Earnings Call: Q4 2020

Mar 23, 2021

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the TerrAscend Corp Fourth Quarter twenty twenty Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Consideration of other callers and time allotted, we do ask that you please limit yourself to three questions. I'll now turn the line over to Dan Foley, Senior Vice President of Treasury and Investor Relations. Please go ahead. Thank you, Joanna. Good morning, everyone. Welcome to TerrAscend's fourth quarter and year end twenty twenty conference call for the three and twelve month period ending 12/31/2020. Joining us for today's call is Jason Wilde, Executive Chairman Keith Stopper, our Chief Financial Officer and Greg Rodland, Chief Executive Officer of Northeastern Operations. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward looking statements that are subject to risks 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. These documents may be accessed via the SEDAR database. I'd like to remind everyone that this call is being recorded today, Tuesday, 03/23/2021. I would now like to introduce Mr. Jason Wilde. Please go ahead. Good morning, everybody, and thanks for joining us today. Before we get started, I'd like to say a quick thank you to Jason Ackerman for his contributions during his time with TerrAscend as CEO and Executive Chairman. On behalf of the entire team, I'd like to wish him all the best in his future pursuits. Now on to the results. 2020 was a tremendously successful year for TerrAscend. We reached new heights across many financial and operational indicators quarter, after quarter throughout the year. While 2020 has certainly been an incredibly challenging year for the economy and the country and the world, due to the COVID nineteen pandemic, our team came together and executed on all fronts for our customers, patients, consumers, shareholders and the communities in which we work. The results of this execution are reflected in the strong top line growth, continued gross margin expansion, further SG and A leverage and strong cash flow generation for the quarter and the full year. These improvements drove our profitability to amongst the highest levels in the industry with adjusted EBITDA margins reaching 40% in Q4. We achieved this milestone even faster than we expected on the strength of our execution and operational excellence. Looking at our growth plans for 2021, we will continue to focus on building depth and scale as we expand our footprint in attractive limited market license markets. We will also continue to strengthen our capabilities by adding talent across the business to support this growth. While we continue to scale to meet current and anticipated demand in our markets, we have not lost sight of our core focus on being financially disciplined. Our goal is to build on the outstanding financial success of 2020. On the strength of this positive momentum, we are confident in raising our guidance for 2021, which Keith will discuss shortly. Turning to an overview of our operations. In Pennsylvania, we continued to distribute our branded products to 100% of the dispensaries in the state. In addition, in q three, we further expanded our cultivation, capacity at our PA facility by 25%. This increased capacity began contributing to revenue midway through Q4, and we are happy to report it immediately sold through. In addition to expanding our cultivation footprint, we are also increasing our production output through improved yields. As an example, output as measured in grams per square foot of canopy space increased by 36% from 2019 to q four of twenty twenty. As a result, our cost per pound has continued to decline, thereby enabling margins to continue to expand. With our customer centric philosophy and a focus on first class service, we have seen demand for our products remain robust, and we've therefore begun work on further capacity expansion in 2021 to fuel further growth into 2022. Sales at our three retail dispensaries in Pennsylvania have continued to grow at a robust rate. Our three stores are performing well above average levels per store in the state with run rates increasing 33% in Q4 sequentially. Patient satisfaction levels are high with customer return rates increasing 37% and patient counts increasing by 24% in Q4 sequentially. The success of our business is ultimately decided by customer satisfaction and meeting patient needs. And to that end, we are constantly working to deliver innovative new products and brands. For example, we recently introduced the Kinetree brand to our East Coast markets. Kinetree is a brand dedicated to producing exceptional cannabis with respect for the earth and love for the plant. Kinetree joins our existing brand, Eylara, which is more medically focused, and Prism, which produces high quality concentrates. Turning to New Jersey, we're continuing to execute on our growth strategy there and are very excited about the passing of adult use legislation. We believe we are extremely well positioned in this emerging and underserved consumer market. Our current medical cannabis business in New Jersey is now fully operational, performing well, and we will be prepared to service the expanded market with a broad array of products when adult use sales begin later this year. We have completed several harvests from our 40,000 square foot greenhouse in Boonton, New Jersey, and we commenced sales from the greenhouse in late q four. In addition, first harvests have been completed from our new 80,000 square foot indoor facility, co located in Boonton as well. We also announced last week that we have been awarded a permit to process and extract at our facility, which gives us the full capacity to sell a wide array of manufactured products. We anticipate the first sales into the market from our indoor harvest and extracted products will begin in the coming weeks. At the November, we opened our first New Jersey retail location in Phillipsburg, and I am pleased to report that it is ramping quite well. As the only dispensary in Warren County and one of only a few dispensaries in Northwestern New Jersey, we've seen great foot traffic in the store with some patients traveling more than an hour to access our high quality products. Our second and third dispensary locations in New Jersey are on track to open in the second quarter and the second and early in the third quarter respectively. Both stores will be located in the densely populated New York City commuter corridor in the Northeastern Part of New Jersey. In Maryland, we are actively preparing to assume control of, the HMS business, once we receive final regulatory approval, which we expect in early q two. Our entry into the $600,000,000 Maryland medical market further strengthens our foundation on the East Coast. We look forward to leveraging our scale, strong portfolio of manufactured brands, and veteran Northeast operation teams who also oversee our New Jersey and Pennsylvania operations. Over time, we expect to achieve full vertical integration and assume a leadership position in this growing market. Turning to the West Coast, the operating environment in California remains challenging due to the ongoing COVID situation in the state. Our recently opened fourth and fifth California stores in Capitola and Berkeley are gradually ramping up under these conditions. We expect conditions to improve as COVID restrictions ease and the foot traffic recovers in these areas. Our recently expanded state flower indoor cultivation facility in San Francisco continues to perform well with all expanded capacity in use and selling through. This expansion significantly increased our ability to supply our ultra premium spade flower products into the wholesale market and into our own apothecarium dispensaries. In Canada, the turnaround of the business there is progressing, and we are seeing further signs of success from the implementation of our clear and focused business model and strategy that is aligned with the current market conditions. As an example, I'm pleased to share that for the fourth quarter, TerrAscend Haven Street Indigo Days 3.5 gram jar SKU was the number one selling SKU out of five zero six in the dried flower category in Ontario, which is Canada's largest cannabis segment or market. The dried flower category represents over half of all cannabis sales in Ontario. With our improved commercial focus and streamlined product portfolio, we feel confident that our strategy is on the right path in Canada. To summarize, 2020 was an incredible year for TerrAscend. We delivered record results and our team successfully adapted to serve customers while maintaining high levels of customer satisfaction during the COVID pandemic. I'm extremely proud of everybody's hard work throughout the year. With the strong footprint we have established in attractive states such as PA and New Jersey along with the anticipated closing of HMS Maryland, we plan to continue to execute on our growth agenda in 2021. With adult use legislation now passed in New Jersey and increasingly being discussed in Pennsylvania and Maryland, we are well positioned for future growth and we look forward to updating you on our continued progress throughout the year. I would like now to turn the call over to Keith, who will discuss the financial highlights for the quarter as well as providing updates to our financial guidance. Thanks, Jason. Good morning, everyone. As a reminder, the results I will be going over today can can be found in our financial statements and MD and A and are expressed in Canadian dollars unless otherwise noted. Net sales increased 152% to $65,300,000 in Q4 versus a year ago and increased 28% sequentially. This significant growth in revenue was primarily driven by recent cultivation expansions in Pennsylvania and California, our first sales in the New Jersey market, 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, grew our branded manufacturing business in q four by 30% sequentially and by almost 200 versus year ago, while we grew our retail business by 24% sequentially and by almost 100% versus year ago. Branded manufacturing with its healthier margin profile represented 70% of our revenue mix in full year 2020. Adjusted gross margin for Q4 was 60% compared with 59% in Q3. Note that adjusted gross margin is a non GAAP measure, which excludes the fair value of biological assets and also excludes a Q4 inventory impairment in Canada, which is a nonrecurring item. This sequential improvement in gross margin is the result of cultivation yield improvements in Pennsylvania as well as continued increase in mix of Pennsylvania related to our additional expansion there. We have maintained our strong focus on cost focus on cost control and s with s g and a expenses growing 10% sequentially relative to the net sales growth of 28%. As a percentage of revenue, s g and a further improved to 23% in q four compared to 27% in q three. With these improvements, we remain at or near best in class levels of SG and A leverage in the sector. Our strategy to go deep, build scale, and leverage our cost structure, teams, and capabilities remains a core operating tenant that drives this strong leverage. Q4 adjusted EBITDA grew 46% to $25,900,000 compared to $17,800,000 in Q3, further demonstrating the leverage present in our business as we continue to grow revenue. Adjusted EBITDA margin improved to 40% in Q3 from 35% in Q4, from 35% in Q3, 24% in Q2, and 14% in Q1. These significant quarter by quarter improvements are a clear indication that our focus on scale and cost control is driving profitability levels that are among the highest in the industry. We expect this progress to continue throughout 2021 as we ramp up our New Jersey business and continue to expand and gain efficiencies in Pennsylvania. Adjusted net income, a non GAAP measure, which excludes fair value of warrant liability and revaluation of contingent consideration, increased by 56% sequentially to a positive 19,900,000.0 for the quarter. Turning to the balance sheet, we ended the quarter with 75,000,000 in cash. We completed two debt financings in December, a US dollar 20,000,000 loan from Canopy Growth to our Arise Bioscience division, and a US dollar 120,000,000 term loan secured by our Alera Healthcare division. Towards the December, we paid a US dollar 106,000,000 towards the final earn out payment for the acquisition of Alera with the remaining US dollar 30,000,000 deferred to June 30. Subsequent to year end, we closed on a Canadian dollar 224,000,000 equity offering, further bolstering our balance sheet beyond the 75,000,000 cash reported at year end. We feel confident that these recent capital raises, combined with our strong cash from operations generation, provide us with the balance sheet strength necessary execute on our our organic expansion plans and on our m and a agenda. Speaking of cash flow from operations, this result has also been improving throughout 2020. As a reminder, in the second quarter of twenty twenty, we we reported our first quarter of positive cash from operations at 10,000,000. In q four, we achieved a positive 24,000,000 in cash from operations, resulting in $33,000,000 for the full year. CapEx spending during the fourth quarter was approximately $20,000,000 compared to $18,000,000 in Q3 and $61,000,000 for the full year. CapEx was largely related to the build out of our cultivation facility in New Jersey and to a lesser extent, the opening of new stores in California and cultivation expansions in Pennsylvania and California. This spending completes the full build out of our current footprint with a few final payments due during q one. Free cash flow net of CapEx was a positive $5,000,000 in Q4, which is the first positive free cash flow result for TerrAscend. We're pleased to report that we achieved this milestone one quarter earlier than internal expectations. However, I'd like to note that due to the timing of certain payments, tax payments and CapEx payments going forward, free cash flow may continue to be choppy on a quarterly basis, but continuing to improve over time, which is only natural given our phase of growth and the significant continued opportunities to invest in extremely attractive ROIC projects. Lastly, before turning the call over to questions, I'll take a few minutes to discuss our 2021 outlook and guidance. 2021 is shaping up to be a very exciting year for TerrAscend, and we expect to continue to achieve rapid growth and expansion. We anticipate continued growth in our Pennsylvania business with q one twenty twenty one being the first full quarter following the completion of our increased cultivation expansion. New Jersey will be a leading growth driver for us throughout the year as we realize the full capacity of both the 40,000 square foot greenhouse and the 80,000 square foot indoor facility as the operation ramps throughout the year. It is important to note that we do expect the scaling and growth in this new capacity to be second quarter and back half weighted as the operation continues to come online throughout the year. For New Jersey retail, q one twenty twenty one will be the first full quarter of sales from our Phillipsburg dispensary. And with the openings of our second and third dispensaries in Q2 and early Q3, we expect to see further growth in the back half of the year from these stores. In California, we will fully annualize the late q three 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 stores in Berkeley and Capitola, which opened in the back half of twenty twenty. With our optimized business in Canada, we expect to see positive contributions to both sales and EBITDA growth in 2021. And finally, our recent acquisition of HMS Maryland will begin contributing to our sales once we have the required regulatory approval for closing of this transaction, which we expect in the early second quarter. Note that our 2021 guidance does not contemplate any expansion of the Maryland assets. Though we do plan to expand the operation in Maryland during 2021, which will contribute to 2022 financially. Turning to our financial guidance, we plan to convert from Canadian dollars to US dollars as our reporting currency effective with our q one twenty twenty one reporting cycle. Also, work is well underway to prepare TerrAscend to become a US 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 permit us to do so. More to come as we progress on all of these fronts. Finally, as a real as a result of all of the strong growth drivers outlined here and our conversion to a US dollar reporting currency, we are raising our guidance for 2021 and converting it to US dollars. Our updated guidance reflects our expectation that we will exceed the high end of the previously announced guidance. Revenue is expected to exceed $290,000,000 adjusted EBITDA is expected to exceed $122,000,000 leading to a full year EBITDA margin of at least 42%. Note that we have converted our 2021 guidance to US dollars based on an exchange rate of 1.3082, which prevailed when we originally issued our Canadian dollar guidance on November 19. To close, we're very excited about our strong finish to what has been an extraordinary year for TerrAscend and are even more excited for what is to come in 2021. I'd now like to turn the call back to the operator to open it up for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 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. First question is from Kenneth Cai at ATB Capital Markets. Please go ahead. Thank you, and good morning. Jason, I mean, congrats to you and the team on the the prints and the guidance revision, which I'll get to in my second or third question. I think top of mind this morning for everybody is obviously going to be the surprise announcement of Jason Ackerman's exit. Is there recognizing there are probably limits on what you can or will say, is there any additional color you could provide us on how we went from there to here and in pretty short order with respect to Jason's exit just such that we can better understand the dynamics at play and some of the risks perhaps that, that imputes for the rest of the year? Sure. I think that it's to start sort of with the end of your question first, but I don't think that it should indicate to anybody that that there's any risk as it relates to the to the business. Things are going very well. They are have been exceeding our own internal forecasts. So Jason's exit has has nothing to do with the success of the of the business or or how we've been executing. I think it's you know, it truly just comes down to a difference in philosophy over over management style and and and culture. I mean, that's really what it comes down to. And I am you know, I feel, a lot better that we were able to, to do something. Well, I don't feel I don't feel good that we were that we did this, but what I'm saying is I feel better that the company is such a is in such a strong position, and it's and it's not in any way an indication of Jason's exit is not in any way an indication of of, you know, anything that's wrong with the business. And, me and and the board just felt like, like it wasn't gonna work out. And to me, the, the best time to do something like this is when, when the business is is running really well as opposed to, you know, if we if we were going through some going through some troubles. So sorry. It probably doesn't fully, answer, all the questions you have about that. But, you know, please don't take it as an indication that that anything is, that there's anything, sort of, lurking beneath the surface. The business is is doing great. We've got, obviously, a big ramp in revenue coming on this year and a big ramp in in profitability and margins. And we just decided that that it wasn't going to to work out with with Jason, and and we decided to make the move. That that's great color, Jason. Thank you. And just just if I'm understanding you correctly, it's not just a function of the momentum you have, but the conviction or confidence you have in the the bench strength that will will see or or limit any potential risk from it. That is that a correct way to characterize or or think about this in terms of you do have that that debt? Yes. And, you know, if there were to be time between here and there and appointing a new CEO, that that doesn't impute any potential slippage? Yes. Thank you. Thank you for pointing that out because I I should have pointed that out, that our that we have some really strong, executives at the company, and everybody has really, been stepping up and and has there are so many people that have a deep operational knowledge of of of the business at at at this point. Just to call out a few, you know, and and people that we have on the call here today, Greg Rockland, who has who started started EYLARA in Pennsylvania, and sold that business to us and has stayed on and has been running the the Northeast for us ever since, now probably about a year and a half. He is extremely involved in the business and will be stepping up even even more so in the in in the coming days. He's on the call, and he's gonna be available to to answer some questions. Keith Stauffer, our CFO, has been with the business since the first half of of last year and now has is fully up to speed and has been really stepping up and and making a a, you know, a great contribution to the business. And and I believe we also have Jason Marks, our chief legal officer, is is on the call as well. Although, you know, I don't I don't think we're gonna have too many legal legal questions, but he is I've I've really been happy with the involvement that he's taken in the business over the over the last several months because he is much more than just a chief legal officer. He is he's he's a he's a lawyer who really understands business as well and deserves a seat at the table, and we've definitely been inviting him to the table much more. So those are those are just sort of three of the top executives that I think signal our our bench strength. And, you know, I don't have any doubt that that these guys are gonna are gonna continue to execute. And when it comes to funding a CEO, we're not we're not in any we're not in any rush. I mean, the business is running well, and and we've got a great team. So there's not it's not like there there's no fire drill going on here, but we we are looking for for candidates, and we think that we'll be able to bring somebody in over time who's gonna who's gonna be able to contribute strongly to to what the rest of the team brings. Thanks, Jason. That that's that's great to hear. And a quick final one for me. Just with respect to your guidance, it doesn't it it sorry. It does not include any assumed contribution from New Jersey Rec. But is it reasonable to believe that, you know, given your expectations around timing that that could potentially provide a buffer if New Jersey Rec does actually come online in the fourth quarter given that it's not in your 2021 guide. How should we think about the evolution there and how much room there may be on from a guidance perspective? Sure. I don't know that I would describe it as a buffer. I would describe it more as an upside. I mean, we this guidance is is does not assume any any rec sales, so that that would be additive to the if if sales kick in in in q four. We're we're not sure exactly when when it will kick in. We've been hearing essentially sometime before the end of the year, so we did not include any rec sales, and that would just be additive to the guidance that we've provided today. You. The next question comes from Glenn Mattson at Ladenburg Thalmann. Please go ahead. Hi. Thanks for taking the call. So very nice job as usual on the profitability. So I'm curious just about you obviously guided for a higher profitability next year. Is there can you give us some color or some level of understanding as to how much New Jersey is detracting as of right now from profitability and how much once that kind of flips over to more revenue producing, how much that benefit you'll get from that swing? And then just on the operating side, you do run some of the highest margins in the industry. So can you give us you know, some confidence that, you know, it's it's it's just great execution and not that you're kind of like starving the business for, for profitability now that could that could, you know, be, harder to, overcome in the future? Sure. Keith Keith, you wanna hand answer that question? Yeah. So first question Glenn. Yeah. So on on the first part of your question, I I would say broadly speaking, New Jersey at this point is a net a net neutral. And and so what you'll see as New Jersey kicks in with a, I'd say, equally at least equally attractive profit profile, to Pennsylvania is that's what's really gonna drive our continue to drive our margins, upward through this year. So we have we we started selling, some in q four, that's in our numbers, and that offset some of the the start up costs, and it's broadly, neutral, I'd say, in the grand scheme. And then, yeah. And then to the second part of your question, I think I kinda answered it, which is with New Jersey kicking in throughout the year and will become a very material, part of our of our business with a profit profile at or better than than Pennsylvania over time, given pricing differences to wholesale in the market, that that should continue. And then I think the other part you alluded to is really starving the business. We're we're we're not starving the business. We we we just have, I think, a unique business model with with the depth and the scale that gives us gives us the margin profile that we have. And then we continue to invest in our capabilities and in corporate areas and and other s g and a related areas as as we feel the need to build out capabilities over time. So, yeah, as you see in this quarter, we we grew our SG and A 10%, but we continue to grow revenues at multiples of that rate. And we we continue to to plan to operate with that cost consciousness over time, but making sure we don't start the business. Great. Then sorry, go ahead, Jason. Sorry, go ahead. I was just going to add one thing more just from a qualitative perspective, I guess. I think part of the reason that our that our profitability margins are are, you know, so so good or or or near the the high end of the of the sector is partly in my mind because we are a lot newer than a lot of the other companies, a lot of our competitors. So we just have less. We've built up less sort of infrastructure and less people over time. I find, yeah, some sometimes when businesses are around for a long time, there's people there might be some people still there that that wouldn't have been there if the company was was just, you know, started, yeah, more from scratch. But I think that that's, you know, that's not really a quantitative answer, but I I think that that's part of it. We just haven't haven't we we just haven't needed and haven't built up the sort of the staffing levels that that some of the other operators have because because, you know, I guess we're newer. Yeah. Yeah. Great. Thanks. That's good color there. And then on on just moving on to Maryland, just can you talk about what kind of expansion plans you you you you you talked about some investment in 2021 that likely contributes in 'twenty two. Can you just give us a sense of what you're thinking there? Sure. I think that would be a great question for Greg Rocklin to answer. Sure. Thanks, Jay W. Hi, Glenn. So we're we're looking forward to getting our getting our license through, you know, Maryland. We're on a docket for to late April. And once we once we have that in hand, our our plans are to to take advantage of the availability to expand the facility pretty dramatically. We have a have some, you know, very nice plans. We've hired a very strong GM there, and we're and we're really looking forward to the Maryland market. And as somebody who lives in Baltimore, it's it's gonna be very nice to to be doing business in my home state. Yeah. Greg's been Greg's been pretty much every week from from the day that that we acquired Hailera, Greg has been asking me when are we getting a Maryland asset. So this was, you know, this was definitely partly I don't wanna say a gift, but I was, you know, very excited to be able to for us to be able to bring this home for Greg. That's something in his backyard as opposed to driving four hours out to Pennsylvania. Right. Maybe I missed it. Last thing for me would just be on Canada. How did you say if it was profitable and to what level and it improved from last quarter? I might have missed that, but that's it for me. Sure. Keith? Yeah. So we continue to progress in Canada. We don't break out those details, but we we did I mentioned we had a a onetime impairment, item, on on inventory in Canada. But, otherwise, we're really happy with the direction and things continue to head in Canada. Like Jason mentioned, we have, we have some top selling SKUs. Our commercial focus and our our focused product portfolio is is much improved, and our cost structure is now aligned with all the the work that we did last year or, yes, in 2020. And and so the path forward, like I mentioned in my in my guidance comments, we we have expectations for Canada to continue to progress both on on top line growth and on having a profitable business through 2021. Thank you. The next question comes from Andrew Partheniau at Stifel GMP. Please go ahead. Hi. Thanks for taking my questions and congrats on the good guidance here. If I could just touching back on the CEO change. Could you talk a little bit about, you know, in terms of management style and culture, you know, if you could give a little bit more color on kind of what were the differences there? And when you are looking for, you know, your your new CEO, what exactly are you gonna be looking for in terms of management style or qualities? You know, what are your top criteria in choosing a new CEO? Any any more color that you can, you know, would be useful. Sure, Andrew. I would say, you know, I I don't really wanna I I'd rather not get into the differences in in, you know, sort of management style or culture because then it's going to seem like I'm saying that what, you know, what what me and the and and the board preferred was was sort of the right way and and, you know, and what Jason's view was of how to deal with that was was the wrong way. So I'd rather not get, you know, get much deeper into that. In terms of somebody in terms of the the candidates that we're evaluating, we'd like to find somebody, you know, that that has experience guiding large consumer companies through through, you know, you know, extremely high periods of of growth. So it would be somebody somebody with CPG experience, somebody with overall large company experience, and somebody to, you know, really be complementary to to the greater executive team that that we have, that we have right now. Thanks for that additional color. Cognizant, you know, you can only provide so much on on today's call. In terms of, you know, the 2021 guidance, you know, you already talked about how New Jersey rec could provide upside. You know, could you could you talk about, you know, your production now? Are you guys, you know, selling everything you can produce? And, you know, if you are, when rec hits, you know, how how exactly do you see that that demand curve changing or the or the sales curve rather changing? You know, could you see a significant increase in prices? You know, I'm just curious, you know, if things are running on all cylinders now, when rec hits and that strong demand hits, how should we think about, you know, sales changing or margins changing? Sure. I think, in terms of as we look at the medical versus rec, our our view is that we are going to sell everything that we, cultivate and manufacture, whether it's medical, or rec. So it's really a matter of the difference that we're gonna see is going to be once once adult use kicks in, is going to be retail sales. Those sales should increase significantly under under adult use versus versus rec. That's really the big draw that that's really gonna be the big driver. It's gonna be essentially, it's gonna be us selling more of our wholesale products through our own stores where, you know, obviously, we're going to be booking a much higher, much higher amount of revenues if we if we sell it all the way through, you know, essentially a seat seat to sale. I I can take I'd I'd like to throw it over to Greg in terms of the first part of your question about where we are now in terms of production and selling something through everything that we can make. Sure. Thanks, Jay. Andrew, great question. Have quite a few different levers that we're we're, you know, we're looking to pull for when an adult shoots. One of the one of the things as Jay and Keith mentioned earlier, we are continuing to expand our existing facilities in Pennsylvania. We have some expansion plans in New Jersey as well. And, of course, as we just discussed, Maryland, that will that really is in preparation for adult use in in The States when when that is when that's available. We also have a a very strong culture of innovation where we are continually coming out with new products and new, you know, forms. You know, one example of that is our prism line, which is, of course, our our concentrate line in New Jersey. We're looking forward to taking advantage of the existing Valhalla brand and and expanding our our edibles lines, all of which help on the the you know, our our high profit margin items. And so we're you know, we we do believe that we are setting ourselves up for for a really nice bump when adult use happens. As as Keith and Jason mentioned, this is not in any of our guidance or any of our numbers currently, but we do we do expect to see a a nice bump when those markets do do, you know, really flip to adult use. Thanks for that. Just maybe one more on on housekeeping item. You know, could you just confirm the exchange rate that you guys are using when converting the year 2021 guidance to USD? Yeah. Hey, Andrew. Hi, Keith. Yeah. It's +1. And and we have a slide on that. I think those was up on the screen for those who were looking when I was talking through it, and we also have it clearly footnoted in our press release. And and the the thinking there is just that we introduced our guidance in Canadian dollars back on our q three conference call. That was the exchange rate. So that was the right rate to convert into to US dollars. Yeah. Just to just to add to that a bit, Andrew, we original we you know, the business is the vast majority of our business is in US dollars, you know, well over 90%. When we do our own forecasts, we forecast them in US dollars, and then we convert it in that we and say in November when we give this guidance, we converted it to Canadian dollars. But the real the way that we're booking all of these sales is in US dollars. So we so in our view, our, you know, our real guidance was what we had based it off of on, you know, at at that conversion rate. It is you know, it it it's it's just a matter of the the way we're reporting it, but there's we actually don't have any FX risk as it relates to, yeah, as it relates to the business there. Thank you. The next question comes from Evan Greenberg at Needham. Please go ahead. Hi. This is Evan Greenberg. Thanks for taking my questions. First one is on going back to Pennsylvania expansion. You said it's already underway, I believe. Is that that facility, I believe it can go up to 30%. Is that on facility size or is Canopy Square footage? And when can you see that starting to hit the avenue? Thanks. I'm sorry. I mean, you were breaking up just a little bit. Could you could you please repeat that question? I yeah. Is this better? Yes. Let's see. It was the cultivation expansion. I believe you have another 30% in Pennsylvania. I think you said that's currently underway. Is that facility a 30% increase on facility size or canopy square footage? And when could you see that come online? So that is actually on do do you want me to take a look at that? Yes. Absolutely. So, Evan, thanks for the question. The the the extension is actually it it'll be from from current footprint including what what we're doing part of what we're doing is is renovating our existing greenhouse into an indoor facility so we will be able to not only increase the square footage, but increase the grams per foot, you know, and our yields. And that will that'll be completed but but all the expansions will be completed this year, and we'll really have our we'll really hit our our revenue, you know, you know, very late this year or early next year. And, again, this is not in our '21 guidance. It's a it's a '22 event from that perspective. Okay. Gotcha. That's helpful. And then my second question is, some other operators on the call have mentioned weather related issues in 1Q, particularly on the East Coast in February due to, cold weather and snow. Have you guys seen a notable impact from that, or is it not really not material so far from what you've seen? Again, I apologize. You you're we we have a little bit of a tough connection. Could you repeat? Yeah. Yeah. I I heard the I heard the question, Greg. I can I can answer that? This is Keith. We we we really have not seen a a notable impact, really materially impacting anything from, from weather, in in the first quarter. Great. Yes, that's it for me. Thanks. Thank you. The next question comes from Noel Atkinson at Clarus Securities. Please go ahead. Good morning, guys. So really well done in q four. Thanks for taking our questions. First off, could you talk a bit about, you know, the potential financial benefits to TerrAscend if the state banking act passes and there's termination of February? Should I take that Sure. J w? Yeah. Okay. Yeah. Go for it. So, there's kinda two parts to that question and a lot of the debate about it. Right? State banking, as I as I think we all know, has multiple potential benefits. The cost of capital being one, it's hard to handicap exactly how much that could be worth, but, I think we it's clear kinda what we borrow at and and what our cost of capital is, and and and that could come down from kind of, low to mid teens down into the single digits and, you know, be worth several million dollars on that front. There there's there's banking fees that are maybe less material, but they they can come down as well. And then two eighty e, the the simple math there is look at our s g and a expenses and and take 30% of that, and and and that's how much we savings we can get on a recurring basis. So quite a bit of unlocked, value there, potentially into our into our market cap. So, hopefully, that that answers the question. Okay. Great. Secondly, are you guys able to give us a sort of a relative production capacity of what you have in New Jersey versus Pennsylvania currently? Sure. Greg? Did you hear that? I don't hear you. Yeah. Sure. Of course. Yeah. Okay. Right now right now, we have approximately, two thirds the, capacity in in Jersey that we have, in PA, before the, you know, the before the expansions in PA that we are we were just discussing. So we have we have really good amount of capacity between the indoor and the greenhouse and really looking forward to that program continuing expansion and, you know, us putting together opening our our second and third dispensaries to really, you know, be able to get the quality cannabis into the hands of the patients in New Jersey that are that really, you know, need it, and then, of course, moving into the adult use market. So we're, we're extraordinarily bullish on New Jersey. Great. Thanks for that. And then finally, Jason, maybe you could talk a bit about what your M and A pipeline looks like. In general terms right now, it seems like there's very busy activity along the East Coast in Pennsylvania, Massachusetts, Florida, you know, what's what's your outlook there? Sure. Yes. We are definitely looking at at many things. We hope to be able to announce some some things in the next, you know, in the next few months. But there's definitely a lot of opportunities. Even though prices have gone up some, there are you know, I think that that's one of the areas where where we excel is finding you know, not necessarily going going after the assets that everybody knows of, but, you know, sort of turning over a lot more rocks and finding, great, assets and credit operators on on a sort of on a single state level. And very often, know, you're able to get you're able to get those assets. If you're willing to sort of topple them together, you can get better assets at better at better prices than just sort of looking at the at the same ones that that everybody else is looking at or the ones that, you know, bankers are are showing around. So I think our pipeline is is really strong there, and we you know, they're never done until they're done, obviously, but we would hope to be announcing at least one deal in the coming months. Thank you. The next question comes from Andrew Sample at Echelon Capital Markets. Please go ahead. Hello and congrats on the quarter. Thank you. Just wanted to ask on the decision to raise the 2021 guidance so earlier in the year. Was there any new information that arose in Q1 that kind of supported your confidence in the guidance? Perhaps maybe some of your businesses may be ramping more quickly than previously expected or maybe you're more confident in being able to deliver on New Jersey? If you could speak to some of those factors, that would be appreciated. Sure. Keith, you wanna would you like to take that? Yeah. Yeah. Sure. I'd hi, Andrew. I I'd say there's really two main elements there. One is, the continued in Pennsylvania that just continues to surpass our internal expectations. As as Jason alluded to earlier, we continue to beat our our forecast internally. And then the second major, component, Andrew, you you alluded to, which is, being granted the the the processing license in New Jersey was sort of the final step in unlocking the the full potential and capability of of our business in New Jersey for the rest of the year. So, I'd say those two were the the main ingredients into us being confident in in raising the guidance. Great. That's very helpful. You also called out the strong same store sales growth in Pennsylvania, in your prepared remarks. I'm just wondering how important was the expansion to your production facilities that you underwent within the fourth quarter to ensure adequate supply for your own dispensaries. Was that a factor to supporting the retail store growth, or or were there other primary factors behind the increase in retail sales? Correct. So great question. It's a it's a combination of both. We we saw strong demand. There's quite a bit more patients that have actually entered the market in in Pennsylvania. We're we're currently supplying 100% of the market every dispensary in the in the state, and we continue to do so. We have great partnerships where we, you know, we supply some of the other MSOs, and they supply us as well as well as the local, you know, the local suppliers in that state. And and, again, you know, a lot of it had to do with real just overall growth Pennsylvania, the patient growth. And, you know, it's it's been a it's been a really strong state state, obviously, and we're we're we're poised to to really be able to to to leverage that. And and, you know, our luckily, our products and our stores and our incredible staff have done just a wonderful job, especially during the pandemic in an extremely difficult time to to really, you know, pivot to whether it was, you know, drive through, curbside, and just, you know, making sure that we met the customers and the patients where they wanted to be so that we were continuing to be best in class from a service perspective as well as the quality of the product. So it was a confluence of of of all those things that really allowed us to experience that, you know, that that impressive growth. That's great. And another quick one, if I may. Just, you know, what you're seeing on the ground in New Jersey, has there been any change to the supply demand dynamics in that state? And how do you see that kind of evolving over the the course of 2021? Yeah. We see our experience in Pennsylvania really serving us extremely well in New Jersey. There is still a huge demand supply imbalance as as you're probably, you know, very aware where there is much more demand than than supply. As that program continues to ramp up, we're, we're fully expecting to see that continue for the, foreseeable future. And, again, it is one of the reasons that we're so focused on, on delivering, high quality, products to you know, in in a whole bunch of different, formats as the patients, you know, would like through, through our New Jersey facility. And and one of the reasons we're, again, looking to continue to to expand to be able to meet as well as we can the the continued and growing demand in in, you know, in New Jersey as well as, of course, Maryland and then excuse me, and then Maryland. Thank you. Next question comes from Clark Murphy at Craig Hallum Capital Group. Please go ahead. Hey, guys. This is Clark Murphy on for Eric DeLore. First, wanted to just extend my congratulations on another great quarter and a great guide. It's really impressive results. Kind of switching to my questions. Yes, no problem. Moving over to California, you know, we've noticed that the obviously, the illicit market is still really strong. A lot of retailers have have been continuously hit by COVID. So just kinda trying to understand, you know, any trends that you guys have seen in the stores as as we exit lockdown here, both on, like, the the store operational side and and kinda how consumer behavior is, is evolving. Jason, you want me to take that? Yeah. Yeah. Okay. That would be great. Yep. Okay. Hi, Clark. So I I think it's no surprise that that back earlier in 2020, COVID hit well, it it it impacted, various, areas. But for us, for our business, it it impacted our stores in in California, in in the San Francisco area. And, once once we kind of found a a new level of sales, it it they've remained relatively stable at that level. And and so if if if we were to compare, kinda quarter by quarter in 2020 even into this year, it's been at at a similar sales have been at a similar level. And and and slowly here as as things are unfolding across the country and and restrictions are are becoming unlocked, we're we're seeing some gradual, improvements in particular in our in our two new stores in in in Berkeley and and Capitola. Certainly not to the levels that we expect longer term once, for example, college students are back on campus in Berkeley and so forth. But we we we remain very, we remain cautious, but, we plan that that over time this year, into the summer and and into the back half of the year, we'll see improvements across the stores there. Yeah. Got it. That's oh, I'm sorry. Yeah. Sorry. The only thing I I would add to that is it's it's sort of we we absorbed the weakness over the last year or so in California. And I think that in terms of our profitability last year, it's a testament you know, to a, the fact that we acted quickly and and we're able to control costs in California, but also the fact that our East Coast operations were were so strong that they were able to, you know, more than make up for for any of that slack in California. But going forward, I mean, I was just thinking last night, you know, watching on the news what's happening in Miami and, you know, all these huge crowds and everybody sort of itching to to come back to the cities, I think that it it sort of popped into my head that that that is, you know, what we may have in store for us in in in San Francisco. You know, the fact is our three existing stores were in Downtown San Francisco, and a large percentage of our customers were either commuters or tourists. And most of most of them have not been in the city for for about a year, but, you know, they will come back. Hopefully, they're gonna be, they're gonna be coming back, in in the coming months. And, you know, that is a that's another area of potential upside because we have not really modeled a strong resurgence in California, but it's certainly within the realm of possibility that that could happen. Got it. That's really helpful color. And then kind of just switching over to your CapEx plans for 2021. Just any color you guys could give there in terms of what CapEx is looking like and in what markets guys will be putting that into? I'm assuming mostly New Jersey, Pennsylvania, Maryland, but any color you could give there would be helpful. Sure. Yeah. Sure. So you you you're right, Clark. So it's really, focused in in those three markets, and and you heard us talking about expansion plans in in each. So so that that's where the CapEx will be spent in in 2021. Those investments will lay the groundwork for continued, strong growth we expect in 2022. And and if I were to frame it, would for you, I would say, more or less at similar levels to spending in in the full year, 2020. So that's kinda to to put, you know, kind of a a frame around it. So, hopefully, that that helps. Yeah. No. That's that's that's great color. And then, you know, just lastly for me, going back to kind of the management transition here and kind of business continuity, just looking to see if you guys expect or if we should expect any involvement from, from Canopy or Constellation in this process? In terms of management, I would say, I would say no. I mean, they they, they know what's, everything that's, that's been going on, and they are, you know, to continually reaffirm their their their support for us. But I you know, Mike Lee from from Canopy isn't isn't coming over anytime soon to to work at a to work at TerrAscend. But we have a we we have a we have a great relationship, with with the company. You know, we talk to them, multiple times per week, and I think that the relationship is only, you know, gonna continue to grow over time. Thank you. There are no further questions. I will now turn the call back over for closing comments. Okay. Thank you, Keith. Did you have the closing comments, or did you want me to close it out? Nothing formal, Jason. Go ahead. Go ahead. Sure. Yeah. Yeah. Thank you. Thank you, everybody, for being on the being on the call today. It's gratifying to see the numbers of people joining and asking questions versus just a year ago. I think back to just about a year ago or less than a year ago, we actually had our first conference call ever. I think that this business has come a really long way from, from many different perspectives, in the in in the in that time since then. And, we look forward to, to sharing our progress, going forward. You'll hear from us, you'll hear from us soon. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.