Q4 2022 Terrascend Corp Earnings Call
Good afternoon. My name is J P and I will be your conference operator today at this time I would like to welcome everyone that there our sense fourth quarter and full year 2022 earnings calls.
Joining us today.
Jason Wild Executive Chairman.
He had gotten him president and Chief operating officer, and Keith sulfur Chief Financial Officer. Our remarks today include forward looking statements, including statements with respect to the company's outlook.
This guidance for fiscal year, 2023, and estimates and assumptions relating thereto, and the company's expectations regarding its market opportunities and other financial and operational matters.
Each forward looking statements discussed in todays call is subject to risks and uncertainties.
That could cause actual results to differ materially from those projected in such statements.
Actual results or the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should be not should not be considered as an indication for future performance.
Information regarding these factors appears under the heading risk factors in the company's Form 10-K filed earlier today with the Securities and Exchange Commission or the SEC.
Which filings available at Www Dot S E T dot Gov and on our website at Www Dot <unk> Dot com.
The forward looking statements in this call will speak only as of today's date.
Undertakes no obligation to update or revise any of these statements.
During the call Sue will present, both GAAP and non-GAAP financial measures.
<unk> of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor relations website or in the S. E T website.
Now I'd like to introduce Mr. Jason Wilde. Please go ahead Mr. Viola.
Good afternoon, everybody. Thank you for joining us.
<unk> continues to hold the leader position leadership position as a vertically integrated north American operator, and the growing cannabis industry.
Despite a challenging macro and cannabis industry environment in 2022, we delivered record revenue of $69 million for the fourth quarter, an increase of 50% year over year, and a four 2% quarter over quarter growth rate in terms of annual revenue also a record we reported $248 million in revenue.
For the full year up 28% year over year.
Importantly, during 2022 revenue grew sequentially every quarter throughout the year. Despite macro headwinds. In addition to our sales performance, we delivered our second successive quarter of positive cash flow from operations.
Last spring, we implemented measures to ensure the terrorists head with physician to be profitable without the benefit of regulatory or tax reform.
Honestly, we thought the safe banking had a good chance of passage, but we made a conscious decision to hope for the best plan for the worst.
These actions to optimize our operations and reduce expenses, including interest expense drove positive that improving cash flow from operations in the second half of the year, our efforts to improve our balance sheet culminated in the <unk> of $90 million of canopy debt in December of last year.
I'm, particularly proud of this transaction as I believe it is an indicator of the strength of our relationship with caterpillar.
Total outstanding debt declined by $80 million in the quarter, providing annualized interest relief of $10 million per year going forward.
We believe that the strategic measures. We took in 2022 have prepared us well for the current operating environment.
With the progress, we're making in Michigan, we expect to be EBITDA and cash flow positive from positive from operations in each of our states in the first half of 2023.
Ziad and Keith will provide more details on that progress.
Looking ahead, we expect new Jersey to continue to perform well. We are also excited about the prospect of Merrill Lynch turning adult use this summer and we are optimistic that Pennsylvania will follow soon thereafter.
Both states where game ready as we were a new jersey with the capacity the right team the retail footprint and brands to capitalize on the opportunity.
Turning to M&A, we continue to have a wide open map to explore our opportunities in 2022, we closed on it.
The pinnacle dispensaries in Michigan and in early 'twenty three we closed on our first dispensary in Maryland.
We are in an increasing number of deals in our pipeline within our existing states as well as the new markets that are very interesting to us, especially given the distressed environment.
This is clearly a buyers market as many operators are facing an existential crisis.
We have been speaking for about a year about how were being patient and believe that we will be able to buy assets for pennies on the dollar.
In fact, we are now reviewing opportunities to acquire assets essentially for free as long as we're willing to assume certain debt and lease obligations.
And even that is up for negotiation.
When discussing with <unk> recently that the only thing better than a Super Bowl.
Low multiple deal is to get an asset for fresh water.
While originally set ingest. This has now become a reality not only are we looking at assets, which would assign zero value to the equity, but we actually believe we should get paid to acquire assets via debt and lease renegotiations combined with that zero equity value.
On the capital markets front, we are excited about the prospect of a New York, New York Toronto Stock Exchange listing, we recently filed our application and believe that post our reorganization, we will qualify for a listing on the exchange.
Based on timelines presented by our legal advisors, we believe we could be in a position to lift soon after our annual shareholders' meeting in June .
With the listing on the <unk>, we believe that <unk> stock will be afforded greater accessibility to a broader pool of institutional investors seeking opportunities in leading cannabis operators and some of the best markets in the world.
We expect that at PSX uplifting could provide a significant advantage in M&A discussions we believe the sellers would be more willing to accept Harrison stock as consideration and assign a greater value to our shares once listed on a major exchange.
Just to be clear, we don't look at the PSX listing is a magic bullet the capital markets have clearly been unkind to the cannabis space in the past year. We do believe however that a well run cash flow positive company can unlock substantially more value at significantly lower its cost of capital if listed on <unk>.
<unk> exchange with more participants higher standards and increased liquidity.
This is in my view not only a great opportunity for <unk>, but I believe that it is also a positive for the cannabis industry as our uplifting could pave the way for others to list in the future.
In conclusion I am so proud of the actions and accomplishments we made in 2022 and I'm looking forward to seeing how 2023 unfolds.
No doubt, it's been a challenging period for the industry, but our team has met these challenges head on demonstrating considerable resilience and the ability to execute effectively in a tough market.
Given our improved balance sheet cash flow and cost structure. We are on a strong footing today to both execute and current market conditions and capitalize on the historic M&A M&A opportunities that have become more plentiful recently.
With that I'll now turn the call over to <unk> to provide an update on our key markets.
Thank you, Jason and Hello, everyone I will briefly walk everyone through a more detailed discussion of our operations state by state, but first I'd like to talk about what I've seen what I've been seeing firsthand across our organization I have spent significant time.
In the field with people across all of our divisions.
I could not be more impressed by the professionalism and quality at our retail and cultivation location.
We cannot be successful without an elevated customer experience.
Between spending time at our locations and spending time with our people.
I am convinced that we have all the ingredients for success, the look and feel of our stores the quality of our service.
Friendliness and efficiency.
The reasons for the loyalty of our customers and patients.
New Jersey is a great example of this exceptional customer experience.
Our three dispensaries are all performing well above the state average and our brands continue to retain a top three market share position.
The same team that successfully transition new Jersey from medical to adult use is now ready for the transition to adult use in Maryland. This summer and also eventually in Pennsylvania.
I'm proud to say that we continue to add very talented professionals to our team.
Geron to buyer recently joined as our Chief people and culture Officer.
Jerome brings more than 20 years.
In global Human resources, and people management operations to tell us that.
We are thrilled that he has joined our team and look forward to his contributions.
Now I would like to take us through more detail on our operations state by state.
New Jersey remains a substantial growth driver for us as we continue to see strong sales and margin performance.
Bds a data confirms that we are capturing significant market share in new Jersey as a top three operator and several of our Skus are among the top 10 in the state.
This demonstrates the strength of our brands not only within our own doors, but across all of the other adult use dispensaries in the state.
We are over indexing in key product categories, including flower in waves and we continue to hold a commanding share of the concentrate segment.
This leaves us with room for further growth opportunities in other form factors, such as such as edibles and pre rolls.
We recently announced our partnership with yet another leading brand Wanna, but of the canopy USA family, which we anticipate will help us drive further market share gains and edibles.
For <unk>, we recently installed more enhanced automation at our facility, thereby enabling us enabling us to increase our output and meet substantial demand for that segment.
This has led to a 5% market share gain and the three year old category in the past eight week period. According to BDSI.
Overall pricing in the states has remained stable and new Jersey sales are currently run rating at a $1 billion.
Recently <unk> a data indicates that total sales in the state continued to grow 19% and the latest eight week period over the prior period, what our brands outpaced the market and grew 26%.
As I mentioned earlier, our three stores in New Jersey in aggregate have continued to outperform the state average.
Looking ahead, we are on schedule and Unbanked yet for further cultivation expansion at our booth and cultivation facility, which will enable us to expand our supply to this growing market.
Turning to Maryland fourth quarter sales were stable on a sequential basis, while gross profit was still under absorbed.
Due to startup expenses at our Hagerstown facility had not yet begun to harvest.
As previously discussed on last quarter's call.
Following the year end, we have had several harvests, which have yielded quality level level equivalent to our cultivation facilities in other states.
In January we closed on the acquisition of Alleghany medical Dispensary.
As one of our vertical integration efforts in Maryland.
AMD is a 10000 square foot high performing medical dispensary.
Currency generating roughly $8 million in annualized sales.
Double the state average per dispensary.
Located in northwest, Maryland. This store is literally walking distance from West, Virginia, and within six miles of the Pennsylvania border. Both currently medical only states.
The cross border location of AMD.
It's very similar to our highest revenue producing dispensary nationwide in Phillipsburg, New Jersey, with Eastern Pennsylvania, a few hundred yards away.
We have seen that locations like this have the potential to double or triple their sales in adult use environment.
So needless to say we are very excited about our Maryland dispensary, given the expected near term launch of adult use.
We are awaiting further guidance from the state after voters approved adult use last year on November eight.
Early indications based on the Bill that was recently released and discussed.
Point to adult use going live July for us.
As we prepare for adult use in Maryland, we will increase output at our Hagerstown cultivation and manufacturing facility to meet the expected surge in demand.
From a branding perspective, we will be ready for adult use with our leading brands, including kind three engage.
Long with our partner brands.
Bottom line when adult use is implemented in Maryland, we are prepared to go to market with ample capacity.
Full suite of brands.
And a broad range of high quality product for retail and wholesale distribution leveraging the same strategy that has proven successful in new Jersey.
Now onto Pennsylvania, which in my view is the sleeping giant we are fully built out at our large scale cultivation and manufacturing facility with plans in place to break with plans in place to bring our currently unused capacity as needed in response.
Adult use conversion.
Until then we will continue to minimize expenses and optimize efficiency.
During 2022, we turned off a number of flower rooms and.
And reduced our labor force and other variable costs accordingly.
Thereby enhancing our gross margins, which rebounded in Q4 versus Q3.
And the first and the fourth quarter, our retail business experienced modest sequential growth, which we are pleased with in this difficult same store operating environment.
At wholesale we saw a rebound during the fourth quarter.
Though off a small base driven by the introduction of the cookies engage product lineups into the states wholesale market.
Looking ahead, Pennsylvania continues to be a key focus area for us.
We see encouraging signs on the regulatory front around adult use budget and timing.
And Michigan during 2022.
We entered this market through the acquisition of Gage, which included two imported importing components.
A leading vertically integrated operation.
A highly desirable iconic orange brand of products to launch into our other markets.
In 2023, we will continue to execute on our plan to be a market leader in the states.
While the market continues to experience supply demand imbalances, leading to pricing compression, we have taken meaningful steps towards achieving this leadership goal profitability.
Profitably.
Our Gage brand has remained incredibly resilient in this market.
Continuing to command a significant premium to the average price per pound in the state.
We have taken advantage of this consumer brand recognition by Rolling Gage out in Pennsylvania, New Jersey, and most recently in Maryland.
Consumer and patient reaction in these markets has been very positive.
Late last year, we took decisive action to optimize our operations improve efficiencies and reduce our cost structure.
For perspective in Q2 of 2022.
Our first full quarter after the closing up gauge.
We're experiencing significant EBITA losses in Michigan.
Within a very challenging operating environment.
We took aggressive action with it within these initial months.
Which resulted in a Q4 EBITA loss of less than $1 million.
In Q1, we are making further progress and expect a roughly breakeven quarter from an EBITDA perspective.
Based up in additional initiatives that we have underway. We anticipate this trend to continue to improve in Q2 and throughout 2023.
Contributing to this progress.
Our extraction lab became 100% operational in our current quarter.
Increasing our full vertical integration.
Flower products.
Michigan is a $2 billion market, which remains highly fragmented with many operators.
Both small and large struggling to survive.
As we continue to advance on our own path to profitability in the state. We will also take advantage of the distress situation in this market.
The other side substantially larger and more profitable as we scale further at retail through M&A.
Our considerable existing 17 store retail footprint in Michigan could see significant expansion through low to no cost M&A.
The addition of the Pinnacle dispensaries in the second half of 2022 indicates that our model of adding retail while leveraging existing states level overhead is an effective strategy.
Lower acquisition multiples should only increase the attractiveness of these deals.
In December the city of Detroit approved our cookies location, an eight mile for adult use.
That location has performed extremely well with daily run rates more than doubling.
Early initial days of adult use as compared to what it was medical only.
Branded wholesale continues to gradually ramp up quarter over quarter.
Now that our lab is fully functional we expect our expanded product offering to drive accelerated wholesale growth in the coming quarters.
While we remain focused on continued success at the premium end of the market, we do acknowledge that certain markets such as Michigan.
<unk> sensitive states.
Value priced candidates is a large component of Michigan sales.
Therefore in the coming weeks, we will be launching our value brand legend, which has enjoyed success in the value segment of the Pennsylvania market.
Turning to Canada in an effort to further drive overall EBITDA improvement.
Consolidated company basis, we commenced an optimization of our operations in Canada.
This optimization resulted in us discontinuing our licensed producer part of the business in order to focus on our cookies, Canada retail business.
We are proud to be the exclusive operator of cookies retail stores in Canada.
As reported in our financial statements. The licensed producers produce their business is now listed as a discontinued operation from an accounting standpoint.
In December we listed for sale, our 67000 square foot facility in downtown Mississauga at $23 4 million Canadian dollars.
Date, we have received multiple bids on the property.
We are optimistic that we will complete a sale transaction in this facility by mid year.
Going forward, we will continue to operate our Canadian retail business, which includes our cookie store in Toronto.
So in summary.
Recognizing the challenging operating environment, we have taken further steps to improve operating efficiencies.
Drive sequential growth across our operations.
And deliver positive operating cash flow as a company.
With our projected breakeven during the current quarter in Michigan. We are also well on our way towards our promised gall of EBITA.
EBITDA profitability in each and every one of our state.
With an amazing team that has a relentless focus on the customer.
Complemented by an improved balance sheet.
An exciting lineup of states.
And best in class institutional sponsorship.
I am more confident today than ever in our ability to profitably grow this company, both organically and through attractive acquisitions as we build long term value for our shareholders.
I would like now to turn the call over to Keith to provide a financial update.
Thanks, <unk> good afternoon, everyone.
The results that I'll be going over today have already been filed on both SEDAR and Edgar and all results that I will reference today are stated in U S dollars.
In todays filing tariffs than was required for the first time to certify our compliance with Sarbanes Oxley related to internal controls over financial reporting.
I am happy to report that in our first year under this requirement. We are certified with no material weaknesses are significant deficiencies in this regard.
This is a huge statement to all of the work put in by the tariffs and team over the last two years in preparation for this great milestone.
Note that all results discussed today incorporate our Canadian license producer business as a discontinued operation as Ziad just described historical periods have been restated accordingly in compliance with U S. GAAP.
Now onto our financial results.
Net sales for the full year totaled $247 8 million compared to $194 2 million for 2021, an increase of 28%.
This strong growth was mainly driven by the launch of adult use sales in New Jersey, where we continue to hold a top three market share position as well as contributions from our acquisitions of Gage and pinnacle in Michigan.
Partially offset by a decline in Pennsylvania related to the challenging market environment in that state.
Net sales for the fourth quarter totaled $69 million compared to $66 2 million for the third quarter of <unk> 22, an increase of four 2% sequentially and 50% year over year the.
The sequential growth was driven by the acquisition of Pinnacle in Michigan.
A rebound in Pennsylvania wholesale and continued growth of adult use in New Jersey.
The strong year over year growth was driven by adult use in new Jersey, and the acquisitions of Gage and pinnacle in Michigan, partly offset by declines in Pennsylvania.
Regarding net sales by channel wholesale revenue for the year was $64 million versus $107 million in 2021, a decline of 40% mainly driven by the challenging operating environment in Pennsylvania.
Retail revenue for the year was $184 million compared to $87 million in 2021, an increase of 111%.
Driven by adult use in new Jersey, and the acquisitions of Gage and Pinnacle in Michigan.
Partially offset by same store sales declines in Pennsylvania, and California.
For the fourth quarter wholesale sales were roughly flat sequentially at approximately $12 million driven by growth in Pennsylvania related to the introduction of cookies engage product lineups.
And growth in Michigan, as we continue to ramp up our branded wholesale business in that state.
This growth was offset by a temporary decline in new Jersey related to the state mandated conversion at year end to the metric inventory tracking system.
This conversion created a temporary backlog order backlog among most operators in the state for tariffs and this backlog has already shipped in early 2023.
Retail sales for.
There were $57 million in Q4 compared to $53 million in Q3, driven by growth in New Jersey, the Pinnacle acquisition in Michigan and modest growth in Pennsylvania.
Gross margin for the full year, 2022 was 41% compared to 58% in 'twenty one.
Adjusted gross margin and non-GAAP financial measure for the full year 2002 was 46% compared to 60% in 'twenty one.
Gross margin for the fourth quarter of 2022 was 44, 6% compared to 47% in the third quarter.
Adjusted gross profit margin of non-GAAP financial measure was 45, 4% for the fourth quarter compared to 47, 9% in the third quarter.
The sequential decline in adjusted gross profit margin was driven by startup expenses and under absorption at our new Hagerstown, Maryland facility and pricing pressure in Michigan, partially offset by a sequential improvement in Pennsylvania.
Gross margin in New Jersey remains consistent and healthy versus previous quarters.
It is also notable that excluding the Maryland startup expenses gross margin in the quarter was 47%.
General and administrative expenses for the full year 2022, excluding stock based compensation were $103 million or 41, 7% of revenue compared to $60 million or 31% of revenue in 2021 the.
The increase in G&A year over year was driven primarily by the addition of Gage in Michigan, who is SG&A totaled $40 million for the year as well as the conversion to adult use in New Jersey.
G&A expenses for the fourth quarter of 2022, excluding stock based compensation were $33 6 million or 48, 7% of revenue compared to 24.0 million or 36, 3% of revenue in the third quarter. The sequential increase was driven by a $10 million.
Our reserve for bad debt related to a customer in Michigan, which was disclosed in past filings.
Excluding this nonrecurring item underlying G&A was slightly down sequentially and.
And 34% of revenue.
Demonstrating our continued strong emphasis on expense reduction and control.
It is important to note that excluding this bad debt accounts, our year end accounts receivable are current and not concentrated materially with any single customer.
Stock based compensation expense for the quarter was $1 6 million compared to $2 7 million in the third quarter.
Full year 2022, adjusted EBITDA, a non-GAAP measure was $38 8 million as compared to $69 6 million in 2021.
The year over year decline was driven by an increasingly competitive conditions and a flattening of the medical market in Pennsylvania, partially offset by an increase in new Jersey, driven by conversion to adult use.
Michigan was a negative impact of $5 million to adjusted EBITDA for the full year.
As <unk> discussed earlier most of those losses were in the first two quarters after taking control of that business with Q4, adjusted EBITDA loss of below $1 million and with line of sight to breakeven and then positive throughout the rest of 2023.
Fourth quarter 2022, adjusted EBITDA, a non-GAAP measure was $12 2 million, representing a 17, 7% margin as compared to $13 million and a 19, 6% margin in the third quarter of 2022.
The sequential decline was driven by startup expenses at our Hagerstown facility in Maryland, combined with pricing pressure in Michigan.
Excluding Maryland startup expenses adjusted EBITDA margin was 19, 3% in Q4.
GAAP net loss for the full year 2022 was $325 million compared to net income of $6 million in 2021.
2022 includes a $311 million noncash impairment of goodwill and intangibles as previously disclosed in our Q3 results related to our Michigan reporting unit.
Excluding the impairment charge GAAP net loss was $14 million in 2022.
GAAP net loss in the fourth quarter of 2022 was $10 million compared to a net loss of $311 million in the third quarter Q.
Q3 was impacted by the noncash impairment charges that I just mentioned.
Turning to the balance sheet cash and cash equivalents were $26 2 million as of year end compared to $34 3 million at the end of Q3 Q4 positive cash flow from operations grew significantly to $7 3 million for the quarter versus a positive $1 5 million in the previous quarter demonstrating our.
<unk> focus on continuing to improve cash flow from operations.
It is important to note that while we did not make a tax payment during the quarter. If we include current period accrued tax of $5 9 million, we still would've generated positive cash flow from operations in the quarter.
The $8 million decline in our cash balance during the quarter was driven primarily by capex spending of $14 million related to the final payments for our Hagerstown, Maryland, new cultivation and processing facility, which became operational in the third quarter, partially offset by the positive operating cash flow of $7.
$3 million in the quarter.
Total debt outstanding declined by $80 million.
To a total of $205 million at December 31.
During the quarter, we completed a $45 5 million financing with Flores equity group and paid down $30 million over $55 million term loan with Chicago Atlantic while refinancing the remaining balance of $25 million, we also paid down $5 million.
Towards our Pennsylvania term loan in the quarter.
In early December we converted all $90 million of our outstanding debt with canopy growth into equity at $5 10 Canadian price per share five.
Finally, we are differentiated in the industry by not having done any sale leasebacks on any of our main properties other than a few retail locations that were inherited as part of the Gage acquisition.
Approximately $3 million of transaction fees were paid during the period for the Florida, and Chicago Atlantic transactions and approximately $6 million of cash was distributed in the period to <unk>, New Jersey minority partners related to accumulated cash flow and our New Jersey partnership business. So net net cash flow.
In financing activities was slightly positive for the quarter.
Looking into Q1, we expect to deliver results in the quarter that are roughly in line to slightly favorable with the fourth quarter of 2022 across the P&L. Despite typically negative seasonal patterns and cannabis from Q4 to Q1.
We also expect to continue to generate positive cash flow from operations.
In Q2, we expect mid single digit sequential revenue growth over Q1.
This growth will be driven by favorable Q2 seasonality along with additional growth from ramped up output at our Hagerstown, Maryland facility and the benefit from a full quarter of dispensary sales in Maryland.
New Jersey will continue to experience growth in that robust market and we also expect growth in Michigan from two new store openings and continued progress with branded wholesale.
Gross margins should remain stable to slightly expanding and we will continue to manage operating expenses at a roughly flat level, leading to a decrease in opex as a percentage of revenue.
Therefore, we expect adjusted EBITDA growth in Q2 will be largely driven by the growth in revenue combined with moderate expansion in gross margin and operating expense rate.
In conclusion.
Having completed my third year as CFO of tariffs and I'm extremely proud of what we have been able to accomplish as a team amidst what has been a very challenging operating environment.
We developed internal plans in early 2022 that we sequence in a very particular order to drive positive cash flow from operations and to strengthen our balance sheet, we executed those plan successfully.
First we were at the forefront in the industry by taking proactive measures in the spring of 2022 to reduce our operating costs in order to generate positive operating cash flow those were not easy decisions, we reduced our workforce by 12%, which we announced in Q3, we also exited noncore and cash consuming businesses.
<unk> and took actions with an eye towards positive EBITDA and cash flow in every state.
And then in the back half of 2022, we turned our focus to our balance sheet and reduced our debt by $80 million, leading to $10 million of interest expense savings annually.
This challenging environment has become an ex existential crisis for many in the industry with strong momentum operationally are vastly improved balance sheet and improved operating cash flow, we are well positioned to capitalize on a surprisingly large number of opportunities that are surfacing in our M&A pipeline.
We have ample access to multiple sources of capital, which could contribute to further strengthening of our balance sheet and lowering of our cost of capital, possibly the most exciting development is our application to list on the TSS, which if completed should increase the liquidity of our stock broaden the potential pool of investor.
<unk> and further aid us during M&A discussions.
We look forward to providing additional updates on all fronts as the year progresses. This concludes our prepared remarks I'd now like to turn it over to the operator for questions.
Thank you, ladies and gentlemen, we will now conduct a question and answer session.
I have a question. Please press star followed by the number one on your Touchtone phone you will hear from college and your request.
Your first question comes from the line of Ken with Peggy from ABB capital markets. Your line is now open.
Thanks, and good evening.
<unk> been intrigued by your commentary on the M&A landscape.
Could you provide any insight just with respect to is this a combination of both public and private side, you're seeing the sort of dynamic you're calling up with almost being paid to take operations of people's hands or is it more.
More private market centric just trying to understand the.
The break out there and the size of the opportunity.
Hi, Eric Yes, I would say it's across the whole spectrum of its public companies and private companies and multistate operators as well as single state operators.
I appreciate that and then Keith if I could just dive in here just with respect to the Hagerstown ramp could you give us some indication of.
Where you are on that journey, and Youre sort of expected level of readiness for that July full stock, which is certainly sooner than some might have expected.
Yes sure.
So.
It has been.
Like we mentioned, it's been a drag upfront, which we knew and we planned for until we.
Realized the first harvest, which we did early this year. So we're we're up and running now we're.
At capacity on the initial rooms that we turned on and we're already.
Sort of calculating if you will when.
When we turn on the next set of rooms, we just want to make sure. We don't get too far ahead of ourselves and we have kind of perfect clarity that July one is in fact, the date and so we're just kind of China thread that needle and not get not go too soon but also not be too late to capitalize on the tremendous opportunity that we think is.
Unfolding for the back half of the year.
I appreciate that.
Final one for me just on New Jersey, now you're calling out.
Where do you rank, Brian wise solid performance good growth.
How does that solid performance and good growth translate into your expectations on that market is three to six months I got into this market behaving as expected I mean, certainly sounds like youre doing well in the context that market.
Whereas the market versus what you expected it to be at this point.
Yes, Kevin this is <unk>.
Thank you.
It's performing well in line with expectation if I break it down line by line from a revenue perspective, we still continue to have no accumulation on our flowers.
I shared a little bit in my prepared remark on all the other.
Categories from a margin perspective, almost a year and we're sitting at a margin that is equal or higher from same time last year so pricing.
Has done well, the Cogs and the yield and cultivation.
Efforts has done well then from an opex perspective due to the revenue our plans continue to be in line and has done well from a opex as a percentage of revenue so really across the board. The state has performed extremely well in line with our budget.
Thanks, guys, congrats so I'll get back in queue.
Your next question comes from the line of Andrew <unk> from Stifel. Your line is now open.
Hi, good evening, Thanks for taking my question.
Yes sure.
I wanted to just ask.
About the balance sheet.
So you are asking $24 million for the Canadian property, you've mentioned it could close this summer.
Signed a $25 million term sheet for mortgage in Pennsylvania could you talk about when that could close and do you have any plans or any ideas or any other debt repayment capital raising or any other effort.
To work on your balance sheet.
Yes, Hey, Andrew so.
So yes, we noted the two big ones that you mentioned.
Canada building like we said on the call there, it's been pretty active actually a lot of back and forth multiple bids. So we're we're optimistic about getting that one done.
The mortgage we're happy about.
What we found there.
And we're pretty far along in diligence not completed yet but.
It would be somewhere in the somewhere in April .
I'd say.
But based on how that's progressing and then we have other irons in the fire. If you will in terms of <unk>.
Exploring other opportunities if and when we need the capital I think one thing we really want to emphasize here is we're.
We're not.
Concerned about raising the capital we're trying to raise the capital.
The right way at the exact point in time, when we need it.
And maybe I'll give you. An example, we could have done.
Sale leaseback on the property, we had a term sheet for $50 million at a 15% cap rate.
And we kept looking around and we sign this term sheet that we announced today.
For less capital, but more efficient raise of the capital at 9.25% fixed and.
That's the kind of way we go about things.
And.
Yes, hopefully that I think I covered all your questions Keith if I may.
Hi, Andrew I, just want I want to confirm.
I want to assure everyone.
We promised that we have zero anxiety around Res Inc.
Any capital that we need for the business, our only focus and our all the worries is how to sequence and the most efficient way to avoid any unnecessary or any high interest that we don't have to get so we continue to be disciplined and we continue to seek with think in a very.
Thoughtful manner in order to increase and improve our cash flow situation.
Okay.
Thanks for the fulsome answer and maybe following along with the M&A discussion.
That's of course related to Covid.
On this last question as well.
Could you talk about.
Yeah.
What would be.
In an ideal world.
How you would fund our acquisition obviously.
Talks about using stock with with the potential PSX listing you've talked about.
May be raising more capital if you need it no problem there.
But could you talk about like what's the ideal capital structure or mix.
For more M&A and as well if you could give us an update on where you're seeing the most opportunities.
In new states. So I know you mentioned.
Michigan is interesting, but in new states.
Do you have any updates there.
So I can I can take the first part of that GW is willing to take the second so so yes, I mean idea. So we threw all of our conversations we're always constantly exploring the mix of the consideration and it's become much more favorable.
Number of months in terms of less less cash.
Sellers willing to accept notes longer term notes lower interest rate notes.
Earn outs.
All stock deals of course, if it's accretive.
From a multiple arbitrage perspective, and so we constantly look at all of that.
We're in we're in cash preservation mode. So cash is very very valuable to us and we take that into consideration in any of the deals. We're looking at to try to just optimize that formula.
J W and other part in terms of the states.
Yeah sure in terms of the states that we're interested in I would say similar to what we've said in the past like Michigan.
And then up and down the east coast those are sort of the main.
The main areas, where we're looking at some assets.
It's back to back to just add a little bit to.
What <unk> said about.
Sort of deal components in consideration I would say that the majority of the deals that we've been looking at much more recently, which.
And how some of these distressed assets, there's really no conversation about cash.
There is actually its more of a conversation about whether the equity is going to have any value at all like I mentioned in the in the script and.
And then also if the conversation with the lenders and the landlords to see how much they are willing to kick into essentially to make this thing work. So those are the those are some of the.
The bigger type deals that we're looking at.
Thanks for that I'll get back in the queue.
Thanks, Andrew.
Your next question comes from the lineup Eric des <unk> from Craig Hallum Capital Group. Your line is now open.
Great. Thank you for taking my questions.
I was hoping that you could perhaps quad.
Quantify some of the.
Efficiency gains you guys have made.
Michigan.
And then just kind of talk to us.
How sort of these patient do you see that in Michigan operation versus some of your other states like obviously, Michigan is much lower average selling price, but I'm. Just wondering if you can help us kind of understand the overall efficiency or cost.
Gains that you guys have made in Michigan, and then how much you kind of see that as being transferable to other states whether you essentially.
Essentially whether you still have room to kind of keep squeezing out efficiency in some of these other states beyond Michigan.
Yes. Thanks, Eric This is <unk>. So we we shared last.
We thought that Michigan is important to us because.
We want to make Michigan successful on its own and in order to be successful kind of as a company on the long term you have to win in Michigan.
So in Michigan.
We started with our efficiency on the cultivation.
And the cultivation area and really by addressing addressing three areas yield slash cost.
Variety of strains and quality and we have to.
Long distance and we're seeing the direct benefit that allowed us in Q4 to be less than $1 million.
On EBITDA and seeing what we see in Q1.
We would like to be in Michigan from.
From a gross margin perspective.
Sorry to say that debt, but took us the longest for multiple reason the internal reason as our.
Production facility took us longer than what we expected now it's fully operational.
Will allow us to go much deeper vertically.
Our Gage and cookies product, we will get back up to where we are for example in new Jersey and that will come back and that will allow us to make up for a lot of the pressure in margin with the pricing in Michigan, where it is today the room that we have on the production.
On the vertical Letty. It gives me confidence that our margin has hit the rock bottom and we'll be climbing.
From there so that's on the margin side.
The earlier earliest lever we've pulled was on the Opex and Thats really buy.
Sure.
Making the tough decisions and.
Looking at every penny and ask whether it's a must have or a nice to have and Opex and Michigan sits in line with the company. So that is what will get us to a breakeven in EBIT.
And positive EBITDA in Michigan in 2023. The next stage in 2023 is to expand the model that we've done with pinnacle and to bring in retail stores five anytime.
With a.
Good price on the acquisition with somewhere around 7% to 10% Opex was just the retail.
Opex of four wall Opex, the labor model Opex and overhead support will still be the same that isn't Michigan, making us even further efficient so that is our Michigan.
We're not looking at New Jersey, and other states and saying Hey, things are great and margins are great. We're taking all the learnings that we've seen in Michigan and we've seen in California, and we are proactively addressing each one of them and the most successful states, including New Jersey, we're looking at a margin today.
<unk> that is higher in new Jersey.
Baird.
Got it and we will continue to squeeze every efficiency out of each line.
I appreciate that color is very helpful.
And then just last one from me here I'm not sure if I missed this in the prepared remarks.
Perhaps but could.
Could you talk about your Capex outlook for this year.
If you're able to quantify it that'd be great, but just overall kind of help us understand.
Which.
Each project you are working on from a Capex perspective, and it seems like M&A is potentially more of a focus than than capex, but just kind of help us understand how you are looking at that this year. Thanks.
Yes, Hi, Eric.
Really one key Capex project and Thats, New Jersey expansion on our existing site.
And that's really the one single and we have we have a little bit here at the beginning of this year on the two Michigan store openings.
Isn't super material.
But those are really the two amounts the new Jersey project, we're scoping at call it ballpark $10 million.
And we would be looking to specifically finance that project through.
Different avenues equipment lease financing and project based financing so.
We look for that to be kind of a net neutral our self funded.
Project.
And Thats thats essentially at our entire footprint otherwise is fully built out.
That's very helpful. Thank you.
Your next question comes from the line of Glenn Mattson from Ladenburg. Your line is now open.
Yes, Hi, just one for me I'm curious could you do you have a good sense of.
What the schedule for Rollouts are kind of like new stores in New Jersey is like selling the social equity side.
It seems like Theres a lot of people were laying the groundwork to begin to open new stores. It just as you think about the year as it progresses.
What kind of scope you see there and what it means for your existing stores versus wholesale that kind of thing.
Yes, thanks Glenn.
And in New Jersey, I think are divided into three phases. The first phase is what we've seen so far and focusing on the virtual <unk> up.
<unk>.
And launching and innovating.
<unk> lines and.
From a.
<unk> perspective.
We're still seeing as a flash a total of 32 operating dispensaries 21 of them are adult use the 11 or so continue to be medical.
The second phase they are more approvals that are coming online and that are given.
We will continue to build relationships with those small operators and.
Recruit them and build relationships with them.
<unk> to be on their shelf and to offer the same.
<unk> that we offer across all dispensaries, except to at this stage today in order to build that brand equity and loyalty and.
The third phase I think where we start.
Growing at a faster rate and this is where we hope.
We plan to have our expansion on the cultivation by the end of this year completed its on the same campus, where we sit today, so plants will move to the new building and the capacity.
It will be increased on the social equity part.
We are building relationship with potential applicants and current.
Players.
It seems that the bill has slowed down a little bit and it is in the.
But we continue to be close to it and we continue to be extremely interested in partnering with.
Sure.
Small business owners in the communities to help grow market share and to help serve the communities that they and we live it.
So just to be clear this small operators with the on the <unk>.
Retail side do you expect them to be open.
At some point this year and roughly what timeframe I know, it's probably scattered with so many different.
Operators or whatever but.
Is that something that's going to be happening over the course of this year.
And do you imagine it has an impact on the on the retail business until the wholesale kicks in or is there.
Any better given take you can give us some sense of the timing of how it might impact you positively or or or adversely.
We believe we believe the schedule is not clear how often they come online. They are licenses that are won but the capital market is not allowing for speed to go online.
There are licenses that are still sitting idle and its hard to tell when they'll come online I do believe that throughout the year, we will see more retail store coming in stores coming in New Jersey still has the least amount of store for Kathy that the market is still growing at 17%.
In the last eight weeks.
Compared to the previous eight weeks as long as that growth.
Line with display.
Dispensary gross over the retail doors, Glenn I expect our growth to stay in line so between our retail stores and the wholesale business.
Our budget is to have no accumulation and no buildup of inventory and in New Jersey, and we will continue to sell everything we produce so it's still a demand market.
Yeah.
Okay, great thanks for that color.
Thanks Glenn.
Your next question comes from the line of Noel Atkinson Clarus Securities. Your line is now open.
Hi, good evening folks and thanks for taking our questions and well done in Q4.
Just a few quick ones for me what exactly do you have to do in order to complete a sufficient reorganization to list on the PSX.
Thanks, Bill I thought nobody was going to ask you about the PSX there was like a <unk>.
We've already we're already like five questions in or something like that.
We can't say much about the re org until.
We put out our proxy which will be next month.
But what we can what we tend to tell you is that it will be similar to.
Other companies that have talked about a pathway.
Powered with the FX E canopy growth figure it should be something similar to the concepts of.
They are structuring our the structuring that theyre going to put into place.
Okay.
Secondly.
You mentioned some backlog that built up in new Jersey in Q4 that shipped in Q1 can you give us sort of size of that.
Managed to shift in Q1.
Yes, I know.
<unk>.
A little bit north of $1 million.
Okay.
Alright.
And then Jason just something quick here so.
What are you seeing across the industry here to for me to pursue regulatory change sort of post.
The failures.
In late 2022.
Do you think the industry should be doing to kind of promote itself to achieve some regulatory change here.
I think that I think I hear that saved us Phil.
Has some momentum.
I believe that everybody over here is that just.
Yes, I think that it's sort of avoid the cried wolf at this point so it's more of a wait and we'll wait and see.
To be honest in my view like faces and even enough at this point the industry is in.
Much much tougher shape there was.
You haven't changed you got the first time that.
I'd say failed I believe that there should be other.
Other sort of.
Efforts made.
<unk> towards achieving our goals.
One of our modestly I think is taking things.
The judicial route.
As opposed to through the Legislative branch.
We believe that the.
That.
The way that catalyst companies legal state level cannabis operators are being treated currently is unconstitutional.
I think that Thats another route that you're going to see some some players in the coming months or that I would hope to see happen.
Okay, great. Thanks, a lot.
Ladies and gentlemen, as a reminder, if you have any questions. Please press star followed by the number one on your Touchtone phone.
Our next question is.
From Andrew Semple from echelon capital markets.
Good evening and congrats on the Q4 results.
First question here and apologies if I missed it did you quantify the magnitude of the margin headwind from the initial under utilization of the Hagerstown facility. During Q4, just trying to gauge what amount of low hanging fruits for margin expansion.
There is ahead as that facility ramps towards full capacity.
Yes, Hi, Andrew Keith.
I mentioned in my prepared remarks and <unk>.
The debt if we factor out those startup expenses our margin in the quarter was.
Was 47% so.
So like 250 basis points of impact or so.
And Thats just to sort of get it get it neutral and then we feel like Theres headway because as that facility ramps and we get to positive then that will contribute further.
So sorry, we do so we're kind of signaling that we're not given a timeframe around it but if thats. The case in Q4, and if you Peel that out and we're at <unk> 47, and we feel pretty good with all the.
The initiatives, we have underway that that we can get into the high 40% if not 50 over time with everything that you had talked about in Michigan in particular, Theres a lot of room for improvement there.
So yes, that's additional color around the margin.
<unk> signaling.
Any of that.
Yeah.
That's helpful. Appreciate that.
Turning the attention to Michigan.
If we begin to see some players dropping out of the market maybe at a quicker pace. In 2023 do you think that begins to underpin pricing and I'd be curious to hear your thoughts on whether cultivators of retailers in that state are bearing the brunt of the challenges.
Yes, Thanks, Andrew I think there are two things that are happening in Michigan that.
Impacting pricing and I'll share some numbers.
The first one is the distress.
And.
Whether it's announced receivership or what.
Almost an announced receivership you have companies that are.
Willing and are taken 2030 cents on the dollar to elongate or to extend.
They have runway.
The second thing that's happening in Michigan.
And this last month.
We the CRA has registered the highest number of offenders.
Sure.
From a practice perspective, as a club down and.
And added on any practice that is not 100%.
Above the table and legal and legitimate.
As a result of dose the capacity being impacted the regulators cracking down on the practice, we have seen over the last few weeks three or four weeks.
Price on a liter of distillate go up from $200 to north of $3000.
And the price per pound of trim.
Went up from $15 to $45. So to me all the signs of the bottom being hit in Michigan are obvious we're seeing it internally the market has seen it I still believe there is a period.
The few last breath that is taken by some.
Players will impact the price a little bit, but overall it has plateaued to the bottle and it's seeing some recovery time will tell I don't want to be over optimistic, but the fact that we still have in Michigan is our.
The brand continues to hold around 80% premium.
The average.
The pound price at retail.
Complemented with our value brand led chip, we will have the biggest coverage we can in Michigan.
That strategy that sequencing and that effort is what has allowed us to go from there.
Significant EBITDA loss to be in less than $1 million in Q4, but then also to look at Q1, being where we are and being happy with the results.
Great Thats very encouraging to hear you get back into queue.
Thanks sure. Thank you Andrew.
The next question comes from the line of Matt Bottomley from Canaccord Genuity. Your line is now open.
Hi, there this is akshay <unk> on for Matt Bottomley good afternoon.
So I just wanted to touch upon the wholesale market dynamics in Michigan and Pennsylvania.
I know you guys saw a rebound in wholesale prices in Pennsylvania, this quarter, but I guess going forward. How do you plan to continue this strong pricing dynamic that <unk> seen in this market and if I could just pivot to Michigan really quickly on the second part of my question.
The initiatives that you guys have in mind to implement guaranteeing food sales.
For the wholesale market I guess, how do you guys think about the timeline as to when you expect this market to show a rebound in wholesale prices. Thank you.
Yes.
This is yet I'd be happy to answer I, just want to make sure.
I got all the questions. So your question around wholesale in Michigan, and Pennsylvania, That's the first part and the second part the timing around.
The timing around when you I guess expect Michigan to kind of show a rebound in prices as well.
Yeah, So I'll start with the Michigan rebound in pricing I think as I.
Andrew in the previous question, we're seeing it.
In some form factors I talked about the trends of stock about.
Let's talk about distillate.
Up from 200 to 3000 to 3200, so that's happening as we speak in Michigan.
We think it will continue driven by the capacity driven by the distressed players and cultivators and driven by the regulators.
Let's Michigan as far as the.
Wholesale in both states, Michigan, and Pennsylvania and Michigan.
Sure.
Ramp up in wholesale took longer than what we would have hoped and wanted and light and that was driven by our.
Our ability to grow as fast as we wanted on the vertical production and that is due by our production.
Production facility being delayed it is currently online and.
We have a clear line of sight for.
At the end of the quarter in Q2 to improve our vertical <unk> by almost twofold in Michigan that will help not only in the margin in our stores, but it also will help by offering a.
A vast or a bigger.
<unk> portfolio to our wholesalers wholesalers, Michigan wholesale is divided into two segments the value brand in the premium brands.
We will be offering both options to the price sensitive value segment and also to the premium brands. We have seemed to improve already from Q3 to Q4, and we expect 2023 trend to continue on that wholesale side.
Then sylvania.
Quite honestly, what's happening has been in Pennsylvania, and the wholesale perspective.
We are seeing a shelf space trade.
I E.
Similar brands and similar segments.
Exchanging shelves and and.
Amongst different comp.
Competitors, who are verticals. So you look at inbound and outbound wholesale and those numbers are very similar so there is a strategy that is working in Michigan.
From different perspective, it's working from a margin protection, it's working from a vertical <unk> perspective, and it's working from a.
Brand equity and brand promotion perspective.
I don't expect Pennsylvania is wholesale to rebound to it.
He used to be but it will continue to increase that.
Slightly between Q3 to Q4, and we're seeing the same trend into Q1.
I'm not sure did I Miss any part or is there any part I need to follow up on.
No that was good thank you so much.
Youre very welcome.
Yes.
Your next question comes from the line of Dave Butsch from Coyote Capital. Your line is now open.
Thanks for taking my call guys.
Two questions one would you be able to update us on the status of the lawsuit with Scotts Miracle Gro.
Against J W and terrorism and the second on the PSX listing is there anything on that reward checklist that is unattainable or do you think is going to be difficult to achieve to get the lithium. Thank you.
Yes.
I'll try to answer on the tariffs and tariffs on behalf on the first part.
There is not much to say from <unk> perspective, here's what I can say our records.
Our board meeting minutes, and our practice and business conduct.
Is second to none and I've spent 20 years enforcement 17 companies and output.
The integrity and the ethics of this group against.
Anyone in the world.
This with a lot of humility.
Yeah.
There's nothing else to add we really did not.
We did not have to make any argument because of what I described and Thats why we were in the best situation throughout the conversation that's on behalf of dose.
Yes in terms of me.
I chair as part of the agreement I can't disclose that.
Consideration that they paid me to settle the lawsuits.
Filed against me, but I can only share that.
Very happy with the outcome.
And then on the second part on the <unk> part.
There is nothing that we don't feel like we have.
Our hand in terms of the steps we need to execute on our end, which includes the rework that we couldnt go into that it'll be in the proxy that comes out in April .
Which is more like mid April by the way to just kind of tell you how close that is.
And then of course, the shareholder vote that needs to occur thats outside of our control and there's the PSX final approval.
Is up to them, but based on everything that we understand we qualified we have the assets that we need in Canada, and we're focused on that business and.
We look forward to.
Yes, if I could add external counsel, who has experience in this still things that we did.
The expected time of up listing is end of June beginning of July .
Yes.
Sure.
Yes, sorry.
The one thing that I would that I would add is that based upon this might be obvious but based upon the fact that Paris and with original was a Canadian domiciled company as opposed to all the other.
Practically all of the other players in the U S.
This re org.
If not is the least complicated for us probably versus practically everybody else. We've already had these structures in place to make sure that we segregated muddy.
In Canada and the U S.
So this is not it's not a major chore for us to.
Restructure.
It could be compliant with what <unk> is looking for.
Perfect guys. Thank you.
Thank you.
The calls in the queue.
Is there no okay at this time.
Please get the rig.
Great well. Thank you all for attending the call. This quarter. We hope you are happy with the progress that we've made over the last two quarters I know that we are but.
But we also know that we already have a lot of work ahead of us.
And we're going to get back to work. Thank you so much.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.