Earnings Call: Q2 2021

Aug 19, 2021

Earnings release

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to TeraSense Second Quarter 2021 Investor Call. Joining us for today's call is Jason Wall, Executive Chairman, Keith Stauffer, Chief Financial Officer and Ryan McWilliams, EVP, Northeast Region, will be available during our Q and A session. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions as could constitute forward looking statements They are subject to risks and uncertainties related to Terasent's 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 TeriCents' MD and A and other periodic filings and registration statements. These documents may be accessed via the SEDAR database. The company began reporting results in U. S. Dollars in the Q1 of 2021, and as a result, figures in the prepared remarks are in U. S. Dollars unless otherwise noted. Please note this call is being recorded today, Thursday, August 19, 2021. I would now like to introduce Mr. Jason Weil. Please go ahead, Mr. Weil. Thank you. Good morning, everybody. Thank you for joining us today. Tiresense has established itself in a very short period of time as a leading multistate operator within the large and rapidly growing U. S. Cannabis market. Our strategy, business model and focus have positioned us extremely well. We continue to increase our scale in our existing markets both organically and through M and A, while also continuing to evaluate entrants into new states. Before getting into our Q2 financial results, This morning, we announced the signing of a licensing agreement with Cookies, one of the most recognized and highest grossing cannabis brands in the country to supply cookies branded products across the state of New Jersey and to bring cookies corners, a store within a store concept to each of our dispensaries in New Jersey. This is exciting news and bolsters for us what was already a very attractive path forward for our business in New Jersey. Our vision for TeraSense is to establish a leading presence in attractive states by going deep through vertical integration, Great branding, high quality products and leading execution. Our agreement with cookies allows us to continue down this path, enabling us to further solidify our leading position in the state as it is expected to turn adult use by the end of the year. Now turning to a discussion of our 2nd quarter results. For the Q2 of 2021, revenue increased 72% year over year and sequentially. Adjusted gross margin and adjusted EBITDA margins were 61% 41%, respectively, Maintaining TeraSense position among the best in the industry on these important financial indicators. Additionally, we continue to have one of the strongest balance sheets In the industry, especially relative to our size with over $150,000,000 in cash. In Pennsylvania, as we mentioned on previous calls, construction is well underway to further expand our cultivation capacity. Our latest expansion plans are to add an additional 50% of Canopy space with the potential for a 60 plus percent increase in output at that facility. The greater increase in output relative to Canopy will be the result I'm converting lower yielding hybrid greenhouse rooms to higher yielding and higher quality indoor grow rooms. Market in Pennsylvania remains very healthy with the recent headset data pointing to 41% growth year over year for the period and continued sequential growth. We are investing into this growth as we see great opportunity over a multiple year horizon. This additional Expansion is expected to be completed by year end and will be a key driver of growth for the company in 2022. Related to this ongoing construction and expansion work, in the middle of the second quarter, we began to see cultivation yields in our Fulton facility impacted by this activity. We experienced similar challenges in 2019 during One of our last major expansions and we were able to remediate the situation in relatively short order. Our recently acquired KCR stores are performing very well similar to our other 3 Apothecary and dispensaries in Pennsylvania. We have also made operational improvements to the acquired stores as part of our integration efforts. While we did not break out revenue per store, KCR did materially contribute to revenue during the quarter and growth was 10% in those three stores on a pro form a full quarter Over quarter comparison. We have a total of 6 retail locations now in Pennsylvania and we fully intend over time to go deeper with the ability to Turning to New Jersey, Our 2nd store in Maplewood opened in early May. This store is built for volume with 6,500 Square Feet of space, 15 point of sale registers and express pickup location And it is in a very densely populated region of New Jersey. We estimate that this location can do $40 plus 1,000,000 in revenue annually in an adult use program. Given the limited number of dispensaries opened in the state, We expect each store and especially those like ours located in densely populated regions of the state 3 towns in New Jersey where Terrascend already has or will have dispensaries that they have passed the ordinances protecting Our continued operation and enabling our dispensaries to participate in the adult use market as well. These in towns have also banned all other cannabis establishments. Therefore, TeraSense dispensaries will be the exclusive cannabis establishments in all three of those This could change in the future, but this is an extremely attractive situation for us at this time. Today, I'm also excited to unveil the location of our 3rd New Jersey dispensary, which will be in Lodi. It's in one of the best locations, If not the best in the state right now in my opinion. Directly off of Route 17 and I-eighty, This location has approximately 107,000 vehicles that pass by per day. For those who are fans of The Sopranos, our location It's right next to the famous Bada Bing. This new location is 5,000 square feet with ample parking space for parking as well as a drive through. We believe that Lodi has the potential to deliver even higher revenues Then our Maplewood store. By the end of this year, we will have Phillipsburg, Maplewood and Lodi up and running in New Jersey. 140,000 square foot cultivation and processing facility in the state is now fully operational and prepared to supply the market. While New Jersey is an extremely attractive market for us, we are seeing temporary market dynamics that we believe are related to the unique situation that exists in anticipation of the expected upcoming adult use transition in Q4. For example, patients with a medical cannabis card Additionally, new patient growth has somewhat slowed with consumer anticipation of adult use in the coming months. We believe that both of these dynamics are temporary and that once the state transitions to adult use, which we expect by the end of the year, it will be a whole new ballgame. Furthermore, in anticipation of a dramatic increase in demand once adult use goes into effect, we have made the decision to increase allocation of our own branded products to our own Apopetarian dispensaries ahead of the anticipated demand surge to ensure that our own stores are fully stocked. This decision will have an impact on our sales in the second half of this year. However, it will result in future more profitable sales and will guard against out of stock situations in our own dispensaries. I'm as excited about Pennsylvania and New Jersey as I've ever been. In both high growth limited license states, I believe we will continue to grow and scale our business and continue to own meaningful market share. In Maryland, with the closing of the HMS acquisition earlier in the quarter, We are now focused on expanding our capacity in the state to a scale, which will enable us to be a leading branded manufacturer. Since we have taken over the business, we have implemented improved cultivation and processing techniques, grown Our own high quality strains and introduced our own brands. It's still early days for us in Maryland, but we're already very excited about the future in this highly attractive market. Turning to California, our stores experienced signs of recovery during the quarter as commuters and tourists began to return to San Francisco. That traffic has started to come back. As an indication, sales at our 5 Apothecaryum Dispensaries in California grew 13% sequentially in Q2. At our Berkeley location specifically, we expect increased demand as students return to campus for the first time Since that store opens in the middle of 2020, that store in particular should see a notable pickup in sales. We expect this to be a great location for us. In Canada, the business grew sequentially driven by top selling flower that we've recently introduced including retrograde, indigo days and secret address. For example, retrograde and Indigo Days were number 2 and number 4 top selling 3.5 gram SKUs at the Ontario Cannabis Our commercial focus and product portfolio are much improved and our cost structure is now aligned with all of the work that we did last year. We have expectations for Canada to continue to progress both on the top line and from a profitability perspective. Subsequent to Q2, we made a decision to undertake a strategic review process to explore, review and evaluate potential alternatives for our Arise CBD business. This business has not recently represented a material part of our strategy. As a result, we will conduct this review with an eye towards focusing our efforts and resources on our core THC businesses. I would like to thank the Arise team for all of our efforts as we continue to work through this process. In closing, TeraCents has established itself Our licensing agreement with cookies, New Jersey going adult use, expansion in Maryland Our larger footprint in Pennsylvania will solidify TeraSense as one of the leading and most profitable multistate operators in the U. S. I would now like to turn the call over to Keith to discuss the financial results for the quarter. Thank you. Thanks, Jason. Good morning, everyone. As a reminder, the results I'll be going over today can be found in our financial In Q1, we transitioned our reporting currency to U. S. Dollars, so all figures discussed this morning or in U. S. Dollars unless otherwise noted. Net sales for Q2 increased 72% year over year and 10% sequentially to $58,700,000 This significant year over year growth was driven by 2020 Elevation expansions in Pennsylvania and California, the initial ramp up of both wholesale and retail sales in New Jersey, The continued growth and ramp up of our 3 Apothecarium dispensaries in Pennsylvania and 2 newer locations in California, as well as the acquisitions of HMS in Maryland and KCR in Pennsylvania. The 10% growth sequentially was driven by the continued ramp up of our New Jersey business, the 2 aforementioned acquisitions, some recovery of retail in California that Jason just mentioned And a strong quarter in Canada, all partially offset by the temporary yield declines related to our construction and expansion in Pennsylvania. Regarding net sales by channel, our branded manufacturing business was down 5% sequentially, Driven by the lower PA yields, while our retail channel grew 50% sequentially, largely driven by 2 months of the KCR acquisition, but also by the 13% growth at our California stores and continued ramp up of our New Jersey stores. Branded Manufacturing with its healthier EBITDA profile represented 62% of our revenue mix for the quarter. This percentage continues to represent the highest mix in the industry and is a key pillar of our business model and strategy as a branded manufacturer first. Adjusted gross margin for Q2 was 61% compared with 65% in Q1. Note that adjusted gross margin is a non GAAP measure, which excludes fair value of biological assets and other nonrecurring adjustments. The 400 basis points of sequential decline in adjusted gross margin was primarily driven by lower yields in PA resulting in an Unfavorable mix relative of branded manufacturing relative to retail and lower absorption of fixed costs. We have maintained our strong focus on cost control with SG and A as a percent of revenue at 25% for the quarter, A 500 basis point decline sequentially, partly due to some one time costs in Q1, but also due to operating leverage. Overall, we remain at or near best in class levels of SG and A leverage in the sector. And our strategy to go deep, build scale And leverage our cost structure, teams and capabilities remains a central focus. Q2 adjusted EBITDA was $24,300,000 representing a 41% adjusted EBITDA margin and 3x The adjusted EBITDA levels of Q2 of last year. This also represents our 3rd consecutive quarter with EBITDA adjusted EBITDA margins above 40%, which continues to place us among the best in the industry with this important indicator. Net loss for the quarter was $23,000,000 driven by a non cash loss on fair value of warrant liability of $20,000,000 A non cash $8,600,000 impairment related to Arise, goodwill and intangibles and a $3,000,000 unrealized loss foreign exchange, primarily driven by revaluation of U. S. Dollar denominated cash in Canada related to our January Equity raise. Turning to the balance sheet, we ended the quarter with a very strong cash position of $154,000,000 This level of cash balance is among the highest in the industry, especially relative to our size and positions us well to further invest In the business, both organically and through M and A. In Q2, we generated $3,400,000 in cash from operations, While CapEx spending during the quarter was $2,500,000 leading to a slightly positive free cash flow for the quarter, our 3rd consecutive quarter with positive free cash flow generation. Year to date cash from operations, Perhaps a better indicator given the timing of tax payments in particular was almost 17,000,000 During the quarter, we also made some significant payments related to M and A transactions. We paid $22,000,000 as part of the closing of HMS in Maryland, dollars 20,000,000 as part of the closing of KCR in Pennsylvania and $30,000,000 as part of the final Alera earn out payment. For the full year, we expect that our cash flow from operations will partially fund our organic expansion plans, While the cash on our balance sheet will continue to largely be used to execute on our M and A agenda. Also of note, we recently or we received approximately $3,000,000 of proceeds from warrant exercises in the quarter. And over the course of the coming months, we expect to receive approximately $40,000,000 of additional proceeds from warrants that will expire in January of 2022 and approximately $50,000,000 of proceeds from warrants that expire in August of 2022. Lastly, before turning the call over to questions, I want to take a few minutes to discuss our 2021 outlook. As a result of what Jason outlined in Pennsylvania and New Jersey, we are withdrawing 2021 financial guidance. This is primarily due to the temporary reduction in yields of Quality Flour caused by the ongoing capacity expansion in Pennsylvania. It also relates to our decision to increase our allocation of branded products to our own Apothecarium dispensaries in New Jersey In anticipation of increased demand in an adult use environment, while more profitable in the long run, Retail sales take longer to sell through when compared to wholesale sales. When evaluating the potential of our dispensaries In an adult use environment, we think prioritizing our retail channel in a supply constrained market is the best path for building long term shareholder value. For the second half of twenty twenty one, although we have withdrawn our guidance, we do expect to continue to deliver strong year over year growth in both revenue and adjusted EBITDA. Finally, I'm pleased to report that we are at the final stages of our work to convert from IFRS This ends our prepared remarks. I'd now like to ask the operator to open the call for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a 3 tone prompt acknowledging your request and your questions will be polled in the order that you received. Your first question comes from Vivien Azer with Cowen. Please go ahead. Thank you. Good morning. Appreciating that this might be hard to answer specifically, but order of magnitude, is there a way for you guys to quantify What the yield disruption impact was to your total company revenue or U. S. Revenue in the quarter? Thanks. Keith, sorry, I was on mute. Keith, you want to take a stab at that? Yes. Hi, Vivek. Good morning. That's one of the reasons, quite frankly why we decided to withdraw the guidance, is we're assessing that. But It started to occur in the middle of Q1 or sorry, in the middle of the quarter in Q2. And the team is already well in terms of getting the situation in hand. And we expect that by in the next couple of months, next few months that we cycle through it. And leading into 2022, we're going to be ready to go with the full expansion and Looking forward to getting that new facility or new space in the facility up and running at the high higher outputs. Yes. And what I would just add to that Vivien, what I would just add to that is it actually there's always a lag in terms of Flower that you're growing and then obviously by the time that it turns into revenue, adding the stores. So There was actually there was a decent sized impact in Q2. And even though in Q3, we've already made substantial progress, because of the lag, We will actually see more of an impact in Q3 than we did in Q2. Thanks for that call out. That's very helpful from a modeling perspective. Jason, not tying these two questions together, but can you update us on where you stand on the CEO search? Sure. We are still actively searching for a CEO. As I've mentioned in the past, we don't Feel like we're it's a fire drill or anything like that or there's a very urgent need in the near term, But we are still conducting that search and we look forward to being able to share the results of that in the coming months. Understood. Thank you. Thank you. Your next question comes from Matt McGillis with Needham. Please go ahead. Thank you. In Pennsylvania, if the yields declined there related to the construction disruptions and your customers Sourced product from other suppliers and didn't seem to skip a beat. Why would they come back when you're in a better in stock position in the 3rd Q4? Like what would change with their Need to come back to you when you're in a better in stock position given that, I guess, they moved on in this quarter and like I said, didn't skip a beat. Sure. I think this would be a good time to introduce Ryan McWilliams, our new EVP of the Northeast, I think you can answer that question. Yes. Hey, Matt. Thanks, Jay. So I think One thing that we can point to is that we've seen an issue very similar to this at the tail end of 2019 as we went through the first phase of expansion in the same facility. And since we've been such a large contributor to this wholesale market, we're a known quantity, a known entity with the current patient base in Pennsylvania. I think that When we come back online, bigger and higher quality than ever, that same trend will continue like we saw it following The end of 2019 and that construction project. Yes. And the thing that I would add also is that it's really only The impact that we felt was on the flower side. It was not on the manufactured product side in terms of vapes and concentrates and things like that, so that's how the business is has continued To be strong, and we do believe when it comes down to it, Matt, I think, it always comes down to if you can Produce high quality products, there's no magic. If you produce high quality products, dispensaries are going to buy those products and The customers are going to buy them as well and pull them through. So we are in every market where we are, We very strongly believe that the better our products are and the higher the quality They are that they will continue to gain share or in the case of Pennsylvania to take back that share. Thanks for that, Jason. And on the inventory, I'm trying to reconcile the comments on not having the inventory to sell in Pennsylvania and Allocating more to your own dispensaries in New Jersey with the $23,000,000 increase you had in inventory in the quarter. And if you're having top line issues related to Why would that inventory be building at such a high rate? And I guess moreover, like how much of that inventory build that you saw in the quarter was actually in New Jersey versus Build in other states? Should I take that, Jason? Yes. So Yes. When you peel the onion on the inventory, it's divided across a few of the areas. But in Pennsylvania, the dynamic is that a lot more of the biomass is needing to get converted to manufactured product formats, which is then a longer process and then a longer lead time to sale. So that's sort of the dynamic in Pennsylvania. And then in New Jersey, it's just like we said, we've made a choice to Build the inventory ahead of time in anticipation of adult use later in the year to make sure that our own stores are fully stocked. So those are the 2 drivers for the 2 main buildups. And I would say roughly A third and a third of each of those 2, and then there's a third of purchases that we've made in Canada to procure products and strains against the high selling SKUs that we talked about earlier. Okay. Thank you very much. Thank you. Your next question comes from Kenric Ty with ATB Capital Markets. Please go ahead. Thank you and good morning. Jason, I'd like to just better understand the construction and Pennsylvania related delays. Is it a function of there are equipment and supply delays and you're actually not able to complete construction, the expansion as quickly as you could And that contributed to the disruption? Or is it simply a case of construction is disruptive and these things happen? I'm just trying Unpack the actual construction related angle on this because we have seen a number of other players referencing delays on sourcing and securing of Key parts or components of their capacity expansion and the like. Could you sort of speak to that so we can better understand the construction Delay as it impacts yields in Pennsylvania? Sure. Yes, I wouldn't describe it as a construction delay. We actually have we actually expanded the expansion in terms of I believe on the last call, we said we were going to we were undertaking a 30% plus expansion of our Canopy, and it's actually going to be more like 50%, and that has not been delayed. The issue That occurs often when you try to undertake a large expansion at a facility that is currently producing product. Is that just the addition of the that construction, the sort of the excavation Of the dirt outside of the facility, the extra people that might be in the facility, Things like that just you end up introducing more issues and More potential issues into the grow. And that's exactly practically exactly what happened to us in Q4 of 2019, when I believe we expanded our footprint at that time by 4x, We ended up having the same issues in terms of that current quarter sales. The thing is nobody was really I don't believe we were covered by analysts at that point, so nobody was really paying attention. And then once we got all of that straightened out, it was off to the races. We believe that it will be the same case here. It's just we think we're going to go through another couple of months of remediating some of these issues and we've already made substantial progress. It's just that It shows up it's going to show up as a lag in terms of revenue. But that's really The sort of the bottom line on it. It's not that the construction was delayed, I would say, at least relative to What we have disclosed, it's actually ahead of plan and our production is going to go up. Our output should go up even more than The 50% increase in Canopy because we are also converting some of these hybrid greenhouse rooms into indoor rooms, which will substantially increase both the quality and the yield in those rooms. Thanks, Ajay. And then if I could just switching to A combined one on guidance versus Pennsylvania and New Jersey. So I mean, so it's all of guidance essentially predicated on, As you've discussed, the yield challenges in Pennsylvania and sort of evolving market dynamics in Jersey. Could you speak to in Jersey, you commented that you would still expect to see recreational new sales late in the year. Can you just help us better understand that in context of the inventory build end market and the fact that those sales can't commence until there is sufficient Inventory, my apologies, to supply the medical market. Do you actually still believe we get there in New Jersey this year? And how should we think about your positioning on the assumption that we do? It sounds like things in New Jersey are tracking well, but I'd like to just better understand the New Jersey in the context of the evolving dynamics and New Jersey in the context of the constraints on adult use sales only beginning once medical use has been covered. Sure. I mean that is that's actually one of the reason that we've been building inventory in Jersey It's because we think that once adult use kicks in that it's going to be a completely New Jersey is going to be a completely different market. And we think that we are going to have demand for pretty much for everything that we currently have in inventory That's ready to go and whatever we're going to be producing on a run rate basis once adult use Kicks in. In the meantime, the dynamics are not great from in terms of as a medical market, As we mentioned earlier, new patient growth In the state, has the growth has slowed down because everybody is just waiting for adult use. I mean, you wouldn't believe how many calls our dispensaries get per day from people asking if we already have adult use in place and if they can come to the store. So we think that there's just sort It's been a little bit of a natural lull in terms of new patient growth. And then New Jersey has its own unique dynamic where When you sign up for a card, you choose a specific dispensary to be your main dispensary. And that just results in a little bit of a longer sales cycle for our dispensaries under medical because there There are several other established dispensaries that have been around for a while and people were already signed up with them. All of that being said, We think that things are going to be completely and it's completely Different come adult use and that demand is going to be more than What we can potentially supply. And that's the reason that we made this decision to move towards Having our brands be almost exclusively sold through our own stores. We want to we don't want to have any stock outs in our stores. We want them to be some of the best supplied stores in the state and we think that these can be some of the best Revenue generating and profit generating stores in the country. So while that serves to Sort of from a timing perspective, move sales from the second half of this year into, Say the 1st and second quarter of next year, just because to book a retail sale, the patient has to buy the product from your store. About the wholesale sale, all you have to have is a dispensary buys your products to put it out on the shelf. So it's really to us, it's more of a timing issue than anything else. But remember, when you sell it through your own retail store, You're getting the full retail price as opposed to the wholesale price that you would sell it to another dispensary for. So we just believe that Those will be higher quality revenues and we are willing to wait to be able to realize those higher quality Higher revenues and higher quality revenues. Additionally, now that we have the cookies agreement That additionally bolsters our confidence that we're going to be able to sell Everything and then some that we can produce, we are actually Planning on a significant capacity starting to work on a significant capacity increase In New Jersey, in the coming months. Thanks for apologizing. That's great. I'll get back in queue. Thank you. Your next question comes from Eric DelOrier with Craig Hallum. Please go ahead. All right, great. Thanks for taking my questions. So I'm not sure if this one is best for Jason or Ryan, but the The Lyra team was obviously a key area of strength for TeraSend. And with Greg now moving on, How does that impact the grow teams in the Northeast? Was this departure a factor in those Pennsylvania yield declines? And Yes. How does that maybe impact your outlook for New Jersey or Maryland? Sure. I think I will let I think I'd like to let Ryan answer that question. Yes. So To the question about how does it affect the yield declines, I think that the remaining team that we have in place, specifically Our SVP of Operations, Jason Morris, who has already been responsible for the New Jersey location to date and That's been such a successful production facility. Now his reach has brought in to cover the entire Northeast. So I only expect Upside from there having this promotion for Jason and expanded responsibility for the region. Okay, great. And then just focusing on Pennsylvania specifically, obviously a Key market for many MSOs here and I understand that the yield decline sort of impacted your participation in the wholesale market for this quarter, but just any commentary on the competitive dynamics unfolding in Pennsylvania, whether you're seeing Sniffer competition as it relates to quality or pricing, if you could kind of just give any comments on what you're seeing on the Competitive dynamics of the wholesale market in Pennsylvania, that'd be great. Thanks. Yes, sure. Yes. Yes, I got it. So from a wholesale perspective, there's really been not too much change at all from a wholesale pricing perspective. On the retail side, we've certainly seen as in any maturing retail industry or any state that's a little bit Further advance in Pennsylvania as we've seen some more competition in terms of promotional activity and discounting, but really We not as much as I would have personally expected to see this far into the program. So we're very pleased with The continued demand that's out there and even as this additional capacity comes on from ourselves and others operating within the state, I think there's still plenty of demand to go around. Okay, great. Thank you. Thank you. Your next question comes from Pablo Zwaneck with Cantor. Please go ahead. Good morning. Thank you. Can you just give us a reminder in the case of your Pennsylvania business, how much say back in the Q4 2020, Q1 2021, much is really coming from Greenhouse and how much indoor, right? Because what we are hearing is that there's significant pressure on the lower end Flower of the market, mainstream, what's coming from greenhouse and that indoor of course is doing well because it's premium. Just here as a reminder of where you were in terms I understand you're building capacity on Indore, but just a reminder where to where in terms of mix back in the Q4 and first. Thank you. Brian? Yes. So Pablo, From a product perspective, the majority of what we have been historically harvesting from the greenhouse is going towards the extracted products. We've had the indoor expansion included on there, which has been the primary driver of our higher quality Flower sales and flower availability since that first phase of the construction project was complete Back in Q1 of 2020, from a square footage perspective, it's more In the range of probably 20% greenhouse to 80% indoor or something along those lines give or take. Okay. Thank you. That's helpful. And then just a second question regarding the cookies plan. Can you talk about I don't know if you can comment on the economics. I understand gross margins will be high in New Jersey. But is it a 10, 20 point difference? If you're selling your own branded product, About the trade off you might have made between licensing from our Canopy Growth, Tokyo Small, Tweed or other of their brands versus Kookies. And also related to Poochie's, well, it's a brand that we hear a lot about. It targets a very, very specific demographic, right? And I understand where your stores are located, I'm just wondering how that plays into all this because one thing is to build traffic, but I'm just trying to understand how The rationale there with that specific brand. Thank you. Sure. I'll let Keith. Keith, maybe you can talk to the margins and then I can speak to overall in terms of why we chose the cookies brands and its demographic. Sure. I mean, just really quickly, I mean, without disclosing, we can't disclose the exact economics, but it's a royalty arrangement. There's a royalty fee, but overall, we feel like the boost that This deal is going to give us in terms of attracting more sales and more interest and everything Through our stores, but then also across New Jersey, the incremental margin dollars are definitely going to be better. And of course, There'll be some percentages some percentage that will be paid, but overall, we expect our margins overall in New Jersey to be great. And so this deal is definitely going to be an add on positive benefit to us. Yes. So I think that, yes, we don't see that cookies products sell definitely in practically every market Across the U. S. Sold at a premium to other products. So we don't see even after the That we're paying them. We think that it is well worth it because we don't see it impacting our margins to any real extent. In terms of appealing to a specific demographic, first of all, we want all demographics to come in our store. So If this appeals to an additional demographic that we wouldn't have, then that's great. I My personal belief on cookies is that it is one of it's the top brand Across the whole entire United States, I think they're to me, they're the best brand, if not sort of the only brand. So the opportunity for us to have cookies in New Jersey was is something that we were very excited about. We've developed a really Strong relationship with the team over there, with Berger and with Parker and the rest of the team. And we think that this is going to be a brand that not only are we going to be able to sell practically everything that we can make, But that is going to pull people into our stores because we are planning on exclusively selling the cookies product So we think it will help drive more sales in our dispensaries for other products and drive more customers to our stores Overall. And by the way and also on top of that yes, sure. And Pablo, just another thing I was going to add is on top of that, They do have best in class genetics. So we will be growing. We've been working with them. We have a great team ourselves in Jersey on the genetics side that's been phenol hunting and popping seeds and really Sort of been able to develop excellent genetics of our own, but the combination of the cookies genetics With ours, which we'll be launching some New Jersey specific genetics that we've developed under the cookies brand. The combination of our genetics and theirs, I think we're just going to be a really Strong competitor in New Jersey. Thank you. That's very helpful. Can I just add one more? I think in the press release you mentioned something about looking at the CBD business and maybe exiting that business. Can you just provide some context because obviously we've seen a number of other companies buying And here you are exiting. So tell us what you are seeing that many others are not seeing? Thanks. Sure. Chip, do you want to answer that? Sure. So we didn't specifically say we're exiting the business, Pablo, but we did want to Just to be clear that we're evaluating our path forward for that business. And so all options are on the table and And we're going to assess that and there'll be more further news in due course once we make any kind of final decision. All right. Thank you. Thank you. Your next question comes from Platt Matson with Ladenburg. Please go ahead. Yes. Hi. Thanks for taking the question. So just looking past the short term issues, but And you may have commented this, I missed the first few minutes of the call. But Jason, curious about your thought process on M and A. You have a healthy balance sheet So you have positive free cash flow in the 1st 6 months. So thoughts about like how pricing looks to you as Asset prices have come down a little bit. And just your thoughts on how aggressive you intend to be in the back half or beyond? Thanks. Sure. Thanks, Glenn. So we are definitely we've definitely been very active on the BD and M and A side. We're working on multiple deals on that front. Valuations, as you mentioned, have definitely come down. I believe that they've Come down more than the public stock prices have come down of the public operators. So Even though our stock is down substantially over the last several months and in addition to pretty much the whole sector, It's not like there's not very accretive deals out there to be had. I mean, I've used in the past examples of Where multiples continue to go down because the dynamic you have in these limited license States, mostly in the East or the Northeast is that there are relatively low caps, License caps in terms of the number of dispensaries or the square footage of Canopy that's allowed by any one player. So if you look at someplace like Massachusetts, I believe all of the top 10 MSOs other than TeraSend are in Massachusetts and most of them are already capped In terms of they can't go out and acquire anything else unless they're willing to divest something that they have. And that has just created the dynamic In states like Massachusetts and other places where there are just there are no buyers left or there's just less competitive tension Competing for specific deals because there are just less people to bid for them. Not to continue to mention Massachusetts, but as an example, We probably see at least 2 deals a week from operators in Massachusetts that are What we would call mom and pop, which just means not a public company, that are doing typically they're doing $20 ish million in EBITDA This year, they've we're going through some expansion. I think they'll do $40,000,000 or $50,000,000 in EBITDA next year. And those assets based upon sort of the most recent deals that we've seen out there, those assets can be bought for 5 or 6 ish times EBITDA because of the simple fact that there are very few companies out there that can pull off $100,000,000 Deals. So that's the dynamic that we're seeing in Massachusetts and seeing in other states as well. And if we wanted to if it was just a matter of doing accretive deals, we should get a whole lot of those deals done in multiple states. We have pretty much for the last several years ever since we entered the U. S, We've chosen to only enter a state if we think that we can be a dominant player in that state over the next 12 months to 24 months or so. So we're sort of we're waiting. It served us well up until this point to sort of wait and pick our spots And be picky because in the meantime, prices have gone down. So we don't have any FOMO. We don't this is not an ego driven strategy or I guess it's almost the opposite of an ego driven strategy For us, because we don't measure ourselves by how many states we're in. We measure ourselves By our profitability and our ability to win in any given market and we just feel that if we stay more focused And we really set the bar very high other than just finding deals that are accretive. If we set the bar really high, then it's going to give us the best chance So when in the markets where we are because we're not going to be too scattered. Great. That's an extensive answer and you covered my potential follow-up. So thanks for the color, Jason. You're welcome. Thank you. Your next question comes from Andrew Parthenio with Stifel. Please go ahead. Hi, good morning. Thank you for taking my questions. Good morning. Maybe expanding on your cookies deal, I was curious if you give a little bit more color Why did cookies decide to partner with you? I mean, the deal that you were that you got Seems to be extremely attractive and not necessarily the same that we've heard from other operators. You guys are going to be the exclusive manufacturer and producer of cookies. You mentioned today that cookies will only be sold in your stores. You don't expect to wholesale it out. You're going to get that full vertical integration margin there. And on top of that, on top of the store and the store as well, on top of that, You might even get some unique genetics that are only sold in New Jersey. So to me, this looks like An outstanding deal for you. And I'm just wondering, what was it from the part of TeraSense That Werner and the team decided to partner with you in such an exclusive fashion. Well, thank you for that. I appreciate that you see I see that it's a good deal for Terrascend. I think it's also the fact is it's the best deals are the ones that are win wins. I think it's an excellent deal for cookies as well. I think what attracted, Bernard and Parker From cookies to TeraSend, and it's just the fact that they were out of our facility And so I did New Jersey. As Ryan mentioned earlier, Jason Morris, who runs that facility, has just built An amazing facility and amazing workplace. That place is spotless. You walk down the halls and you At least we get comments every week from people who took tours that say that it's the Cleanest and one of the best run facilities that they've ever seen. The fact and what I alluded to earlier about cookies is I believe that cookies is the strongest brand in the U. S, largely because their branding and marketing is, I don't know, in my view, head and shoulders above almost everybody else. But not only that, it's Because their products and their genetics are the best in the market, and they really do value quality. And they've made multiple visits to our facility and just really, I believe, grew to trust That we were going to take the same care with their product that they would if they were growing it themselves. So not to try to pump ourselves up too much, but I really believe that that is the reason that they Such an extensive deal with us, because they know that they're not going to need to worry about the quality of the product That goes out in these cookies bags at retail. It's going to reflect well on their brand And help further their brand and the and sort of the recognition out there on the market that their products and their genetics are best in class. Hey, Jason, if I could just add one point on top of that, which is also just the scale and the capability that we have in New Jersey and also our Plans to increase that scale so that's another major factor. Absolutely. You're right. Thank you for pointing that out. And they are I will tell you that partner specifically is off the charts excited about our Lodi location. As we mentioned, I believe earlier, it pretty much shares the parking lot with the bada bing, which Practically everybody knows from The Sopranos, it is a one of the highest, I believe, one of the highest Traffic areas in the country with 107,000 vehicles per day driving right by our front door. If you're driving on Route 17, you don't even need to pull get off on an exit and make any turns. You pull Directly off of Route 17 into our parking lot. And Berner was so excited That he started texting in the middle of the night a few weeks ago talking about all of the amazing things We could do there and soprano, whether it's sopranos, specific strains and Different. The other thing that's great about cookies is it's not just about the flower and the other branded Cannabis products, they have a full line of merchandise and clothing that does extremely well. And we've even talked about sort of Some Soprano specific clothing lines and things like that, I believe that store is going to be You know, one of the best dispensaries in terms of sales in the whole entire country and that's something that the cookies Folks are really excited about as well. Really appreciate that color. Thanks for taking my questions. I'll get back in the queue. Thank you. Your next question comes from Andrew Sample with Echelon Capital Markets. Please go ahead. Hi there. Sorry, I got a little fire alarm going off in the background. So There we go. Could you perhaps speak to the intra quarter dynamics at play in Q2 2021? When we last had the Q1 update in mid May, the business was on a stronger growth trajectory than what was achieved. Were there any changes in the back half of the quarter? Chuck Keith, do you want to walk? Yes, sure. Hi, Andrew. That's Squarely, the issue that we were referring to here where that's where the yield Impacts in Pennsylvania started to impact us in the back half of Q2. So it sort of lined up almost in parallel with The update that we were giving in mid May. And then again also we started to see the dynamics Starting to shift our approach there like we talked about. So those are the 2 key dynamics in the back half of Q2. Got you. And just switching gears to New Jersey, just trying to still understand the narrative here. You're signaling that medical patient growth on the retail side was a bit slower than expected, Which should have naturally given you some incremental capacity for the wholesale market, but you're also signaling that you kind of had to dial back On the wholesale side to make sure the stores are adequately supplied. So it sounds like you're moderating both the retail and the wholesale side for 2021. Is the underlying strategy behind that, to put it simply, is that you want to build inventory for the adult use market, so you're ready for day 1 of that program. Yes, I would say that that's the strategy. We believe that once an hour based upon the location Of our stores and the size of them and the throughput ability because 2 out of 3 of them Our large stores with a high number of point of sale systems and we really think that we can We think that the we'd like for the only thing to limit the sales at those stores to be the how much throughput We can get there. How many people we can get through the doors? We'd much prefer that than Having our sales there be limited by the fact that we don't have enough product, especially now that we have the Exclusive on the cookies brand. So that's really the reason and the decision that we've made. If we wanted to drive a whole lot of wholesale revenue in the second half of this year in New Jersey, We think that that would be there for the taking, especially as we get closer to adult So it's all used implementation and the dispensaries out in the state starting to stockpile product in anticipation of that. But we have we've made a conscious decision to forego that Because we would I would much rather have $2 worth of sales in January or February at retail Than a dollar's worth of sales in November or December because we sold it wholesale. And that's really part of the reason That we decided to withdraw the guidance is I don't even want anybody internally to be focused I'm trying to grab a dollar of sales in November or December when Those dollars will be higher and of higher quality because they came through our dispensaries if we wait for those sales To be pulled through by the customers early next year. Great. And we think And just the only other thing to add to that is we do believe that the market We'll be severely undersupplied once adult use kicks in. We're not sure that the In terms of the way that the state is going to implement the adult use program, we're not sure that it's just going to be a blanket approval For everybody to just turn over from medical to adult use, we think there's a chance That the state will choose which companies have enough supply to meet their own medical patients' demand. And the ones that do, they will essentially upgrade them to adult use licenses. And we think that since we have some of the largest capacity in the state And we have high quality inventory of product waiting and ready to go. We think that that's going to position us Really well in an environment where not all of the 10 cultivators in the state are necessarily going to be allowed to sell into the adult use market for the 1st several months. Appreciate the color. Thank you. Thank you. Your next question comes from Noel Atkins with Clarus Securities. Please go ahead. Hi, good morning. Thanks for taking our questions. First off, just in New Jersey on your production expansion here, can you give us a sense of the Scale of how much you're expanding the Canopy and the timeline to completion? In New Jersey, we are It's still at the earlier stages. We have not yet started the expansion. I figure New Jersey allows 150,000 square foot up to 150,000 square feet of canopy. That is a whole lot of canopy. There's not I don't there's very few growers that are cultivators that I know anywhere That are at that size in any one state, but we plan on getting there over time. I would say that the expansion that we are currently contemplating and could start work on in the next several months Would be somewhere around a doubling of our current capacity right now in the state. So that's substantial. We have, I believe, the largest capacity, if not right near the largest capacity in New Jersey right now. And obviously, if we double it, we will we should be in an even stronger position. We're going to do it We're going to do it over time. In terms of getting to the full $150,000,000 we're going to do that over time because as you all can see that there are Complications that sometimes arise when you try to take on very large capacity Increases at your facilities in a short period of time. That's I'm alluding to obviously the Pennsylvania. Even there, I think that this short term pain that we're going through is going to really reward us well Come next year, but in the meantime, we're dealing with like we did in Q4 of 2019, we're dealing with Sort of some of the headaches that come along with taking your capacity up by 50 plus percent. Okay. And then, thanks. On our my follow-up, just following up on the prepared remarks that you guys provided, are you expecting to achieve quarter over quarter Growth in total revenue and adjusted EBITDA in Q3 for Q2. Yes. I can take that. And again, we withdrew our guidance, Noel. Hi, Noel. But just directionally, what we see is that Q2 revenue sorry, Q3 revenue We'll be similar levels to Q2. There's some headwinds and some tailwinds that we've kind of talked through before picking back up into Q4 as we cycle through the yield situation in Pennsylvania. And then on the margin side, we Due to those factors, we expect margins to compress in Q3, Because again, we're going to continue to we're continuing to deal with this in this quarter. Then they'll begin to recover Back to near recent quarter levels towards the end of the year. So that's kind of broad brush maybe to Help you kind of through what to expect through the rest of this year. And again, we just want to reemphasize like we said That overall, this year is still a great year and Back half of the year, we'll continue to grow revenue and EBITDA on a year over year basis and we're really focused on Getting ourselves set up well as we've talked here for this whole call and positioning us really well and in a strong way for 2022. Okay, great. And just for those of us that have covered you guys for quite a while, it's nice to see California and Canada coming back strong. So, well done there. Thank you. Thank you. The only thing I would add to Keith's comments on Q3 in terms of That we're going to see some margin compression there. That's really it mainly has to do with mix shift Because the fact is that Pennsylvania Wholesale is some of the highest margin or is the highest margin part of our business. So with that being with the yield Issues that we've had and that's certainly going to show up in Q3, because Because even though we've had improvements, the revenue shows up on a lag, the percentage of revenue made up by Pennsylvania wholesale We'll be smaller in Q3 and therefore that's why the margins will be lower. Yes. Thanks, Jason. Thank you. There are no further questions at this time. Mr. Wilde, you may proceed. All right. Well, thank you everybody for attending our call and we look forward to speaking to you all next quarter. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.