We believe it has given us a leg up versus the competition in this increasingly sophisticated market and wait until ph patients the new genetics, we're launching over the next few months.
We will first be launching we'll reconsider our best in class genetics from our New Jersey facility, followed by gauge and other exclusive genetics.
In the coming months.
Winning formula is now in place.
Well very hybrid market with adult use on the horizon.
Turning next to New Jersey as everyone knows this is an important market for us with transformative growth potential as we eagerly await adult use and I want to emphasize that we are in a very strong position for when that day arrives.
Today's Harrison has one of the largest approved cultivation capacity in the state, which gives us a significant advantage over all new competition.
For new market entrants the count if you limit our 30000 square feet.
Our license has 150000 square foot limit.
Also worth noting is that all of the new licensees cannot sell into the adult use market until after they have sold into the medical market.
Full year.
That applies to both cultivators and dispensaries.
Given our optimism for this market we are on the verge of signing a lease at a new location for a planned expansion of our cultivation capacity beyond our current category size, which will enable us to expand to 150000 square foot limit overtime.
The Buildout will commence immediately and we will bring on additional industrial capacity in a measured way to ensure that we maintain the high quality that our products have become known for in New Jersey.
A greater capacity will enable us to meet the expected demand from what is estimated to be at $2 5 billion dollar adult use market.
We expect to share more details once we finalize the finding of beliefs in the coming months in the coming days actually.
Looking at the retail landscape in New Jersey, where our 36 total issued and approved the retail licenses that qualify.
The first round of near term adult use sales.
All three dispensaries are strategically located in attractive northern New Jersey locations in Maplewood, Phillipsburg and load out.
As we have previously discussed we anticipate reaching generate in excess of $40 million in revenue annually from each of these locations and a post adult use market.
As you can see the opportunity isn't bad.
We will continue to bring innovation to the new Jersey market and broaden our product portfolio for patients and consumers.
One example is the progress we have made towards the launch of concentrates manufactured through the process of hydrocarbon extraction.
This anticipated launch will be significant and will expand our product offering in the state.
Concentrates typically represents 10% to 20% of sales in other markets and are not currently available in New Jersey.
We look forward to getting approval to introduce this new product category in the coming weeks and intend on being first to market.
Another example is our exclusive agreement with cookies one of the most recognized cannabis brands in the world.
While the regulatory process is still underway, we are making progress every day in preparation for an expected spring launch.
We are planning our first harvest in early April and cannot wait for New Jersey residents to set eyes on this amazing flower.
Additionally, we will introduce cookies corners, a star within a store concept exclusively in each of our three retail dispensaries in the state subject to regulatory approval.
Asia has experience in Michigan demonstrates that consumers are willing to drive several hours in order to access cookies branded products.
Consistent with Michigan. We believe this will result in the highest average basket sizes in the states.
Its foundation, we anticipate a dramatic increase in demand once adult use goes into effect and we are ready for it with the necessary applications approvals inventory staffing adult use packaging.
Our large scale cultivation footprint and exclusive dispensaries in three G locations position us well to deliver massive growth.
The Maryland market is our next significant growth lever.
And as a $600 million market currently with a population of roughly 6 million people.
With the potential for adult use.
To be on the ballot and the November Midterms, we believe that Merrill Lynch should turn to adult use in the second half of next year.
Maryland is a perfect example of a.
While your Dream state.
Where we are profitable on the medical program and once adult use kicked in.
We will experience significant growth beyond the current beyond aircraft sales yet.
Since the closing of our HMS acquisition in 2021, we have made significant progress in expanding our wholesale distribution points in Maryland, which now total 60% of the market up from 25% at the time of the acquisition.
We are pleased to have been awarded Merrill Lynch best grower by MJ Kinect and <unk>.
I am proud of how quickly we have been able to turn this facility into an award winning operation.
It is a testament to our passionate team our operational expertise and deep understanding of what is required to produce high quality product.
While we are currently selling everything we produce at our facility in Maryland, the build out of our recently purchased warehouse in Hagerstown is well underway.
This will expand our cultivation footprint as well as broaden our portfolio of form factors and increase our capacity to make manufactured products.
We expect to complete and operationalize the extraction lab in the second quarter of this year and cultivation in the third quarter.
This significant expansion will be operational and dialed in in time to fully capitalize on the expected adult use implementation.
Vertical integration is also a key part of our growth strategy for this market.
We have been actively focused on the potential acquisition of dispensaries in Maryland, and look forward to reporting progress on that front in the coming months.
Turning to California, our Super premium stayed flower brand has continued to perform performed well in the face of an oversupplied flower market, which has enabled us to continue to sell out our total capacity a consistent pricing levels.
On the retail side, our fiber Papa Terra in dispensaries have remained stable theyre uncovered while we look forward to a pickup in foot traffic and San Francisco as we move into the spring and summer months with tourism and work commuting hopefully normalizing.
As I mentioned last quarter.
Being a multichannel retailer is the next step in the evolution of serving our customers' needs wherever and however, they want to shop.
And you saw we are pioneering the leveraging of technology to meet the needs of our customers. Just this week, we launched the Papa Terra mobile retail app for Apple iOS devices available for download in New Jersey and California.
Our proprietary app allows customers to instantly connect with her pothecary in dispensaries, while providing more choice and convenience and a personalized digital environment.
This launch rounds out our multichannel offering with the app seamlessly integrating into our existing retail and web based e-commerce experiences.
In Canada, we continue to navigate challenging market dynamics, while managing to modestly grow full year sales and adjusted EBITDA with plans to continue to do so in 2022.
We are also now the exclusive cookies retail partner in Canada through our acquisition of gauge and are excited to see the recently opened Toronto store continue to ramp.
In closing <unk>.
'twenty two is expected to be a breakout year for tariffs that.
We have added one of the best operators and brands and the third largest market in the U S with the closing of our gauge acquisition.
The state of New Jersey will turn adult use in the coming weeks.
We will exclusively introduce cookies into that market and we will see further benefits from our vastly improved quality in Pennsylvania, and our expansion and Merrill Lynch.
Importantly, we have a solid financial position that will enable us to continue to support our growth initiatives, both organic and inorganic.
We are building this business for success over the long term and we will continue to make decisions with that mindset.
I would now like to turn the call over to Keith to provide a financial update.
Thanks, Jason and good afternoon, everyone.
As a reminder, the results I'll be going over today can be found on Edgar and SEDAR.
All figures discussed in reported are in U S. Dollars. Additionally, this is the first quarter that we are reporting under U S. GAAP, our year end 2021 filing as a form 10 with the 10-K with the SEC.
The company is now prepared to list on the U S stock exchange once permissible.
Net sales for the full year 2021 totaled $210 4 million as compared to $147 8 million in 2020, an increase of 42%.
A little less than half of this growth was driven by our initial year in the New Jersey medical market.
Also about 40% of the overall growth was driven by retail in Pennsylvania, partially driven by our acquisition of KC are in May of 2021, and partially driven by organic growth from a full year of operations at our three existing apothecary them dispensaries.
The remainder of the growth was driven by a combination of our late 2020 expansion of state flower cultivation in California, and our entry into Maryland through the acquisition of HMS health in May of 2021.
Net sales for the fourth quarter of 2021 totaled $49 2 million as compared to $49 6 million for the fourth quarter of 2020, and $49 1 million for the third quarter of 2021.
Regarding sales by channel wholesale revenue for the year was $123 million versus $103 million in 2020, an increase of 20% driven mainly by the initial ramp ramp up of our New Jersey medical business and by the acquisition of H M. S.
Health in Maryland.
Retail revenue for the year was $87 million compared to $45 million in 2020, an increase of 95% driven.
Driven by a combination of a full year of business at our three apothecary them dispensaries in P E. The acquisition of Casey our NPA.
And the opening of our first two new Jersey dispensaries in Phillipsburg in late 2020, and Maplewood in May of 2021.
Wholesale for the fourth quarter of 2021 totaled $24 4 million, representing flat sequential sales and a 28% decline year over year, driven by a decline in Pennsylvania offset by growth in New Jersey, Maryland, and California.
Retail sales for the fourth quarter of 2021 totaled $24 8 million.
Not sequentially and up 55% year over year.
The year over year growth in Q4 was driven by the acquisition of ACR and growth at our two New Jersey dispensaries.
Gross margin for the full year 2021 was 53, 3% as compared to 54, 8% in 2020.
Adjusted gross margin for the full year 2021 was 56, 1% compared to 57, 2% in 2020.
A contraction of 110 basis points year over year.
Driven by second half under absorption NPA related to a reset activities at that facility.
Note that adjusted gross margin is a non-GAAP measure please refer to our filing for the definition of non-GAAP measures.
Gross margin for the fourth quarter of 2021 was 42, 3% as compared to 43, 8% in Q3 of 2021.
This sequential contraction is related to one time noncash write downs of inventory in Canada, and a step up in fair value of inventory related to our acquisition of HMS health to Maryland.
Adjusted gross margin for the fourth quarter of 2021, excluding these one time items.
Was 49, 8% as compared to 46, 2% for the third quarter.
This 360 basis point improvement sequentially was mainly driven by improvements in P. A.
For full year 2021, G&A expenses, excluding stock based compensation.
Improved to 31, 4% of revenue versus 37, 6% of revenue in 2020.
G&A, excluding stock based compensation was $66 million in 'twenty, one compared to $55 5 million in 2020, driven by increased personnel expenses to support the growth of the business and legal expenses, primarily related to acquisitions and settlements.
Note that lease expense is now part of SG&A under U S. GAAP across all periods, rather than previously being reported as finance expense under Ifr S.
Lease expense for 2021 was $4 5 million and for 2020 was $3 8 million representing around 2% of revenue and among the lowest of the peer group as we have not utilized sale leasebacks as a source of capital.
G&A, excluding stock based compensation for the fourth quarter of 2021 was 17.0 million.
As compared to $16 1 million for the third quarter of 2021.
With the increase primarily related to an increase in professional fees for the U S Filer and GAAP conversion work that was completed.
Full year 2021 adjusted EBITDA.
It was $65 6 million.
Or $70 1 million excluding lease expense.
Versus $41 7 million.
Or 45 $5 million, excluding lease expense in 2020.
Representing a 57% growth year over year.
Including lease expense.
2021, adjusted EBITDA margin was 31, 2% versus 28, 2% in 2020, representing a 300 basis point margin expansion year over year.
About three quarters of the adjusted EBITDA growth was driven by the ramp up of our New Jersey business and the existing medical market. While the remainder was driven by a combination of the acquisition of H M. S in Maryland.
And profitability improvements year over year in both California and Canada.
Q4, adjusted EBITDA was $11 9 million, representing a 24, 2% adjusted EBITDA margin versus 9.0 million and an 18, 3% margin in Q3.
The sequential improvement in adjusted EBITDA was primarily driven by growth in New Jersey and improvement in Pennsylvania.
For reference Q4, adjusted EBITDA, excluding lease expense was $12 8 million as compared to $10 5 million for the third quarter of 2021.
Our <unk> numbers.
Operating income for the full year 2021 totaled $23 5 million as compared to $9 6 million in 2020.
Representing an increase of 145% year over year.
The increase was primarily driven by the scale up of the New Jersey business and the acquisitions of H M. S. In Maryland in case, the RMT Ed.
Yeah.
Fourth quarter operating income was 0.3 million as compared to a loss of $1 8 million in the third quarter.
The improvement quarter over quarter was due to gross margin expansion and a reduction in share based compensation expense.
Net income for the full year 2021 was a positive $6 1 million mainly related to a noncash $58 million gain on fair value of warrant liability compared with a net loss of $142 million in 2020.
<unk> was also impacted by a noncash loss on fair value of warrant liability of $110 million.
Net loss in the fourth quarter of 2021 was $5 9 million, mainly driven by a one time loss of $3 3 million from the termination of our lease in Frederick Maryland.
$6 9 million of finance and other expenses $6 9 million of accrued income taxes and $2 million of transaction costs, mostly related to the <unk> acquisition.
These expenses were partially offset by a $14 4 million gain on fair value of warrant liabilities.
Turning to the balance sheet, we ended the year with a healthy cash and cash equivalents balance of about $80 million.
This healthy cash position will enable us to continue to invest in the business both organically and through M&A.
In Q4, we used $3 8 million in cash from operations, mainly driven by an increase in working capital as we continue to prepare for adult use in New Jersey.
For the full year, we used $32 million in cash from operations $24 million related to working capital increase in preparation for New Jersey adult use mainly with the remainder being related to the contingent consideration payment.
Mostly related to our final earn out earlier last year for Allegra.
We received just over $15 million in proceeds from warrants and options. During the quarter included in our year end cash balance of 80 million, mostly related to the warrants that were set to expire in mid January of 2022.
We later received the remainder of the proceeds of about $25 million from those warrants in early January .
Total of approximately 40 million of proceeds from those warrants.
During the fourth quarter, we made the second of 225 million payments to our new New Jersey partners related to the increase of our ownership from 75% to 87, 5%.
We also paid $2 $3 million of note related to the KC, our acquisition and paid $3 3 million to terminate our Frederick.
Lease in Frederick, Maryland, as we prepare to transition to our facility in Hagerstown.
Finally.
Capex spending during the quarter was $11 8 million, mostly related to the completion of our build out in P. A.
Ongoing work at our Hagerstown, Maryland facility and the completion of our third New Jersey Dispensary in Lodi.
Capex spending for the full year was $38 5 million about half of which was related to our expansion in P. A with the remainder related to our build out of New Jersey, and the acquisition of the Hagerstown facility.
This concludes our prepared remarks, I'd now like to turn the call over to the operator to open it up for questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three tone prompt acknowledging he's a quest and if you would like to remove yourself from the question queue, you will need to press star followed by two.
And in consideration of other callers on the line today, we ask that you. Please limit yourself to one question and one follow up please.
Please go ahead and press Star one now if you have a question.
And your first question will be from Owen Bennett at Jefferies. Please go ahead.
Evening, guys hope all well and yeah first question just relates to Michigan engage obviously deals closed now you've you've had some lumps to to really get to know that business. Even though I was just wondering what areas you really identify this as possible upside that you've mentioned.
And some plans may be touch on that a bit more but any of the abbvie is a debate that you think there's some easy wins to upside in the near term. Thank you.
Sure G I, Joe would you like to take that one you were just out in Michigan last week, Yes, Yes, I would love to Hi, <unk>. Thanks for the question.
We have been working with our partners.
<unk> engaged over the last few months and we are extremely excited.
On multiple fronts first from the leadership perspective, and the expertise that they have developed in the state of Michigan.
We will get better in every state because of the extra fees that they have.
In Michigan, but we will also bring some of the learnings from other states. So combined together will bring synergy from discards and from the learning of the past and we will make each other better from a execution perspective from a calculation perspective and from an efficiency perspective.
I am personally excited the most.
Gage acquisition is how well.
The team has been able to build the brand the gauge brand. It is really I believe the best in Cat best in class brand.
Who.
With me are the customers and the patients in Michigan when you look at the pricing pressure in Michigan.
And you will be starting to see how well the gauge strain gage trend and the grade a gauge for fall. This has done against that pressure. So all those.
Reasons, why im extremely excited to expand our family and Ed Michigan to the team.
Okay. Thank you very helpful. Just a follow up please just an interesting development with the M <unk>.
The mobile App I was just wondering in terms of kind of how so influential do you think that's a beta in sandy driving footfall to the stall then on what sort of additional ways that youre going to be able to use that in Tianjin key data around cost emission certain trends et cetera.
Sure.
Take this one from a consumer analytics perspective, this will be by far the biggest advantage to us when it comes to digital presence. So the patients and the customers will be able to reach us where they want us and when they want us and they will be able to stay closer to our bus tenders.
Our dispensaries at all times.
Yeah.
With price.
Being sensitive and a lot of areas. The digital presence will allow us to look at our segmentation of customers and patients in a different way in an intelligent way and in a way that we can target different segments based on what brings the most value to that segment, so instead of going with it.
Blanket discount instead of going with calculated price change, we would be able to target the behavior of the consumers and deliver it to them value with a high quality product.
Awesome. Thanks, guys very helpful I'll pass it on.
Thanks Al Thank you Rod.
Next question will be from Kendrick time at <unk>.
<unk> capital. Please go ahead.
Thank you and good evening Jason.
Jason <unk> question for you very encouraging comments on New Jersey.
I think what I'm trying to sort of better handicap is that as well as your position how do we think about the timing of that ramp and how quickly that can ramp I mean, we all recognize as the new Jersey as a back half story, but I think where the street is struggling to sort of get a better read as a wide range of commentary out of management team.
On how material the contribution given their footprint they expect to see in Q2 and all the ramp into Q3. So if you could just help us better handicap that would be great.
Sure.
It's funny I mean, I sort of I remember somebody asked me about this a few weeks ago and I said I've stopped trying to predict when that new Jersey is going to turn around adult use.
So maybe I'm going to densify my own.
Sort of views here, but I'll give you I'll I'll take a stab at what we think.
It should happen.
There is a.
CRC meeting on March 24th.
We are hopeful that at that point, they will approve several of the operators that they believe are ready for adult use which means that they have more than enough supply.
Also supply their medical patients.
We think that we will be one of the first approved licensees based upon that criteria.
What will happen if they approve.
Those licensees on them on the 24th is they will also.
Declare.
Or give 30 days notice.
Adult use would check in roughly 30 days after that.
<unk> of the way.
If that happens it terms of the way our sales will ramp.
We believe that it will not necessarily wait until.
Actual adult use kicks in say towards the end of the April because there will be met.
Dispensaries that are looking to stock up ahead of what they see as a huge level of <unk>.
The bands are a huge increase in demand.
Currently you have comply.
Compliant adult use packaging and if we get the go ahead in the approval on March 24th we will be ready to supply our wholesale customers are pretty much.
Mediately once April certainly not happened for the 24th.
And the actual adult use sales start about 30 days later in April that's when we will see the substantial increase.
In our dispenser yourselves.
Great color. Thank you guys.
Yeah, I mean, that's I've been burned a few times in terms of trying to predict.
It's going to kick in but we are hopeful for.
From what we have been hearing and from what others have been hearing that there's a good chance that that could happen on March 24th.
Thanks, guys Center allows us to just better triangulation and handicap it benefits Youll put quick quick follow up on New Jersey can you give us any insights on the relative sophistication you spoken just sort of increasing specification in Pennsylvania, obviously.
That's a different market a different points in its evolution, but any insights you can provide on the sophistication of absolute or relative all of the new Jersey kind of a consumer.
I think they are similarly sophisticated.
While even in Pennsylvania, the market as sophisticated we should also remember that there are not a whole lot of dosage forms of form factors are allowable in Pennsylvania. There is.
Theres no edibles.
Ed.
The other.
<unk> form factors that are available Ed.
Many of the other states are not allowable and in Pennsylvania.
But when we say sophistication.
Really sort.
Sort of.
Gearing desktops more towards.
Statistics, its sophistication and expectations on flower quality.
What I would say as we compare that to new Jersey is it similar but we came out of the gate.
We're seeing some of that.
Some of the best flower available in New Jersey, we've only dialed that in over the last year of change that we've had a heart indoor facility up and running so I would say that it is not a it's not sort of a game of catch up like we felt like we were playing a little bit in Pennsylvania.
It's actually part of the reason that really drove us to make the changes that we did make in Pennsylvania last the last summer was because.
Once I would once I was spending a lot of time in our Jersey facility I saw what great was and I saw how much better we can be everywhere that we operate it so I feel like.
As it pertains to two Jersey, where we're on the leading edge in terms of quality and also from a genetic point of view, we have are probably the most diverse lineup genetics.
And the whole state alright.
Thanks, guys and good luck and I'll get back in queue.
Yeah go ahead.
Yeah.
Yes, Gerrick I just wanted to give you my my fresh IQ on New Jersey, I joined the company and spent a lot of time in New Jersey, and I couldn't be more excited about what the team has done to be prepared and to be ready from all fronts. The team. The team. The team is in place they are well trained well educated.
Got it and I think that will bring sophistication to the consumer the stores are.
Great look in great position and they will have the visibility by the consumers and they are anchored by powerful brands and partnerships that will come soon to the states starting with cookies and other strains that we mentioned and brands, we mentioned earlier with gauge et cetera.
So that that that those stores with those anchors would also bring sophistication to the consumers.
With education with the stores, you'll have a robust product roadmap that our marketing team is thinking about nonstop.
In order to also help with that sophistication. So I am extremely excited about new Jersey and cannot wait to start.
Thanks, guys, just kind of as you have I'll get back in queue.
The next question will be from Andrew passing you at Stifel. GMP. Please go ahead.
Hi, good evening, Thanks for taking my questions and congrats on the on the great rebound here.
Maybe just start off.
With with M&A.
How do you see the the New York Rec market.
<unk> there wanted to kickstart, the rec market potentially this year.
Through social equity and HAMP operators.
Do you do you think that there's an opportunity to.
Maybe enter the market through.
Our hemp operator, it at maybe a reduced valuation versus acquiring a vertical.
Existing medical operator license.
And just your thoughts around around New York in General.
Sure Hi, Andrew.
Yeah.
The answer is yes, we are.
We are.
Windows are.
The news came out several weeks ago about the hemp operators are doing.
Being able to help kick start the program. We were extremely excited and you should assume that we have said.
Essentially our combing the phone box or the yellow pages.
So to speak for the last several weeks.
Meeting with and speaking to as many hemp operators.
So we think there is a real possibility to enter the New York market and in that way.
And it's made us a sort of a.
Very happy that we waited and we're patient.
And did not enter the New York market and have to sustain.
Substantial losses.
The other operators have had to sustain over the last few years to make it to the finish line.
We think that we are going to be able to enter the new York market in one way or another over the next over the next couple of years.
Thanks for that and maybe just M&A in general.
You previously talked about some attractive valuations in states, where most other large operators have already reached their caps.
Just wondering right now obviously the markets have been challenging.
Are you seeing.
Do you still see opportunities to maybe enter new states or we're vertically integrated Maryland for example.
And just your thoughts around that.
Sure, Yes, we see the opportunity to go deeper where we are in places like Maryland. This afford dispensary cap, we currently own zero dispensaries.
And there the expectations are very reasonable.
In terms of what the sellers are what we'd like to.
P paid so we think that we should be able to indicate our.
Our progress on that front.
Over the coming months.
In terms of Michigan, that's another area, where since Theres no license caps.
That we think that we should be able to get extremely attractive.
Three acquisitions done.
Over the course of over the course of this year the great thing about Michigan.
Is that since it's an unlimited license state there are many many years ago, when we call mom and pop operators.
Business has been a whole lot harder than they expected it would be especially because they're not vertically integrated.
So the multiples the expectation of multiples in Michigan is a fraction of what it is in other markets.
And when we run these models and we sort of run the Dcs in the MTV on what what is worth to the seller and what it's worth to us and what we looked at what these assets are worth to us they're worth even more than they are to the sellers because J.
Age has not.
Supply their products to other dispensaries in Michigan up until this point. So if we go in and we can get some very attractive dispense.
Dispensary acquisitions.
Done we will also the multiple will be even lower so whatever that headline multiple is because we will be supplying the stores with a gauge and cookies products and be making.
A nice profit on the on the wholesale side as well. So that's that's the examples of going deeper into places, where we are and then as it pertains to entering new states, we definitely would like to enter at least one or two new states over the next six to 12 months, we have multiple conversations.
Going on.
In multiple states and I would say that our.
Valuation expectations have continued to slide with the valuations of the public companies. So when we're looking at deals they're actually no more even though our stock price is lower than it was.
Six months ago, the deals are actually not any more dilutive than they were six months ago, because the targets are gone down as well.
We are I mean, we're thrilled that we do not have a very large footprint that we're very deep in a limited number of states because it gives us the opportunity to go in and buy.
Very very accretive assets in additional states.
I appreciate the detailed answer I'll get back in the queue.
Thanks, Andrew.
Our next question will be from is it the logi at Craig Hallum Capital Group. Please go ahead.
Great. Thanks for taking my questions.
Because you had you mentioned.
That engages pricing is holding up particularly well in Michigan. We of course have seen some of these pricing pressures.
In previous quarters gauge had sort of commented on their average wholesale prices or at least your average premium.
Just wondering if you had that data available for us today.
Yeah. Thanks.
Thanks for the question Eric.
I don't have the details to share right now but.
Directionally I can tell you that there has not been any change on the pricing.
Four gauge wholesale the demand is still high.
The numbers I looked at where linear towards the prices have been but we'll continue to work and learn more on how the behavior of the product is but we're very confident that it has resisted those changes very well.
All right that's great to hear.
And then as my follow up here. So it seems like the playbook in Michigan.
Is to really reserve.
Cookies and other sort of premium branded products.
For gauges owned retail channels, and then wholesale sort of the non premium or mid tier brands. I guess first is that sort of the right way to think about the strategy in Michigan and then second.
And if so should we expect that same strategy in New York, Sorry, New Jersey, Pennsylvania, Maryland. Thank you.
So the strategy that we are convinced that has worked for us and will continue to work and we have plenty of examples Michigan is one.
Specialty and credit quality flowers with.
Our state flower that is another one the rebound we have seen in Pennsylvania by doing a very daring move couple of quarters ago to take the loss. We took in the short term to get to where we are today.
Really confirms our thinking and our strategy as the patients and the customers become more sophisticated they will continue to hire their expectation is what they would like to get from the product from the flower and we are convinced the more sophisticated.
We can be advanced for the patient better off we will be whether it's with our own brand and strains or whether it was through strong partnership like partnerships like cookies and others.
Okay.
Sure.
Yes.
Thank you.
Did that answer your question Sir.
Okay.
Yeah, I think we lost him.
Next question will be from Glenn Mattson Ladenburg Thalmann. Please go ahead.
Hi, yes, thanks for taking the questions. So I'm just curious if you get a little more.
Detailed guidance on how to think about gauged over the course of.
2022, I know going.
That's helpful plenty, just kind of the pace of the rollout there and then the margins that you pointed to in Q4.
The extent to which those are sustainable throughout the year or whether you expect them to continue to gain as the year progresses, just some color there would be great.
Yeah, I'll take that one.
Yes, I'll make some comments Keith I know you did begin more anything you'd like to share before I start.
Sure Hey, Glenn.
I guess I was traveling all thing and then you can add in <unk>. So I think sure I look at the pace of rollout just to kind of read a iterate. The game plan that the gauge team has been <unk>.
Executing on here.
They're they have their arms, I'd say well around the pipeline of our retail dispensary openings over the coming few quarters. So you can expect a ramp up there in retail.
The 12 existing stores up to and over.
20, count by the end of the year end and above that.
So that'll happen in driving the top line and then very shortly that'll be opening their extraction lab, which has been a long way to process just given some of the supply chain challenges, but finally, it's going to happen here soon in the coming weeks and that's really going to give them up.
Big lift on the gross margin line.
And by the way the big lift that Jason mentioned on the call from Q3 to Q4 into the into the mid Forty's was driven even before the extraction lab opened and that was driven driven by the gauge branded vape introduction in October September October . So so there's like a series of.
Margin driving initiatives that will continue to.
Kind of fuel decline and gross margin and EBITDA profitability as we go through as Cage goes through this this year.
And then last but not least later in the year or in the next.
A handful of months or so the monitor two cultivation expansion will happen and so that will give them.
The ability to bring more growing in house capture that margin then.
Create some more and just rely less upon the contract grow agreements and balance that out.
Yeah. So do you have anything to add there.
I think you described it well I can sum it up real quick Glenn when I look through the entire supply chain from cultivation.
Or the value chain from cultivation to production to supply chain and to retail there are multiple opportunities here.
It will play as a tailwind for the margin from a cultivation.
The team will be opening a best in class state of the art facility like Jason described earlier from a production perspective, we have a great example of the gauge phone brand.
That recently has launched and what it has done to the gross margin. The lab will be completed here in the next few weeks or so and will start producing.
The more in house product that will do the same thing the debate has done.
In the retail store.
From a pricing perspective do you think.
Cogs can you think of.
Pricing I think the advantage is all.
There and it will it will be all tailwind for the margin.
Okay, great. Thanks for the color there one quick one on just on PAA just.
With the like you said patient being flattish and the potential competition from New Jersey in total.
Cultivation come online we.
We saw a tough year was in 'twenty, one just kind of thoughts about.
Your ability to sustain that.
For cloud.
Okay.
Just.
What would you would think about in terms of if prices started to get pricing started to get worse, if you're willing to.
Followed that down or a whole firm or just the thoughts on that market a little more in depth.
So you have you want to take that.
Yes.
Jason and then you can.
So sure if I had to describe what I, what I came in and what I saw in Pennsylvania, The Pennsylvania story, it's been a great story for US It started super painful and it turns out as you know Brian I'd like Jason has described we made it very hard decision to do what we did when we killed the plan that we killed in order to.
Restart.
Accomplish the goals that you wanted to accomplish since we've seen quality improved.
Every months and still the best quality is ahead of US we have seen that we've been able to protect pricing from a wholesale perspective and the data does not fly the consumer and the patients are asking for it and we have entered in more doors and have set some record penetration rates from a wholesale perspective.
The flower portfolio, we have the highest percentage of flowers flower testing is the highest THC average we've ever seen.
Average, we've ever seen and we think that the better numbers are still in front of us.
Due to all the cleanup and construction and expansion that we've done the facility is that much more efficient again, making us more efficient on the cost of good side and that is.
Helping.
Seeing and hearing from patients, describing and tweeting and bragging about the flowers. They are buying and we are seeing switch and increase our own brand utilization not only through wholesale but also our own store. So all this has caused us so.
Far to not see any change to our pricing when it comes to wholesale traction from a retail perspective, the environment. The external environment that we cannot control we face it the same way all our competition.
Our competition.
Or they do.
What we can control and what we are laser focused on all the levers we can pull under all the revenue drivers the gross margin drivers and Opex drivers just to give you few examples stronger revenue drivers team is focused focused laser focused on.
Patient acquisitions patient retention and basket size drivers through our.
Segmentation that we talked about through our digital platform, new launches new brand ability to connect with the patient outreach programs from a gross margin we talked about the pricing we talks about the cost of goods and then from an operation perspective, really staying ahead of the trend and making sure.
Our labor model.
In line with our revenue.
Our customer service and our products serve the patients.
Jason anything else.
Yeah, the only thing I would add is.
We've made all the like as I said earlier, we've made all of this progress.
Of the new genetics that are about to that or are at about the launch in the coming weeks. So that will we believe that will be another differentiator for us and make it. So that we can continue to hold the price because we're.
We're delivering essentially we're delivering more value.
Than we ever had at the same price.
Right right. Okay. Thanks for the color guys I appreciate it.
Thank you. Your next question will be from Noel Atkinson Clarus Securities. Please go ahead.
Good evening folks so well done in Singapore.
First off can you provide any update on the timeline to opening you alluded I store.
Yeah sure.
So why don't you take that one I know you've been deeply involved with the with the New Jersey I P O T.
Yes, thanks for towards the World Cup.
From a store perspective to open a store you need.
Trc approval, we got this you need a certificate of occupancy we got this and the last step which is the easiest one to get its Tom.
The department of Transportation's. This is where we are today and that took longer than what we thought.
It should take but for good reasons for great reasons to store has a drive through the store is one of the most dynamic.
It's on one of the most dynamic.
The traffic drivers for any retail store and then the department of transportation expressed concern about the traffic we will drive to the store that they required us to get a new pocket and extra parcel, which we did we aligned on the data, which we did we resubmitted.
Then we are not waiting for an approval that literally could come any day, we were actually hoping that while we are doing the call today, we could share does use a flawed.
But it is eminent at any point right now no.
Great.
And then just follow up in New Jersey.
So you mentioned on your prepared remarks.
There'll be.
Wholesale availability.
So hopefully this gives you the thumbs up here into the 30 days, you'll be able to.
Provides.
They're just been series, but once you get your.
Presuming three stores up and running do you still see that youll have availability of product from your from your facility sale or you can keep pretty much everything.
Oh.
We believe that we will have a <unk>.
<unk> to sell wholesale as well.
Obviously.
The record the adult use kickoff the has been delayed versus what we had originally thought originally we thought it was probably going to happen around November back at that point, where you were prioritizing building inventory for our own stores.
But at this point we have.
Significant inventory of product to sell.
To our own medical patients.
For our own stores and to be able to sell wholesale. So we are at we.
We intend on being able to serve both markets on top of that we also like I believe.
Believe firmly that at your retail stores, you Shouldnt only try to push your own products.
On customers.
You know I think that the way to build the most loyal customer base, our retail is to sell customers the products that they want not the products that you make the most money on so we are also planning on stocking.
Many of the other brands.
That are cultivated and manufactured across the state we will be stocking those brands at well as well at our stores, which also frees up some by some inventory for us to sell wholesale.
Ross the state.
Okay, great. Thank you very much.
Thank you.
Next question will be from Andrew sample at Echelon. Please go ahead.
Hi, Andrew would evening.
It isn't just wanted to ask on the gross margins, which were a 50% adjusted for the current quarter I'd like to get your thoughts on the puts and takes on the gross margins for the year ahead, given the large number of moving items, including.
Including the consolidation of gauge and New Jersey adult use sales.
Sales potentially beginning in the near term.
Any thoughts you could share margin expectations for 'twenty, two and whether you believe the 50% level can be sustained or perhaps even improved on.
In the year ahead.
Sure Keith you want to take that.
Sure.
Hey, Andrew.
So I think directionally.
I think it's clear, we're still kind of coming out of some of the activities in the back half of last year and sort of climbing our way out of the bat and rediscovering some some scale in Pennsylvania and absorbing the costs there and so.
It's not going to be a straight smooth lineup.
But ah, but we are going to continue to see we expect to see.
Margins being able to stay at or above those levels.
The biggest driver.
You said the puts and takes the real Big driver, obviously is new Jersey, where we will have a very favorable cost structure very favorable pricing structure and the initial many months of that adult use market.
So.
New Jersey is going to be a great driver of gross margin for US and then and then gauge will be you know we started to kind of bring that into the fold in and kind.
Kind of get our heads around that in and come out at some point with more more visibility for you all but.
That that might be a slight offset to something like a new jersey that will be.
That's definitely a tailwind to call out so all in all we do see that we're way, but we'll be able to make continued progress on the gross margin front.
Great. Thank you Keith.
Just a quick follow up here have you have.
Have you made any capex budget plans for the year ahead, and if so would you be able to share those.
Yeah, I can take that one as well.
So then the major projects will be.
The first which is well underway as the Hagerstown expansion.
And then the second that we talked about a little bit on the call here is.
The soon to start expansion in in New Jersey.
So those will be our two major capex projects I think directionally you can think about those projects being.
Larger spend items, then our last couple of year trend of Capex.
And then on top of that add in more from a retail perspective.
With with gauge.
So those are kind of the three big levers on the Capex line for us this year.
Okay, great. Thank you so much.
Thank you.
Next question will be from Howard Penney hedge I. Please go ahead.
Hey, Thanks very much for the question.
Margin question as well I was wondering if you had attempted to try to quantify what the reset and pay a 10 P. A its pennsylvania cost you from a revenue and margin standpoint, and how you thought that would I think you may have answered this but how that may influence margins next year. Thanks.
Yeah, specifically quantified that Keith what you want to take a shot.
Yes, it's a tricky one to say a specific quantification, but surely I mean, you saw the impact in our in our Q3 results that that was.
Where we may be bore the brunt of it we've got some recovery in Q4 are there some sort of accounting technicalities of what flows through the P&L, what what the cost it gets capitalized and how that.
<unk> flows each quarter, so I think taking a step back from all that there could be some ups and downs related to P. A but.
Over the course of the next several months, we're going to see that facility continue to gain scale given the quality that we're seeing and the ramp the ramp back up in sales.
And again it won't be a smooth straight line, but it will go in the right direction as we go through the year here.
Yes.
Did that answer your question Mr. Penny.
Awesome. Thank you so much.
Thank you. Thank you.
At this time I would like to turn the call back over to Mr. Wilde for closing comments.
So thank you everybody for joining our Q4 call. We look forward to our next call. Our Q1 call in a couple of months hopefully New Jersey will have launched it will be able to give you a more detail on that.
As well as a whole lot more detail on that on how we're doing in Michigan with with gauge.
Thank you so much.
Thank you Sir.
Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Thanks.
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