Earnings Call: Q1 2021

May 19, 2021

Earnings release

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to TerrAscend's First Quarter twenty twenty one Investor Call. As a reminder, I would like to advise I would now like to hand the conference over to your first speaker today, Dan Foley, SVP of Treasury. Please go ahead. Thank you, Joanna. Good morning, everyone. Welcome to TerrAscend's first quarter twenty twenty one conference call for the three month period ending 03/31/2021. Joining us for today's call is Jason Wilde, Executive Chairman Steve Stauffer, our Chief Financial Officer Greg Rockland, Chief Executive Officer of Northeast Operations and Jason Marks, Chief Legal Officer. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute and uncertainties relating to TerrAscend'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 TerrAscend's MD and A and other periodic filings and registration statements. Documents may be accepted I'd via the SEDAR like to remind everyone that we began reporting results in U. S. Dollars this quarter, and as a result, all figures in our prepared remarks are in U. S. Dollars unless otherwise noted. Please note this call is being recorded today, Tuesday, 05/19/2021. I would now like to introduce Mr. Jason Wilde. Please go ahead. Good morning, everybody. Welcome to our thanks for joining us today. Sorry about that. Since our last conference call in March, we have made progress on many fronts. We just posted quarterly record quarterly results. We entered the Maryland market, doubled our dispensary footprint in Pennsylvania and continue to invest in organic projects to lay the foundation for strong growth beyond 'twenty one. Due to the significant progress, are increasing our full year guidance. Net sales are now expected to exceed $300,000,000 up from our prior guidance of at least $290,000,000 and adjusted EBITDA is expected to exceed $128,000,000 up from our previous guidance of at least $122,000,000 This would translate to more than a doubling of our net sales and almost tripling of our adjusted EBITDA year over year. Few companies are experiencing the explosive growth we are currently delivering with our operations. Our targeted investment strategy is yielding growth and margins that are among the top of our peer group. We continue to invest in our existing operations while pursuing accretive acquisitions to fuel continued growth. Overall, 2021 is shaping up to be another banner year for TerrAscend and its shareholders. Now on to the results. Our continued focus on execution and operational excellence delivered yet another quarter of strong top line growth, gross margin expansion, SG and A leverage and positive cash flow generation. Our profitability continues to be among the highest in the industry with adjusted EBITDA margins reaching 42% in Q1. Taken together, our Northeast operations in Pennsylvania and New Jersey represented around 80% of our Q1 net sales. Also with the recent closing of HMS in Maryland and KCR in Pennsylvania, the significant majority of our expected 'twenty one business mix is anticipated to come from these three high growth, highly profitable limited license markets. Turning to an overview of our operations, as I mentioned, we closed the acquisition of KCR on April 30, which doubled our dispensary footprint in Pennsylvania. We paid a mid single digit adjusted EBITDA multiple for KCR, and it will be immediately accretive. This acquisition gives us more contact points with our patients, diversifies our customer base, and will enhance margins through deeper vertical integration. Cultivation and production output at our Pennsylvania facility continues to scale. Output as measured in grams per square foot of canopy space continued to improve, enabling margin expansion in our operations there. We continue to distribute our branded products to 100% of the dispensaries in the state. The power of the brand and our wholesale distribution can be seen in recent third party data which showed TerrAscend having built a clear leadership position in the important flower category which makes up nearly half of all product sales in the state. Our Country brand now represents 28% of all flower sales in the state, 1,000 basis points ahead of the nearest competitor. In addition, our IOLERA branded tinctures are number one in their category. It is clear from this data that demand for our products, is robust. As such, we are currently expanding our existing production capacity in Pennsylvania to further fuel growth into 2022. As we integrate our three new dispensaries, sales at our three existing apothecariums in Pennsylvania have continued to perform well. Our number of active patients has grown more than fourfold from Q1 of last year with our average order size continuing to be very strong, leading to extremely robust retail throughput and sales per square foot at these locations. As we move through 'twenty one, we are excited about the future potential of the Pennsylvania market. While we maintain a leadership position in branded cultivation and manufacturing and have expanded our retail presence with the addition of the KCR dispensaries, we are continuously working on new and innovative products, formulations, and form factors that will appeal to both, our patients and to our wholesale customers. Pennsylvania remains one of the top cannabis markets in The US, and we continue to believe there remains tremendous potential upside from here. Turning to New Jersey, we continue to execute on our growth strategy. And with the passing of adult use legislation, we are extremely well positioned in this emerging and underserved market. Our current cultivation and processing business in New Jersey is now fully operational, and we are prepared to meet the expanded market with a broad array of high quality products when adult use sales begin later this year. As to retail operations, we're pleased with the ramp up of our first medical dispensary at Phillipsburg, which opened at the end of twenty twenty. Our second dispensary opened in May in Maplewood, a town in Northern New Jersey located within the densely populated commuter corridor of New York City. We're extremely excited about the Maplewood dispensary size, aesthetic and throughput capacity. When combined with our cultivation and processing capabilities, the Maplewood location is set up to be one of the top performing dispensaries in The U. S. Our third dispensary location is on track to open in late summer in another densely populated town in the Northeast part of the state. All three dispensaries will be branded as the Apothecarium. Our 120,000 square foot cultivation and processing facility is now delivering high quality flower and manufactured products to both our Phillipsburg and Maplewood retail stores as well as the wholesale market in New Jersey. We expect our business to continue to ramp in Q2 with an acceleration of this growth in the second half of twenty twenty one. In Maryland, we entered the market on May 3 with the closing of the HMS Health acquisition. Our entry into the $600,000,000 medical, market in Maryland further strengthens our foundation on the East Coast. We look forward to leveraging our scale, strong portfolio of brands, and our veteran northeast operations team who oversee oversee our New Jersey and Pennsylvania operations as well. Over time, we expect to achieve full vertical integration and assume a leadership position in this growing market. As part of this plan, we will soon begin a significant expansion of our existing capacity, which we expect to complete by the end of this year. This expanded capacity will enable us to better address the underserved Maryland market consistent with our approach to other core Northeast markets. Turning to the West Coast, the operating environment in California is improving as COVID restrictions abate. Our Capitola and Berkeley stores are ramping up and our existing flagship dispensaries in the Bay Area are showing signs of tangible recovery. At our San Francisco stores, transaction volumes were up 14% month over month in March and in April our four twenty sales were up 67% year over year. Our Apothecarium stores were the only Bay Area dispensaries that were part of The U. S. Launch of Seth Rogen's Houseplant brand, demonstrating that the Apothecarium is a trusted retail partner and a premier retail experience. In March, State Flower recorded its best month of sales ever. State Flower is a popular brand within our California Apopitarium dispensaries representing approximately 30% of flower category sales. In Canada, the progression of our business continues and we see further signs of success of our clear and focused strategy which is aligned with current market conditions. Our Indigo days continued its strong performance in Ontario and was a top selling SKU during the first quarter. We also saw a positive reaction to the launch of our retrograde 3.5 gram jar SKU in Nova Scotia and British Columbia, where it was the top selling SKU for the March. With our improved commercial focus and streamlined product portfolio, we are confident that these positive trends will continue. To summarize, we believe our first quarter results demonstrate the outstanding fundamentals that exist in our business. We once again delivered record results and expect 2021 to be a banner year for TerrAscend. With the strong footprint we have established in Pennsylvania, New Jersey and now Maryland, we are poised for continued growth. We look forward to updating you on our progress throughout the year. I would like to now turn the call over to Keith Stauffer, our CFO, who will discuss the financial highlights for the quarter as well as detail our financial guidance. Thank you. Thanks, Jason. Good morning, everyone. As a reminder, the results I'll be going over today can be found in our financial statements and MD and A on SEDAR. This quarter, we transitioned our reporting currency to U. S. Dollars, so all figures discussed this morning are in U. S. Dollars unless otherwise noted. Net sales increased 106% to 53,400,000.0 versus year ago and increased 8% sequentially. This significant year over year growth was driven by cultivation expansions in Pennsylvania and California, the initial ramp up of sales in New Jersey, and the continued growth and ramp up in our three apothecarium dispensaries in Pennsylvania and the two new locations in California. Regarding net sales by channel, we grew our brand and manufacturing business by a 121% versus a year ago, while our retail business increased 77%. The higher growth of brand and manufacturing was driven by cultivation expansion in Pennsylvania and California, while retail growth was driven by new store openings in Pennsylvania, California and New Jersey. It is important to note branded manufacturing with its healthier EBITDA profile represented 72% of our revenue mix this quarter. This percentage represents the highest mix in the industry and is a key pillar of our business model and strategy as a brand and manufacturer first. Adjusted gross margin for Q1 was 65% compared with 60% in Q4. Note that adjusted gross margin is a non GAAP measure, which excludes fair value of biological assets and excluded a Q4 inventory impairment in Canada. There were no adjustments to gross margin this quarter. The 500 basis points of sequential improvement in gross margin was primarily driven by greater mix of higher margin business in Pennsylvania and the initial ramp in our New Jersey operations. We have maintained our strong focus on cost control with SG and A dropping 1,200 basis points year over year to 30% net sales. While SG and A did increase seven percentage points from Q4, about half of that increase was related to one time legal and severance costs, while the balance of the increase was related to planned investments in personnel systems and other capabilities to enable future growth. While some quarters will show more improvement in SG and A as a percentage of net sales than others, we expect the overall downward trend to continue as we continue to scale our operations throughout the year. 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. Q1 adjusted EBITDA was $22,600,000 representing a 42% adjusted EBITDA margin. Just to recap our quarterly progression, adjusted EBITDA margins improved throughout 2020 from 14% in Q1 to 24% in Q2 to 35% in Q3 at 40% in Q4 and now 42% in Q1. These significant quarter by quarter improvements are a clear indication that our focus on depth, scale and cost control is driving profitability levels that are among the highest in the industry. We see room for further margin expansion as we ramp up our New Jersey business and continue to expand and gain efficiencies in Pennsylvania. Turning to the balance sheet, we ended the quarter with a very strong $234,000,000 in cash as a result of the $175,000,000 equity offering that we closed in January. This level of cash balance is among the highest in the industry. In Q1, we generated $13,000,000 in cash from operations, while CapEx spending during the quarter was approximately $8,000,000 As a result, we generated a positive $5,000,000 of free cash flow for the quarter, our second consecutive quarter of positive free cash flow generation. Due to the timing of tax and CapEx payments going forward, free cash flow may continue to fluctuate on a quarterly basis. However, for the full year, we expect that our cash flow from operations will be sufficient to largely fund our organic expansion plans. Including payments subsequent to quarter end for the acquisitions of KCR and HMS totaling $42,000,000 as well as the final Alera earn out payment in June of $30,000,000 we expect to have approximately $160,000,000 in liquidity on our balance sheet to continue to execute on our M and A agenda. Also of note, during the quarter, we received approximately $8,000,000 of net proceeds from warrant exercises. We expect to receive approximately $40,000,000 of additional proceeds from warrants that expire in January 2022 and approximately $50,000,000 of proceeds from warrants that expire in August. Lastly, before turning the call over to questions, I will take a few minutes to discuss our updated 2021 outlook. 2021 is shaping up to be a very exciting year for Terascend and we expect to continue to achieve rapid growth. The drivers that I will highlight here are also expected to result in continued expansion of margins. New Jersey will be a leading growth driver for us throughout the year as we realize the full capacity of the operation. It is important to note that we do expect the scaling and growth in this new capacity to be back half weighted as the operation continues to come fully online for the remainder of the first half of the year. For New Jersey retail, Q1 was the first full quarter of operation at our Phillipsburg dispensary. Our second dispensary in Maplewood opened on May 7 and our third dispensary will open later this summer. With our expanded cultivation capacity and growing retail footprint, we expect to see robust growth through this year in New Jersey, especially in the second half. Finally, we are excited and prepared for adult use sales to begin in New Jersey, hopefully later this year. However, we do not have any of that opportunity built into our guidance for the year. In Pennsylvania, Q1 was the first full quarter following the completion of our increased cultivation capacity. Also, construction is currently underway to further expand our cultivation capacity by an additional 30 plus percent. This expansion is expected to be completed later this year and will be a key driver of growth for us in 2022. Finally, the acquisition of KCR closed on April 30 and will begin to contribute to our consolidated results. Pennsylvania remains our largest market and is an anchor for our expanding Northeast strategy. In Maryland, the acquisition of HMS began contributing to our sales as of May 3. Note that our 2021 guidance does not contemplate any expansion of the Maryland assets. Though as Jason noted, we will soon begin an expansion of our cultivation and processing operations in Maryland. This expansion is expected to contribute to results beginning in early twenty twenty two. In California, we will fully annualize the late twenty twenty expansion of our state flower cultivation facility, and we'll see continued growth at retail with the further ramp up in our fourth and fifth California stores in Berkeley and Capitola, which opened in the second half of twenty twenty. We are also cautiously optimistic about some early indications of COVID impact subsiding with some recent sales trends that we have observed with our California stores. Finally, in Canada, with our optimized business, we expect to see positive contributions to both sales and EBITDA growth in '21. We converted from Canadian dollars to U. S. Dollars as our reporting currency effective this quarter. Also, our work continues with preparing TerrAscend to become a U. S. Domestic filer with the SEC under US GAAP later this year. In addition, we are preparing to meet the requirements necessary for our securities to trade on a major US exchange if laws should change in the future to to permit us to do so. As a result of these strong growth drivers, we are raising our guidance for 2021. Net sales are expected to exceed US300 million dollars and adjusted EBITDA is expected to exceed US128 million dollars leading to an expected full year EBITDA margin of 43%. Overall, we remain very excited about our recent financial performance and growth trajectory in 2021 and beyond, we look forward to providing progress updates in future quarters. 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. Should you have a question, please press star one on your touch tone phone. You will hear a three tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. We do ask that you please limit yourself to three questions, and we'll certainly requeue with any follow ups. First question comes from Vivien Azer at Cowen. Jason, I was wondering if we could just start off with you providing an update on your CEO search, please. Thanks. Sure. Absolutely. So recruitment is, you know, still underway. I've interviewed several good candidates, but we haven't found the right fit as of yet. This remains a priority, but we don't feel any pressure to, hire anybody on on on any, you know, sort of shortened timetable. As you can see, business is strong, and the executive team has really, stepped up across the board. Many or or most of the operators that we have here have been a major part of our success up until this point, and they are continuing to drive the business in a really strong and efficient way. So we're continuing to look, but we don't feel like there are any shortened timetables or that this is a higher drill in any way. We're gonna wait and find somebody that we think is really perfect candidate or as close to perfect as we can find. Understood. That's great. Thank you. Then either Jason or Keith, one of you guys quantify what the sequential retail trends were in California specifically? Just trying to unpack how much of the total decline was really just coming out of California in isolation. Thanks. Sure. Keith, do you want to take that? Sure. Hi, Vivian. Not sure about the sequential decline, but, the and we we don't necessarily break out specific store level data, but I would I would characterize California as as being stable. And as I mentioned in in the prepared remarks, actually, in recent weeks, over the last month or or two, we've actually been seeing some some signs of recovery as as, commuters and and, tourists and so forth, and and the situation, broadly speaking, starts to improve. Okay. Understood. And last one for me, please. In terms of the three new, doors that you guys acquired in Pennsylvania, can you kinda just dimensionalize the productivity of those doors relative to the the three existing doors that you have in that market? Thanks. Maybe this is good time for Greg to jump in here, who runs our Northeast operations. Good morning, everybody. Yes, my pleasure. The KCR stores are actually performing just about equal to our other three apothecarium stores in in Pennsylvania, and we're we're really bullish on our future potential there, especially once we get the synergies completely in place. We're really, really proud of team at KCR and the accretive nature that's given us in our Pennsylvania retail business. Understood. Thank you so much. Thank you. Next question comes from Matt McGinley at Needham. Please go ahead. Thank you. My question is on New Jersey. Can you help me understand the type of revenue ramp that we should expect in that state, I guess, primarily in the wholesale business from the first to the second quarter? I know those facilities were largely ramping in the first quarter and you it sounded like in your prepared remarks, you wouldn't really hit a full run rate until later in the year. But can you help us understand, like, when we would hit kind of steady state for revenues in that in that business in New Jersey? That sort of a steady ramp with a bump up in the bigger in the back half? Or is that something that really doesn't hit hit normal until until 2022? Keith, do wanna take that? Sure. So hi, Matt. You you have that pretty much right, and we were trying to, in our prepared prepared remarks, kind of signal that that, it will be ramping through the first half, q one, of course, and and this quarter and q two. And then, it it'd be quarter by quarter really getting to, kind of a a run rate level exiting the year. So it's gonna be a pretty dramatic ramp, but concentrated in the back half of the year. Got it. And on the gross margin side, that was a pretty impressive step up in gross margin rate, and it sounded like that was primarily based on the efficiency increases you're getting out of Pennsylvania. Just making sure that nothing would happen in terms of the acquisitions with Maryland and the dispensaries in Pennsylvania that would reduce that rate. So thinking that through into the second and third quarters, would we would you think it would be around that 65%, rate for gross margin, you know, assuming any other variables in the business don't, you know, impact that and and drag it down? Yeah. So the way to think about that is there'll be there'll be headwinds and tailwinds, based on business mix, and and you're right. Retail stores, as as you know, are are typically below average, especially below our average, given our concentration, of brand and manufacturing mix, as I mentioned. But then we'll continue, the the the tailwinds will be New Jersey continuing to ramp at at a very at an at an above average, margin, and Pennsylvania also continuing, to show productivity and and cost per pound improvements. So that's kinda how we we model and forecast things. And and net net, we don't see taking any material step backwards. Next question comes from Pablo Zuanic at Cantor Fitzgerald. Please go ahead. Thank you. Can I ask just the first question regarding overall market trends that you're seeing in Pennsylvania? Some companies that disclose numbers seem to point to some softness either because of one off issues in the first quarter regarding weather or just the market reaching a certain level already. And at the same time, there's a lot more stores opening, right? So I'm guessing revenue per store is being capped in some cases. Can you just talk about that in general for the state? We don't the headset data is there, but it's not entirely reliable in my opinion. So just some I mean, some color on Pennsylvania if you can, please. Thank you. Sure. Hi, Pablo. I think, Greg, this will be a great question for you to answer. Certainly. Thanks, Pablo. So we are seeing more stores open as primarily a wholesale operation. That is good for us. We continue to see growth in our retail stores. It has slowed a little bit. Last year was just gangbusters. As you can see from my numbers, our growth in our retail stores is incredible. We have come from more, I'll it, normalized growth in our retail stores. But with the advent of additional stores, our wholesale growth continues, which is great. We've seen Pennsylvania has been such a strong market with over 580,000 patients in this point in time. We do see continued growth in that market. And we still have about onethree of retail stores able to open that haven't opened yet in the marketplace. So we expect that growth to continue. And at that point, you're not seeing any softness at all on wholesale prices? They remain strong or even going up. Can you comment on that, wholesale prices? The flower prices haven't dropped whatsoever. Some of the nonflower has come down a a very small amount, but there's still been great strength in the in the pricing in the PA market, especially comparative to other markets in the country. Right. And I guess, Jason, just a more general question, but regarding the contingent stake that Canopy owns at 20%, does that affect in any way your ability to raise capital in the future? Or if you want to do an equity raise, you can just adjust the terms with Canopy? Can you talk about that in general? Thank you. Yes. Sure. There's no impact whatsoever. We're not limited by anything we want to do on the capital raising side. We we don't currently have any plans to to raise capital, but Canopy's Canopy's state does not preclude us from from doing anything, and we and we don't need a we don't need permission or anything like that. Okay. And and the very last one, you know, as we're beginning to see more m and a in the in in the sector, and of different types, I suppose, I know everyone talks about about depth, in key states, but it seems that, you know, the assumption is that investors will also pay for breadth, right, being in more states. And, you know, right now, mostly two three states, now four with Maryland. How are you thinking about that, in terms of having more states in the portfolio versus, adding more depth where you are? Thank you. That's it. Sure. We we are gonna continue along with our strategy, which has been to be very, very selective in terms of adding additional states. There are probably 10 states right now that we can go find accretive deals, earnings accretive deals, but they're not all necessarily strategic. We really are setting a higher bar for ourselves where it has to not only be an accretive deal, but something that is very strategic and puts us in a position to win. That's why our view is we'd like to add one to two states over the next twelve months or so, preferably in the general vicinity of where our other locations are because we think it actually is an advantage to to have our people be able to get in a car and and go over and see people and go see go see our stores and our facilities and and things like that. We're working on we're working on multiple deals on on that front to to potentially enter an additional state or two. And then we are also looking at going deeper in the places where we are. We're looking for more dispensaries in Pennsylvania. We're looking for dispensaries in Maryland. We think that those would just give us that extra scale in those states we'll continue to be able to drive the strong margins that we're driving. Overall, Pablo, I would say we don't feel any pressure to have more breadth in terms of know, having having more pins in the map. We're, as you know, we're we're much more focused on on making sure that we're a top player in the states where we where we play because we just we think if we're more focused, like I said, it gives us a better chance of winning, but it also makes us focus our capex dollars and builds more scale in that limited number of states where we are. And therefore it gives us better margins in the near term, you can see from today's results. But even over the long term, as these limited license states get more competitive, we think that there could be the point where pricing comes down to a certain price where a smaller subscale operator could no longer turn a profit at that price, and we would still be able to drive strong margins at that price if we had some of the best scale in the state. Got it. Thank you. Thank you. You. Next question comes from Kenric Ty of ATB Capital Markets. Please go ahead. Jason, just with respect to Pennsylvania, you're looking to sort of flesh out that footprint at retail. Can you speak to the past to 15 stores, whether it has or you expect it will get more expensive the closer we get to potential recreational use legalization? And really, your visibility on that past to 15, has that sort of stayed largely unchanged? Is it improving? Just any insights you can provide on evolution here and path to current tax in the state would be great. Sure. Sure. Absolutely. So we are currently trying to find more stores. As I as I mentioned, we have we have a few potential deals on on that front. Nothing that's far along enough for us to to announce, but we are seeing opportunities. I don't think that I don't think that prices are are going up or that they will be that they'll be going up the near term. We've actually started to feel like we're seeing the opposite. You know, I think if I can back if if I can pull back from Pennsylvania, maybe Massachusetts is an even better example of what's going on in these limited licensed states on the East Coast because so many of them, practically all of them, have caps on either dispensaries or cultivation canopy. The fact is that in a state like Massachusetts, which a great state in the cannabis industry, The fact is practically all of the other buyers are already capped out in Massachusetts. If you look at the top 10 market cap MSOs, I believe every single one of them is already capped out or right near their cap in Massachusetts other than TerrAscend. So we actually have seen that opportunities for deals in in Massachusetts, the prices are actually going down because there are simply not enough other there's no buyers left that can pull off a 100 plus million dollar deal. This applies in Pennsylvania as well. Maybe the operators are already capped out at their dispensary cap in PA, Therefore, we see prices holding steady and hopefully going down as opposed to going up. Thank you. And then, Jason, if we could just switch to Maryland, obviously, a market that people are spending more time looking at and sort of speaking to. Can you just sort of take us through to your mind the appeal and where you and when I say the appeal, having just closed that acquisition, how you think about the urgency to your capacity expansion? Are you completing it through a year? But essentially, the question is, are you more or less excited about the opportunity in Maryland now than you were, you know, three or six months ago? And how should we think about, you know, your, you know, your sort of mature footprint maturity in the state? Sure. I like I'd love to have Greg answer answer this one because I know he is just so excited about Maryland. That would be my pleasure, Jason. Thank you. I so I I, you know, I live in Maryland, which which is why Jason threw it over to me. So I'm very excited about the Maryland opportunity. I would say that Maryland, you know, as as Jason mentioned, we believe very much in going deep before going wide, and we think that Maryland is gonna be just a fantastic state for us. It there's great synergies, you know, with our with our Pennsylvania and New Jersey assets as far as our, you know, our capacity, our people, and the the, you know, the location as far as the and the opportunities and the similarities of the state from from makeups of of product mixes, etcetera. So we are, I can say without any hesitation, much more excited today now that it's actual versus theoretical. We we acquired a great team at HMS, and and they're doing a great job. And we we think our future expansion opportunities are are really solid and that we can, you know, be a top tier player here just like we are in Pennsylvania and New Jersey. So we're really excited about it. Great opportunity. Great. Thanks so much. I'll leave it there. Get back in queue. Thanks, Ken. The next question comes from Glenn Mattson at Ladenburg Thalmann. Please go ahead. Hi. Curious, Jason, on your thoughts on just when we get to you know, your best guess as it stands today where we get to adult rec in New Jersey. I know there's a lot of you know, the the state regulators want regulators wanna get, you know, the medical market fully supplied and all that. So just your sense of, like, how long, you know, it takes to meet that requirement and and and and what your your feel is and sense on on a direct, in general. Sure. I mean, we are we're going under the assumption that it flips over to Rick, at some point before the end of the year. It doesn't it has not been direct revenues have not been included in our guidance, but we're, we're just assuming that it happens, before the end of the year. If it happens, you know, sooner, say, say in the fall, then, you know, that'll that'll be great for, great for Tyrosan. We are prepared to fully, be be able to fully supply our stores, and we think that we will be able to supply the the wholesale market as well in addition to fully supplying the stores. So we are we will be ready. It's just a matter of when, you know, when when the whole program is gets gets kicked off. Greg, did did you have anything that you'd like to add today? The only thing I'd add, Jason, is as, you know, as we are now growing in both our greenhouse and our indoor facilities in New Jersey, we are able to help supply the entire marketplace. And we're hoping with the as Keith mentioned, as we really get to full production coming to q three that that we're really, you know, allowing the medical program to be fully supplied, which will help, of course, move into the adult use market. So we and I believe the other players in the marketplace are trying to do our part to help this program move forward in an expedient manner. So we're really optimistic again in New Jersey as well. Great. Thanks. That's helpful. Keith, you mentioned on the margin side, obviously, great performance in the quarter. You said that there were kind of pulls and give and takes going forward, but it seems like there's more benefit coming given that as New Jersey ramps, that will be better margin. And as the Pennsylvania acquisition comes into the fold, you'll get good margin on that side and California is improving. So in general, maybe can you just think about like what's the upper end of where margins could be, say, I don't know, next year when all these assets are producing at their highest level, highest case? Yeah. Hi, Glenn. I'll I'll reiterate a little bit what I said earlier and and just make sure. So, like I said, net net, we don't expect any any negative, impact material negative impacts going forward in the quarters. I also wouldn't model too much, positive, continuation either. So I I would say 65% is a is a very high level, and and and that's kind of with with the with the puts and takes like I mentioned earlier. There there may be some improvement, but but roughly, let's say, stabilizing in the near term at that level, and we expect the rest of the year really, from an EBITDA standpoint, to get more improvement from SG and A leverage, as I mentioned in my prepared remarks. And and so, I I know that wasn't your question, but, more there, maybe less, on the gross margin side side in in the near term given some of the mix impacts from like KCR coming in with retail gross margins being lower than that average. Great. And then thanks for that. One more would be just on the guidance. So raised guidance, but then there's also a couple of acquisitions in there. So if I just look at, let's see, like the Pennsylvania acquisition, I think you said you paid like a mid like $70,000,000 and it was like a mid single digit multiple, which would imply something to the tune of $10 ish million in EBITDA. And so maybe more, maybe less, but that if you got seven months out of that business, that would equate for most of the increase. And you also have Pennsylvania and other stuff. So maybe is there a little bit of conservatism there or or something else that I'm missing? Maybe I'm not doing the math right. That's it for me. Thanks. Yeah. Jason, you want me to take that? Sure. Okay. Yeah. So just just to clarify there, Glenn. So, HMS was already in our guidance. Okay. That's important Gotcha. To understand. And then, yes. KCR is is a key driver of of the change, and and I think your math is is broadly correct. And and there are, you know, there are other moving parts here and there as as we go through weeks and months, but that's largely, the the right takeaway. Great. Thanks. The next question comes from Andrew Perteno at Stifel GMP. Please go ahead. Hi, good morning. Thanks for taking my questions and congrats on the quarter. Thank you. Just wanted to maybe talk about New Jersey following up earlier question and maybe more focused on your stores. You know, given in the past that you've talked about the big change that you would expect in, you know, a switch to to turning on Rack is is is just higher vertical integration and and more sales going through your own stores. You know, with that in effect and and, you know, your recent store opening in May, having been quite a large store, could you talk about, you know, how much torque should we kind of expect, you know, on your on your store's productivity before it reaches full capacity? Sure. In terms of, the specific stores, where when we could get to full capacity, That that that was the question in Jersey. Yeah. In comparison to where you're at now. Yeah. Well, first of all, there's a yeah. There's certainly a huge amount of upside versus versus where we are now, especially in in Maplewood because because it's only been open for for for a couple of weeks. But what I would say is we think, you know, this Maplewood store has we have the capability to have 15 of sales at that store, which when we talk about high throughput, a 15 of sale store generally can push through figure over 35 or $40,000,000 in in annualized revenue. We're obviously nowhere near that right now because we we're because we just opened. And our view is, you know, it it would not hit those type of numbers under under medical. But under rec, we you know, especially if we are one of the best if we have some of the best supplied dispensaries in the state, under rec, we think that that those are the type of numbers that we can that we can achieve in in those stores, a store like Maplewood, our third dispensary as well, will be a high throughput store in a very high traffic area of New Jersey. So we think that that is another one that could have, you know, figures $30.40 plus million dollar revenue potential pretty quickly. Pretty impressive. And then maybe following on, on m and a, you know, you talked about, you know, less less buyers in Pennsylvania to to do large deals, but you also talked about, you know, some some potential for tuck ins or or smaller deals. Do you have a a preference one versus the other? Or is really you know, you you're looking at, you know, all potential acquisitions there? And, you know, you mentioned pricing in in Pennsylvania, but could you also maybe talk about more broadly what what you're seeing with pricing, you know, especially given the the pullback in the market in the in the last couple months? Sure. So you mean pricing in terms of to buy assets. Right? Just to make sure I'm clear. Yeah. As I mentioned, we've just been getting very excited the last the last month or so by sort of we've come to the realization or it's become a reality. We had a theory that we could wait on several of these attractive states because they had low caps that we could wait and really pick our spot. As I mentioned earlier, Massachusetts, I think, is a good example of that. The last two deals in Massachusetts have been at progressively lower multiples of EBITDA. I believe the last, the last deal in Massachusetts announced about a month ago was at, I think it was four and a half to five times current, EBITDA and even lower number, obviously, for for next year. And even that deal, that's that deal ended up taking out the last buyer out of the out of the top 10, MSOs. So we're just seeing in states like Massachusetts and other ones, we're seeing really attractive, assets assets where, you know, where these operators have put in the time and the sweat and the and, you know, lived through some of the pain to get to the point where they now have nicely profitable businesses that are actually many of them are actually, you know, already cash flowing at this point. And we're just really excited because we can now step in and buy assets like that for mid single digit EBITDA multiples and really sort of leapfrog our way right into you know, right up near the near the top in in those states. The other thing we really like about these limited license states is that we don't have to or or at least the ones in the Northeast is that there are not many dominant players because of the caps. And, you know, in Massachusetts where you can only own, you know, three rec dispensaries and three medical dispensaries and a 100,000 square feet of of canopy, we don't have to worry that if we entered someplace like there like that that we'd be competing with a with a a really entrenched strong player that owns, you know, 50% of the market just because it's not possible with those caps. So not to spend too much time talking about Massachusetts. I'm only using it as an example, but we think that that type of situation is starting to play out in several other limited license, extremely attractive states and that we're gonna be able to we're gonna be able sort of to get into those states at a at a much lower cost than the existing players or whatever it costs them to buy their way or organically build it and have to wait for the cash flow, we're excited that that we can enter enter there and immediately have cash flow and enter at a at very, very accretive multiples. Thanks. And and and and just to follow on that, do do you think that, you know, smaller or larger acquisitions are are more preferable, or would you would you say that that both you know, if the if the terms are right and if this if this strategy is right would be, you know, equally as attractive? Yeah. I would say, I would say they're equally as attractive. It it it depends on on, you know, on which state. I mean, we do, aim to we we don't like to enter a market unless we think that we could be a a top three player within the within the first year or so. So that, may relegate us to, to some larger operators, but I think HMS is a good example where we bought an operation that is not very large. We bought it at a very attractive mid single digit multiple of run rate EBITDA, but to a certain extent, we were getting that EBITDA. On top of that, we were getting a piece of paper, the license, which we can now take and transform into a much larger asset. We'll look at smaller assets if we think that we can turn them into much larger assets. We'll also just look at large assets if they're attractive. Thanks for that. I'll get back in the queue. Congrats again. Thank you. Next question comes from Noel Atkins at Clarus. Please go ahead. Good morning, guys. Congrats on our strong Q1 and thanks for taking our questions this morning. First off, you mentioned in the remarks and in the filings, the rev split between wholesale and retail, the sort of 72% wholesale, I guess, in Q1, the rest retail. What do you think your 2021 guidance represents in terms of wholesale and retail split? Keith? Yeah. Hi, Noel. I I would say broadly speaking, it's gonna remain in that in that range. And and in past quarters, I I think, just based on our filings, it's been kind of that 68 to 72 range, and and it's going to depend on, you know, whether or not there's any other m and a and so forth, like we're talking about. But, broadly speaking, it's gonna stay in that range. Okay. Can you talk at all about the performance, of your second dispensary in New Jersey after the opening? I know it's only been a few days. But Yeah. We're I I don't think it it it's truly only been a truly only been a few days, and I don't think that I I don't even I don't even know the the specific numbers, but we we it would that would not be something that we would, that we would share. Generally, we we don't we don't give any, sort of single store level, sales numbers. Okay. And then the the status of your third store in New Jersey, where is it in terms development process? Like, have you received zoning approval? And and would it be a similar size to your big store in Maplewood? Sure. Greg, do wanna take that? Yeah. We're finalizing all of the all the approvals right now, and we're this store will be a little bit smaller, but but still a nice sized store, about 5,000 square feet in in our third location. And as as stated, we are expecting to be open, you know, late summer of this year. Okay. Great. That's it for me. Thanks. Thank you. Next question comes from Eric DeLoret at Craig Hallum Capital. Please go ahead. Great. Thanks for taking my questions. Congrats on the continued impressive profitability here. Question for Greg with PA. So cultivation operations obviously continue to impress both from a profitability and market share perspective. Greg, can you help us understand how you think about the trade off between potency and quantity? Should we think of it more as a quantity game in early phases and then more of a potency game as competition increases? If so, we'd love to to hear your thinking of EYLEA's competitive positioning from a quality and potency standpoint. Thanks. Well, let me let me congratulate you on a really good question. And that it's a it's a topic that we talk about quite a bit internally. As markets mature, as we've seen in the West Coast, there is definitely a, you know, what we call a flight to quality. And it was, you know, starting out much more of a quantity race than it was a quality race to some extent. We, you know, we've always focused on quality, and we continue to do so. And we have made some pretty significant steps, especially in our nonflower production, to to continue the the race to quality and, as you say, potency as well. So we are focused very much on potency, both in flower and nonflower, as well as the diversity that the that the marketplace wants. So it's not necessarily only high THC. It's the terpenes, of course, and the and, you know, just the overall quality, again, of the product line and making sure we have a diverse product offering to really hit the market where the market is today and where it's going, not necessarily where it was. So again, a really good question. Alright. Great. Thanks. I appreciate the insight. In the interest of time, I'll say my follow ups are offline. Thank you. Thanks. Thank you. Next question comes from Andrew Sample at Echelon. Please go ahead. Hi there, and congrats on the results. Hi, Andrew. No. I just wanna go back to the gross margins for the quarter. I'm just getting a sense that Pennsylvania was the primary driver behind the quarter over quarter increase that we saw on the gross margin level. But I'm also wondering whether first sales in New Jersey had a material impact on on the gross margins, if you had any comments on that. Yeah. Hi, Andrew. It's both. And you can think broadly speaking, maybe roughly half and half. So half contribution from from Pennsylvania continued improvements and and and half from New Jersey. Oh, okay. That's great color. Appreciate that. And then looking at New Jersey in the months and quarters ahead, I mean, obviously, you're gonna have to make decisions there with what you do with your production capacity in that market and how much you want to allocate to your own stores. Do you have an early sense of what kind of proportion of your own shelf space you'd like to reserve for your own branded products relative to third party products? Or is it still a little bit early to make that call? Greg, do wanna take that? Yeah. Yeah. That's again, that's a great question. It a lot of it depends on what other grow grow processors are producing in the marketplace. So what we like to do is give our customers and our patients a variety of products so that they're really, you know, again, getting the the the the medicine or the products that they want and need. So depending on what is being produced from others will will help determine how much of our own product will be on the shelf. We wanna make sure that we have a a robust product offering. If that means that we need to supply more, that's great, and we could do so. If we we can kind of play it around and and supply the other, you know, dispensaries and and have supply from the other GPs, then we'll, you know, we'll look at that. So some of that will really be determined on what happens in the next, let's call it, six months or so. Understood. Thanks for taking my questions. Yeah. The only thing I would add to that, though, is we believe that we can fully supply our stores and additionally supply the wholesale market based upon the capacity that we have. Would be even if it ended up skewing much more towards us needing to sell a larger percentage of of our own products in our own stores just because there's not enough supply of of others' products, we can still fully supply, our stores and and have additional products for the wholesale market. Absolutely. Thank you. Thank you. Ladies and gentlemen, that concludes today's question and answer session. I will now turn the call back over to Jason Wilde for closing comments. Thank you. So, yeah, thank you everybody for joining our q '1 call. We look forward to our next call in August to report our 2Q results. Thank you very much. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Enjoy the rest of your day.