Earnings Transcript for TER.CN - Q4 Fiscal Year 2021

Company Representatives: Jason Wild - Executive Chairman Ziad Ghanem - President, Chief Operating Officer Keith Stauffer - Chief Financial Officer

Operator: Good morning, everyone, and welcome to TerrAscend's, Fourth Quarter 2021 Conference Call for the three month period ending December 31, 2021. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to 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 the results are detailed in TerrAscend's annual information form 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 Wednesday, March 16, 2022. And I would like to turn the conference over to Jason Wild, Executive Chairman. Please go ahead, sir.

Jason Wild: Thank you. Good afternoon, everybody. Thank you for joining us today. I'm so proud of the hard work of the entire TerrAscend team in 2021, which has us well positioned for the explosive growth we expect in 2022 and beyond. The huge strides we made at our Pennsylvania Cultivation Facility have resulted in the highest quality flower we have ever sold in this market, allowing us once again to recapture top three market share in the state for the month of December 2021. We are eagerly awaiting the use in New Jersey at our fully – sorry, and are fully prepared to meet the tsunami of demand that we expect. Additionally we completed our acquisition of Gage last week, which gives us a leadership position in yet another multi billion market, with the ability to extend their brands beyond Michigan. Before I provide an update on each of the states in which we operate, I would like to welcome Ziad Ghanem, our newly appointed President and Chief Operating Officer. Ziad joins our team along with several other recent additions, including Charishma Kothari, SVP of Marketing; Charles Oster, SVP of Sales; and Jared Anderson, SVP of Finance & Strategy. I would also like to welcome our newest addition to the Board of Directors, Kara DioGuardi. It is a priority for TerrAscend to attract the diverse talent necessary to build this company for the future and I think that all of these new team members exemplify our efforts on that front. At this time I would like to turn the call over to Ziad who brings nearly two decades of experience in large scale healthcare services, cannabis, pharmacy and retail operations to TerrAscend where he will manage and oversee all operations. Ziad.

Ziad Ghanem : Thank you, Jason, and good afternoon everyone. It is a pleasure to be here today participating in my first TerrAscend earnings call. I would like to briefly take few minutes to introduce myself to everyone on the call and share what attracted me to the cannabis industry and to TerrAscend. As Jason mentioned, I'm a pharmacist by training and my career has been centered on health and wellness. Having spent nearly two decades at healthcare services company, including large global drug store chain, Walgreens Boots Alliance, where I spent 17 years and built expertise in operation, strategy and innovation. Most recently, I served as President of all markets at Parallel, a multi-state cannabis operator in the U.S. My progression from pharmacy to the cannabis industry was natural. Throughout my career, I have witnessed first-hand patients, friends and relatives struggle with the opioid epidemic that the nation faced. I have interviewed, talked with and assisted individuals from all walks of like who have struggled with depression, PTSD, insomnia and so many other diseases and I have seen law-makers, successful community and business leaders win their life back by replacing up to five narcotic bills with safe cannabis products alternatives. When I looked at the cannabis industry, I also saw a new industry that is growing fast, and that is highly regulated and complex, and became convinced that my experience in the first 20 years of my career will allow me to bring meaningful contribution to the industry throughout the entire value chain. I was drawn to the opportunity at TerrAscend for multiple reasons. Allow me to share the top three. First, the portfolio of state where TerrAscend already has a presence. All have attractive growth opportunities, which include the impending adult use in New Jersey and down the road Pennsylvania and Maryland. This growth in the Northeast, coupled with the acquisition of Gage, a leader in Michigan, has the company well positioned for growth in a leadership position in the cannabis industry for many years to come. Second, the strong balance sheet, coupled with an open U.S. map for us to be selective with and continue targeted and calculated M&A opportunities. Finally and as importantly, the backing of the GW Fund and the benefits that this will continue to bring TerrAscend both in the short and long term as we continue to grow. I spent time with Jason daily and I witnessed the benefits that he brings us with his team regularly as we constantly come across different opportunities. I have very specific goals for the company that I divide in four main buckets. Those are

Jason Wild : Thanks Ziad, and welcome again to TerrAscend. Before getting into our operational and financial results for the fourth quarter and full year ’21, we are pleased to have just completed the acquisition of Gage. I believe they are amongst the best operators in the country with one of the best brands, and I am more excited than ever about this combination. Gage provides us entrances to Michigan, the third largest U.S. market estimated at over $2 billion in sales annually. Equally important is the unlimited license structure with no caps in Michigan, which is very beneficial to the larger operators in the state and gives us the opportunity to expand our footprint quickly given our scale and resources versus our competitors. Gage’s facilities are amongst the best I have seen, not only in Michigan but anywhere. Their attention to detail and pristine operations falls very much in line with us culturally. This acquisition will provide TerrAscend with access the Gage’s sought after brand and proprietary library of genetics, as well as Gage’s exclusive licensing partnerships in Michigan with COOKIES, SLANG Worldwide, Blue River, Pure Beauty and Khalifa Kush. Our combined company now operates seven cultivation facilities, including three in Michigan, in addition to Gage’s nine contract growths. Additionally we now operate a retail network expected to reach over 40 stores by the end of this year. This includes 25 currency open dispensaries across five states and Canada, with Gage operating 11 dispensaries in Michigan and one COOKIES branded dispensary recently opened in Toronto, in addition to TerrAscend’s 13 store footprint in key markets including California, New Jersey and Pennsylvania. For the year ended 2021, Gage delivered unaudited record revenue of nearly $100 million with gross margins continuing to improve sequentially from 26% in Q1 to 34% in Q2 to 37% in Q3 and 46% in Q4. This significant expansion into Q4 was primarily driven by the introduction of Gage branded dates, as well as a higher mix of Gage grown flower relative to contract grown and third party flower. This impressive sequential gross margin expansion led to an inflection in adjusted EBITDA from negative in Q3 to slightly positive in Q4, which is expected to continue to expand in the coming year driven by the continued gross margin improvement that I mentioned, along with operating expense leverage and other synergies as part of the combination. Gage’s financial position is healthy with $45 million in cash and equivalents at year end 2021. This strong balance sheet, combined with ours, positions TerrAscend with the financial flexibility to execute on our growth plans. Integration is well underway and we look forward to updating everyone as we continue to make progress in Michigan. I would like to now discuss the substantial progress we've made across each of our states over the course of the year. Starting with PA, I am pleased with the significant improvements we made at our cultivation facility and our recovery in market share. The upgrade to our facility is complete and we are seeing significantly improved quality. I know that we disclosed at our Q3 call that we were already producing the highest quality flower we have never produced at that facility and I am proud to say that this improvement has continued throughout Q4 and all through Q1. This higher quality product is resonating with patients as well, both within our six operating dispensaries and across the state’s footprint at wholesale. As a result, we have captured top three market share in the state for the month of December 2021, increasing over 400 basis points from November. Not only have we successfully reactivated more than 50 dormant doors during the fourth quarter, but order replenishment from those doors has also been strong indicating robust sell through. The quality and potency of our product is what is driving this momentum as our top flower SKUs have been recently ranked among the top three highest potency flower SKUs in any dispensary – on any dispensary menu. While we maintain the high quality of our current strengths in genetics portfolio, we are also very excited to be on the verge of introducing new genetic to the PA market following the open genetics window in December of 2021. We will go from having some of the oldest genetics in the state, to having the newest, and in our view the most desirable, diverse and proprietary genetics in the Pennsylvania program. The first of these new high quality strength is being harvested as we speak and is expected to be available for sale in early Q2 with more strains to come soon after. The fact that we have regained a significant level of market share prior to the launch of these new strains as our Pennsylvania team is very excited about the potential for further market share gains in the coming months. Overall, the market in Pennsylvania remains competitive with patient growth flattish and the number of dispensaries nearing the stated limits. Patients are getting more sophisticated in this market and in every market across the country, and they are demanding increasingly higher quality products. We think that our focus on quality will be a key driver of our increased market share going forward. We believe that this is a marathon, not a sprint. In the end we are heartened that the best products win. I am thrilled with the decision we made last July to reset our cultivation facility. While it was not easy to sacrifice significant short term revenue to ensure our long term quality, in a retrospect this decision was a no brainer. We believe it has given us a leg up versus the competition in this increasingly sophisticated market and waited till patients see the new genetics we’re launching over the next few months. We will first be launching what we consider our best-in-class genetics from our New Jersey facility, followed by Gage and other exclusive genetics in the coming months. Our winning formula is now in place in a still very vibrant market with adult use on the horizon. Turning next to the Jersey, as everyone knows, this is an important market for us with transformative growth potential as we eagerly await adult use, and I want to emphasize that we are in a very strong position for when that day arrives. Today TerrAscend has one of the largest approved cultivation capacities in the state, which gives us a significant advantage over all new competition. For new market entrants, the canopy limits are 30,000 square feet, while our license has a 150,000 square foot limit. Also worth noting is that all of the new licensees cannot sell into the adult use market, until after they've sold into the medical market for a full year. That applies to both cultivators and dispensaries. Given our optimism for this market, we are on the verge of signing a lease at a new location for our planned expansion of our cultivation capacity beyond our current canopy size, which will enable us to expand to the 150,000 square foot limit over time. The build out will commence immediately and we will bring on additional capacity in a measured way to ensure that we maintain the high quality that our products have become known for in New Jersey. A greater capacity will enable us to meet the expected demand from what is estimated to be a $2.5 billion adult use market. We expect to share more details once we finalize the signing of the lease in the coming months, in the coming days actually. Looking at the retail landscape in New Jersey, there are 36 total issued and improved retail licenses that qualify for the first round of near term adult use sales. Our three dispensaries are strategically located in attractive Northern New Jersey locations in Maplewood, Phillipsburg and Lodi. As we have previously discussed, we anticipate we can generate in excess of $40 million in revenue annually from each of these locations in a post adult use market. As you can see the opportunity is immense. We will continue to bring innovation to the New Jersey market and bought our product portfolio to patients and consumers. One example is the progress we have made towards the launch of concentrate, manufactured through the process of hydrocarbon extraction. This anticipated launch will be significant and will expand our product offering in the state. Concentrates typically represent 10% to 20% of sales in other markets and are not currently available in New Jersey. We look forward to getting approval to introduce this new product category in the coming weeks and intend on being first to market. Another example is our exclusive agreement with COOKIES, one of the most recognized cannabis brands in the world. While the regulatory process is still underway, we are making progress every day in preparation for an expected spring launch. We are planning our first harvest in early April and cannot wait for New Jersey residence to set eyes on this amazing flower. Additionally, we will introduce COOKIES corners, a store within a store concept exclusively in each of our three retail dispensaries in the state subject to regulatory approval. [inaudible] experience in Michigan demonstrate that consumers are willing to drive several hours in order to access COOKIES branded products. Consistent with Michigan, we believe this will result in the highest average basket sizes in the state. In summation, we anticipate a dramatic increase in demand once adult use goes into effect and we are ready for it with the necessary application, approvals, inventory, staffing and adult use packaging. Our large scale cultivation footprint and explosive dispensaries in three key locations positions us well to deliver massive growth. The Maryland market is our next significant growth lever and is a $600 million market currently with a population of roughly 6 million people. With the potential for adult use to be on the ballot in the November mid-terms, we believe that Maryland should turn to adult use in the second half of next year. Maryland is a perfect example of an ‘eat while your dream state,’ where we are profitable under medical programs and once adult use kicks in, we will experience significant growth beyond our current sales there. Since the closing of our HMS acquisition in 2021, we have made significant progress in expanding our wholesale distribution points in Maryland, which now totals 60% of the market, up from 25% at the time of the acquisition. We are pleased to have been awarded Maryland's Best Grower by MJ Connect and I am proud of how quickly we have been able to turn this facility into an award winning operation. It is a testament to our passionate team, their operational expertise and deep understanding of what is required to produce high quality product. While we are currently selling everything we produced at our facility in Maryland, the build out of our recently purchased warehouse in Hagerstown is well underway. This will expand our cultivation footprint, as well as broaden our portfolio of form factors and increase our capacity to make manufactured products. We expect to complete and operationalize the extraction lab in the second quarter of this year and cultivation in the third quarter. This significant expansion will be operational and dialed in in time to fully capitalize on the expected adult use implementation. Vertical integration is also a key part of our growth strategy for this market. We have been actively focused on the potential acquisition of dispensaries in Maryland and look forward to reporting progress on that front in the coming months. Turning to California, our super premium State Flower brand has continued to perform well in the face of an oversupplied flower market, which has enabled us to continue to sell out our total capacity at consistent pricing levels. On the retail side, our Apothecarium dispensary has remained stable during COVID, while we look forward to a pick up in foot traffic in San Francisco as we moved into the spring and summer months with tourism and work commuting hopefully normalizing. As I mentioned last quarter, being a multi-channel retailer is the next step in the evolution of serving our customers’ needs wherever and however they want to shop. To do so, we are pioneering the leveraging of technology to meet the needs of our customers. Just this week we launched the Apothecarium mobile retail app for Apple iOS devices, available for download in New Jersey and California. Our proprietary app allows customers to instantly connect with Apothecarium dispensaries, while providing more choice and convenience in a personalized digital environment. This launch rounds out our multi-channel offering with the app seamlessly integrating into our existing retail and web based e-commerce experiences. In Canada we continue to navigate challenging market dynamics while managing to modestly grow full year sales and adjusted EBITDA with plans to continue to do so in 2022. We are also now the exclusive COOKIES retail partner in Canada through our acquisition of Gage and are excited to see the recently opened Toronto store continue to ramp. In closing, 2022 is expected to be a breakout year for TerrAscend. We have added one of the best operators and brands in the third largest market in the U.S. with the closing of our Gage acquisition. The state of New Jersey will start adult use in the coming weeks. We will exclusively introduce COOKIES into that market and we will see further benefits from our vastly improved quality in Pennsylvania and our expansion in Maryland. Importantly, we have a solid financial position that will enable us to continue to support our growth initiatives, both organic and inorganic. We are building this business for success over the long term and we will continue to make decisions with that mindset. I would now like to turn the call over to Keith to provide a financial update.

Keith Stauffer : Thanks, Jason and good afternoon everyone. As a reminder, the results I'll be going over today can be found on EDGAR and SEDAR. All figures discussed and reported are in U.S. dollars. Additionally, this of the first quarter that we are reporting under U.S. GAAP, our year-end 2021 filing of the Form 10K with the SEC. The company is now prepared to list on a U.S. stock exchange once permissible. Net sales for the full year 2021 totaled $210.4 million as compared to $147.8 million in 2020, an increase of 42%. A little less than half of this growth was driven by our initial year in the New Jersey medical market. Also, about 40% of the overall growth was driven by retail in Pennsylvania, partially driven by our acquisition of KCR in May of 2021, and partially driven by organic growth from a full year of operations at our three existing Apothecarium dispensaries. The remainder of the growth was driven by a combination of our late 2020 expansion of State Flower cultivation in California and our entry into Maryland through the acquisition of HMS Health in May of 2021. Net sales for the fourth quarter of 2021 totaled $49.2 million as compared to $49.6 million for the fourth quarter of 2020 and $49.1 million for the third quarter of 2021. Regarding sales by channel, wholesale revenue for the year was $123 million versus $103 million in 2020, an increase of 20% driven mainly by the initial ramp-up of our New Jersey medical business and by the acquisition of HMS Health in Maryland. Retail revenue for the year was $87 million compared to $45 million in 2020, an increase of 95% driven by a combination of a full year of business at our three Apothecarium dispensaries in PA, the acquisition of KCR in PA, and the opening of our first to New Jersey dispensaries in Philipsburg in late 2020 and Maplewood in May of 2021. Wholesale for the fourth quarter of 2021 totaled $24.4 million, representing flat sequential sales and a 28% decline year-over-year, driven by a decline in Pennsylvania offset by growth in New Jersey, Maryland and California. Retail sales for the fourth quarter of 2021 totaled $24.8 million; flat sequentially and up 55% year-over-year. The year-over-year growth in Q4 was driven by the acquisition of KCR and growth at our two New Jersey dispensaries. Gross margin for the full year 2021 was 53.3% as compared to 54.8% in 2020. Adjusted gross margin for the full year 2021 was 56.1% compared to 57.2% in 2020. A contraction of 110 basis points year-over-year, driven by second half under absorption and PA related to our reset activities at that facility. Note that adjusted gross margin is a non-GAAP measure. Please refer to our filings for the definition of non-GAAP measures. Gross margin for the fourth quarter of 2021 was 42.3% as compared to 43.8% in Q3 of 2021. This sequential contraction is related to one-time non-cash write downs of inventory in Canada and a step up in fair value of inventory related to our acquisition of HMS Health in Maryland. Adjusted gross margin for the fourth quarter of 2021 excluding these one-time items was 49.8% as compared to 46.2% for the third quarter. This 360 basis point improvement sequentially was mainly driven by improvements in PA. For full year 2021, G&A expenses excluding stock based compensation improved to 31.4% of revenue versus 37.6% of revenue in 2020. G&A excluding stock based compensation was $66 million in ‘21 compared to $55.5 million in 2020, driven by increased personnel expenses to support the growth of the business and legal expenses primarily related to acquisitions and settlements. Note that lease expense is now part of SG&A under U.S. GAAP across all periods rather than previously being reported as finance expense under IFRS. Lease expense for 2021 was $4.5 million and for 2020 was $3.8 million, representing around 2% of revenue and among the lowest of the peer group as we have not utilized sale lease back as a source of capital. G&A excluding stock based compensation for the fourth quarter of 2021 was $17.0 million, as compared to $16.1 million for the third quarter of 2021. With the increase primarily related to an increase in professional fees for the U.S. Filer and GAAP Conversion work that was completed. Full year 2021 adjusted EBITDA was $65.6 million or $70.1 million excluding lease expense, versus $41.7 million or $45.5 million excluding lease expense in 2020, representing a 57% growth year-over-year, including lease expense. 2021 adjusted EBITDA margin was 31.2% versus 28.2% in 2020, representing a 300 basis point margin expansion year-over-year. About three-quarters of the adjusted EBITDA growth was driven by the ramp-up of our New Jersey business in the existing medical market, while the remainder was driven by a combination of the acquisition of HMS in Maryland and profitability improvements year-over-year in both California and Canada. Q4 adjusted EBITDA was $11.9 million, representing a 24.2% adjusted EBITDA margin versus $9.0 million and an 18.3% margin in Q3. The sequential improvement in adjusted EBITDA was primarily driven by growth in New Jersey and improvement in Pennsylvania. For reference, Q4 adjusted EBITDA excluding lease expense was $12.8 million as compared to $10.5 million for the third quarter of 2021, those are IFRS numbers. Operating income for the full year 2021 totaled $23.5 million as compared to $9.6 million in 2020, representing an increase of 145% year-over-year. The increase was primarily driven by the scale up of the New Jersey business and the acquisitions of HMS in Maryland and KCR in PA. Fourth quarter operating income was $0.3 million as compared to a loss of $1.8 million in the third quarter. The improvement quarter-over-quarter was due to gross margin expansion and a reduction in share based compensation expense. Net income for the full year 2021 was a positive $6.1 million, mainly related to a non-cash $58 million gain on fair value of warrant liability, compared with a net loss of $142 million in 2020, which was also impacted by a non-cash loss on fair value of warrant liability of $110 million. Net loss in the fourth quarter of 2021 was $5.9 million, mainly driven by a one-time loss of $3.3 million from the termination of our lease in Frederick, Maryland; $6.9 million of finance and other expenses; $6.9 million of accrued income taxes and $2 million of transaction costs, mostly related to the Gage acquisition. These expenses were partially offset by a $14.4 million gain on fair value of warrant liabilities. Turning to the balance sheet, we ended the year with a healthy cash and cash equivalents balance of about $80 million. This healthy cash position will enable us to continue to invest in the business, both organically and through M&A. In Q4 we used $3.8 million in cash from operations, mainly driven by an increase in working capital as we continue to prepare for adult use in New Jersey. For the full year we used $32 million in cash from operations, $24 million related to working capital increase in preparation for New Jersey adult use mainly, with the remainder being related to a contingent consideration payment, mostly related to our final earn out earlier last year for Alera. We received just over $15 million in proceeds from warrants and options during the quarter, included in our year end cash balance of $80 million, mostly related to the warrants that were set to expire in mid-January of 2022. We later received the remainder of the proceeds of about $25 million from those warrants in early January for a total of approximately $40 million of proceeds from those warrants. During the fourth quarter we made the second of two $25 million payments to our New Jersey partners, related to the increase of our ownership from 75% to 87.5%. We also paid $2.3 million of a note related to the KCR acquisition and paid $3.3 million to terminate our lease in Frederick, Maryland as we prepare to transition to our facility in Hagerstown. Finally, CapEx spending in the quarter was $11.8 million, mostly related to the completion of our build out in PA, ongoing work at our Hagerstown, Maryland facility, and the completion of our third New Jersey dispensary in Lodi. CapEx spending for the full year was $38.5 million, about half of which was related to our expansion in PA, with the remainder related to our build out of New Jersey and the acquisition of the Hagerstown facility. This concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions.

Operator: Thank you, sir. [Operator Instructions] And your first question will be from Owen Bennett at Jefferies. Please go ahead.

Owen Bennett: Evening guys. Hope your well. Yes, first question just relates to Michigan and Gage obviously. With the deal closed now, you’ve had some months to really get to know that business even more. Just wondering what areas you really identified as possible upside there. You've mentioned expansion plans maybe took some out a bit more. Any of the areas of the business you think are some easy wins for upside M&A attempt. Thank you.

A - Jason Wild: Sure. Ziad, would you like to take that one? You were just out in Michigan last week.

Ziad Ghanem: Yes, yes, I would love to. Hi Owen, thanks for the question. We have been working with our partners in Gage over the last few months and we are extremely excited on multiple fronts. First, from the leadership perspectives and the expertise that they have developed in the state of Michigan, we will get better in every state because of the expertise that they have in Michigan, but we will also bring some of the learning from other states. So combined together we will bring synergy from the scars and from the learning of the past and we will make each other better from a execution perspective, from a cultivation perspective and from an efficiency perspective. What I am personally excited the most with the Gage acquisition is how well the team has been able to build the brand, the Gage brand. It is really I believe the best-in-class brand and who agrees with me are the customers and the patients in Michigan. When you look at the pricing pressure in Michigan, Owen you will be stunned to see how well the Gage strain, the Gage brand and again the Gage performance have done against that pressure. So all those are reasons why I'm extremely excited to expand our family at Michigan to the team.

Owen Bennett: Okay, thank you. Very helpful. Just one follow-up, it’s just an interesting development with the mobile app. I was just wondering in terms of kind of how sort of influential do you think that could be, your intend to driving footwork to the store and what sort of additional way that you’re going to be able to use that in terms of key data around customers in certain trends, etc.

Ziad Ghanem: Sure. Owen, I’ll take this one. From a consumer analytics perspective, this will be by far the biggest advantage to us when it comes to digital presence. So the patient and the customers will be able to reach us where they want us and when they want us, and they will be able to stay closer to our attenders [ph] and our dispensaries at all times. With price being insensitive in a lot of areas, the digital presence will allow us to look at our segmentation, our customer segmentation in a different way, in an intelligent way, and in a way that we can target different segments based on what brings the most value to that segment. So instead of going with a blanket discount, instead of going with an uncultivated price change, you will be able to target the behavior of the consumers and deliver to them value with the high quality product.

Owen Bennett: Thanks guys. Very helpful. I’ll pass it on.

Ziad Ghanem: Thanks Owen.

A - Jason Wild: Thank you, Owen.

Operator: Next question Kenric Tyghe at ATB Capital. Please go ahead.

Kenric Tyghe: Thank you, and good evening. Jason, a question for you; a very encouraging comment on New Jersey. I think what I'm trying to sort of better handicap is that as well as your position, how do we think about the timing of that ramp and how quickly that can ramp? I mean we all recognize New Jersey’s a back half story, but I think where the street is struggling to sort of get a better read is it’s a wide range of commentary out of management team on how material a contribution, given their foot print they expect to see in Q2 and all the ramp into Q3. So if you could just help us better handicap, that would be great.

Jason Wild: Sure. So, it's funny. I mean I sort of, I remember somebody asked me about this a few weeks ago and I said I had stopped trying to predict when New Jersey is going to turn on adult use. So maybe I’m going against my own sort of views here, but I'll give you – I’ll take a stab at what we think should happen. There is a CRC meeting on March 24. We are hopeful that at that point they will approve several of the operators that they believe are ready for adult use, which means that they have more than enough supply to also supply their medical patients. We think that we will be one of the first approved licensees based upon that criteria and what will happen if they approve those licensees on the 24th is they will also declare you know or give 30-days’ notice and adult use would kick in roughly 30 days after that. In terms of the way – if that happens, in terms of the way sales will ramp, we believe that it will not necessarily wait until actual adult use kicks in, say towards the end of April, because there will be many dispensaries that are looking to stock up ahead of what they see as a huge level of demand or user increase in demand. We currently have compliant adult use packaging and if we get the go-ahead and the approval on March 24, we will be ready to supply our wholesale customers pretty much immediately. Once April – you know assuming that happens on the 24th and actual adult use sales start about 30 days later in April, that's when we will see the substantial increase in our dispensary sales. [Cross Talk] Yeah, I mean that's – I’ve confirmed a few times in terms of trying to predict when it’s going to kick in, but we are hopeful from what we have been hearing and from what others have been hearing, that there's a good chance that that could happen on March 24.

Kenric Tyghe: That’s excellent! I’ll just better triangulate and handicap it relative to your footprint. A quick follow-up on New Jersey. Can you give us any insight on the relative specification? You spoke into sort of increasing sophistication in Pennsylvania, you know obviously a different market, a different point in its evolution, but any insight you can provide on the sophistication of absolute or relative of the New Jersey cannabis consumer?

A - Jason Wild: I think they are similarly sophisticated. While even in Pennsylvania the market is sophisticated, we should also remember that there are not a whole lot of dosage forms or form factors allowable in Pennsylvania. There's – you know there's no edible and many of the other form factors that are available in many of the other states are not allowable in Pennsylvania. But when we face sophistication, they are really sort of gearing those thoughts more towards sophistication and expectations on flower quality. What I would say as we compare that to New Jersey is it's similar, but we came out of the gate producing some of the best flower available in New Jersey. We've only dialed that in over the last year and change that we've had our indoor facility up and running. So I would say that it is not – it's not sort of a game of catch up like we felt like we were playing a little bit in Pennsylvania. It’s actually part of the reason that really drove us to make the changes that we did make in Pennsylvania last summer, was because one-time I was spending a lot of time in our Jersey facility, I saw what great was and I saw how much better we could be everywhere that we operated. So you know I feel like as it pertains to Jersey, we're on the leading edge in terms of quality and also from a genetics point of view we have probably the most diverse line of genetics in the whole state at range.

Kenric Tyghe: Thanks and good luck! I'll get back in queue.

Jason Wild: Ziad, did you want to answer that?

Ziad Ghanem: Yeah, no. Kenric, I just wanted to give you my fresh eye view on New Jersey. I joined the company and spent a lot of time in New Jersey and I couldn't be more excited about what the team has done, to be prepared and to be ready from all fronts. The team is in place. They are well trained, they are well educated and I think that will bring sophistication to the consumer. The stores are great looking and great position, and they will have the visibility by the consumers and they are anchored by powerful brands and partnerships that will come soon to the state starting with COOKIES and other strains that we mentioned and brands we mentioned earlier with Gage, etc. So those stores with those anchors will also bring sophistication to the consumers. With the education, with the stores you have a robust product roadmap that our marketing team is thinking about non-stop in order to also help with that specification. So I am extremely excited about New Jersey and cannot wait to start.

Kenric Tyghe: Thanks for the colors there. I'll get back in queue.

Operator: Next question will be from Andrew Partheniou at Stifel GMP. Please go ahead.

Andrew Partheniou: Hi! Good evening! Thanks for taking my questions and congrats on the great rebound here. Maybe just start off with M&A. How do you see the New York rec market, you know regulators there want to kick start the rec market potentially this year through social equity and hemp operators. Do you think that there is an opportunity to maybe enter the market through hemp operator at maybe a reduced valuation versus acquiring a vertical existing medical operator license and just your thoughts around New York general?

A - Jason Wild: Sure. Hi Andrew! Yeah, the answer is, yes. We are – when those – the news came out several weeks ago about the hemp operators being able to help kick off the program, we were extremely excited and you should assume that we have been you know essentially combing the phonebook or the yellow pages [ph] so to speak for the last several and meeting with and speaking to as many hemp operators that we can. So we think there is a real possibility to enter the New York market in that way and it's made us sort of very happy that we waited and were patient and did not enter the New York market and have to sustain the substantial losses that the other operators have had to sustain over the last few years to make it to the finish line. We think that we are going to be able to enter the New York market in one way or another over the next couple of years.

Andrew Partheniou: Thanks for that, and maybe just M&A in general. You know you previously talked about attractive valuations in states where most other large operators have already reached their caps. Just wondering you know right now obviously the market has been challenging. You know what are you seeing? Do you still see opportunities to maybe enter a new state or vertically integrate at Maryland for example, and just your thoughts around that?

A - Jason Wild: Sure, yes. We see the opportunity to go deeper where we are in places like Maryland for our dispensary cap. We currently own zero dispensaries and they are – the expectations are very reasonable you know in terms of what the sellers would like to be paid. So we think that we should be able to indicate our progress on that front over the coming months. In terms of Michigan, that's another area where since there's no license caps that we think that we should be able to get some extremely attractive dispensary acquisition done over the course of this year. The great thing about Michigan is that since it’s an unlimited license state, there are many, many what we would call mom and pop operators. This business has been a whole lot harder than they expected it would be, especially because they're not vertically integrated. So the multiples, the expectation of multiples in Michigan a is fraction of what it is in other markets, and when we run it, we run these models and we sort of run the DCF’s and MTD [ph] on what it’s worth to the seller and what it worth to us. And when we looked at what these assets are worth to us, they are worth even more than they are to the sellers, because Gage has not supplied their products to other dispensaries in Michigan up until this point. So if we go in, and we can get some very attractive dispensary acquisitions done, we will also – the bulk of it will be a bit lower to whatever that headline multiple is, because we will be supplying their stores with Gage and COOKIES products and be making a nice profit on the wholesale side as well. So that's the example of going deeper into places where we are, and then as it pertains to entering a new states, we definitely would like to enter at least one or two new states over the next six to 12 months. We have multiple conversations going on in multiple states and I would say that valuation expectations have continued to slide with the valuation from the public companies. So while we're looking at deals, there are actually no more – even though our stock price is lower than it was six months ago, the deals are actually not any more diluted than they were six months ago, because you know the targets have gone down as well. We are – I mean, we're thrilled that we do not have a very large footprint that we’re very deep in a limited number of states, because it gives us the opportunity to go in and buy very, very accretive assets in additional states.

Andrew Partheniou: I appreciate the detailed answer. I'll get back in the queue.

Jason Wild: Thanks Andrew.

Operator: Next question will be from Eric Des Lauriers at Craig-Hallum Capital Group. Please go ahead.

Eric Des Lauriers : Great, thanks take my questions. Ziad, you mentioned that Gage’s pricing is holding up particularly well in Michigan; of course we’ve seen some of these pricing pressures. In previous quarters Gage had sort of commented on their average wholesale prices or at least their average premium and just wondering if you had that data available for us today?

Ziad Ghanem : Yes, thanks for the question Eric. I don't have the details to share right now, but directionally I can tell you that there has not been any change on the pricing for Gage wholesale. The demand is still high, the numbers I looked at were linear to where the prices have been, but we’ll continue to work and learn more on how the behavior of the product is, but we are very confident that it has resisted those changes very well.

Eric Des Lauriers : Yeah, that's great to hear. And then as my follow-up here, so it seems like the playbook in Michigan is to really reserve COOKIES and other user premium branded products for Gage’s own retail channels and then wholesale, sort of the non-premium or mid-tier brands. I guess first, is that sort of the right way to think about the strategy in Michigan, and then second, if so should we expect that same strategy in New York – sorry New Jersey, Pennsylvania and Maryland. Thank you.

Ziad Ghanem : Eric, the strategy that we are convinced that has worked for us and will continue to work and we have plenty of examples, Michigan is one; specialty and quality flowers with our State Flower is another one. The rebound that we have seen in Pennsylvania by doing a very daring moves a couple of quarters ago to take the loss we took in the short term to get where we are today, really confirms our thinking and our strategy. As the patients and the customers become more sophisticated, they will continue to hire the expectation as what they would like to get from the product and from the flower, and we are convinced the more sophisticated we can be and advanced with the patient, the better off we will be, whether it's with our own brand and strains or whether through strong partnerships like COOKIES and others.

Operator: Thank you. Did that answer your question, sir?

Jason Wild: Yeah, I think we lost him.

Operator: Next question will be from Glenn Mattson at Ladenburg Thalmann. Please go ahead.

Glenn Mattson: Yeah, thanks for taking the questions. Just curious to get a little more detailed guidance on how to think about Gage over the course of 2022. I know going through [inaudible] ’20 just out of the pace of the rollout there and then the margins that you pointed to in Q4 to the extent to which those are sustainable throughout the year or whether you expect them to continue to gain as the year progresses, just some color there would be great.

Jason Wild: Ziad, should I take that one?

Ziad Ghanem: Yeah, I’ll make some comments. Keith, I know you’ve been doing more. Anything you’d like to share before I start?

Keith Stauffer : Sure. Hey Glenn! I guess I’ll try the whole thing and then you can add in Ziad. So I think if you look at the pace of rollout, just to kind of reiterate the game plan that the Gage team's been executing on here, there they have their arms I'd say well around the pipeline of retail dispensary openings over the coming few quarters, so you can expect a ramp up there in retail from the 12 existing stores up to and over a 20 count by the end of the year and above that. So that will happen driving in the top line and then very shortly they'll be opening their extraction lab, which has been a long awaited process just given some supply chain challenges. But finally it's going to happen here soon in the coming weeks and that's really going to give them a big lift on the gross margin line. And by the way that the big lift as Jason mentioned on the call from Q3 to Q4 into the mid-40s was driven even before the extraction lab opened and that was driven by the Gage branded vape introduction in October, September-October. So there's like a series of margin driving initiatives that will continue to kind of fuel decline in gross margin and EBITDA profitability as we go through, as Gage goes through this year. And then last but not least, later in the year or the next handful of months or so, the monitor to cultivation expansion will happen and so that'll give them the ability to bring more growing in-house, capture that margin and creates some more and just rely less on the contract grow agreements and balance that out. Yeah, so Ziad, anything to add there.

Ziad Ghanem : Yeah, I think you described as well. I can sum it up real quick Glenn. When I look through the entire supply chain, from cultivation or the value chain, from cultivation to production to supply chain into retail, there are multiple opportunities here that are – that will play the tailwind for the margin. From a cultivation, the team will be opening a best-in-class, state of the art facility like Jason described earlier. From a production perspective, we have a great example of the Gage owned brand Vape that recently has launched, and what it has done to the gross margin. A lab will be completed here in the next few weeks or so and we'll start producing more in-house product that will do the same thing that the vape has done. In the retail store, from a pricing perspective you think of TOG’s [ph] and you think of pricing, I think the advantage is all there and it will be all tailwind for the margin.

Glenn Mattson: Okay, great. Thanks for that color there. And one quick one just on PA, just with the like you said patient has been flattish and you know potential competition from New Jersey and some [inaudible] online. You know we saw what a tough year it was in ’21, which kind of talked about your ability to sustain that top three position, more at the same time quality and just what you would think about in terms of if prices started to get – pricing starting to get worst if you are willing to you know follow that down or hold firm or just your thoughts on that market a little more in depth. Thanks.

Jason Wild: Ziad, you want to take that.

Ziad Ghanem : Yeah, I’d love to. Yeah, I’ll start Jason and then you can… So I have to describe when I came in and what I saw in Pennsylvania. The Pennsylvania story has been a great story for us, it started super painful and it turned out as a no-brainer like Jason has described. We made a very hard decision to do what we killed the plan that we killed in order to restart and accomplish the goals that we wanted to accomplish. Since we've seen quality improve every month and still the best quality is ahead of us. We’ve seen that we've been able to protect pricing from a wholesale perspective, and the data does not lie. The consumer and the patients are asking for it and we have entered in more doors and have set some record penetration rates from a wholesale perspective. The Flower portfolio, we have the highest percentage of flowers testing at the highest THT averagewe’veeverseen and we think the better numbers are still in front of us. Due to all the clean-up in construction and expansion that we've done, the facility is that much more efficient, again making us more efficient on the cost of goods side and that is helping. We are seeing and hearing from patients describing and tweeting and bragging about the flower they are buying and we are seeing a switch, an increase in our own brand utilization, not only through wholesale, but also in our own storage. So all this has caused us so far to not see any change in our pricing when it comes to wholesale prices. From a retail perspective, the environment, external environment that we cannot control, we face it the same way our competitions – the way our competition does what they do. What we can control and what we are laser focused on is all the levers we can pull under all the revenue drivers, the gross margin drivers and the OpEx drivers just to give you a few examples. From a revenue driver, the team is focused, is laser focused on patient acquisitions, patient retention and basket sized drivers. Through segmentation that we talked about, through our digital platform, new launches, new brands, ability to connect with the patient outreach programs. From a gross margin, we talked about the pricing, we talked about the cost of goods and then from an operation perspective, really staying ahead of the trend and making sure our labor model stays in line with our revenue, while our customer service and our product serve the patients. Jason, anything else you want to add?

Jason Wild: Yeah, the only thing I would add is with where – we’ve made all this – as I said earlier, we've made all of this progress in the absent of the new genetics that are about to launch in the coming weeks. So that will – we believe that will be another differentiator for us and making sure that we can continue to hold price, because we're delivering, essentially we're delivering more value than we ever have at the same price.

Glenn Mattson: Right, right. Okay, thanks for the color guys. I appreciate it.

Jason Wild: Thank you.

Operator: Next question will be from Noel Atkinson at Clarus Securities. Please go ahead.

Noel Atkinson: Good evening folks. So, well done in the quarter and welcome Ziad. First off, can you provide any update on the timeline to opening your Lodi store?

Jason Wild: Yes, sure. Ziad why don’t you take that one. I know you’ve been deeply involved with the New Jersey DOT.

Ziad Ghanem: Yeah Noel, thanks for the welcome. From a Lodi store perspective, to open the store you need a CRC approval, we got this. You need a Certificate of Occupancy, we got this. And the last step, which is the easiest one to get a thumb up from the Department Of Transportation. This is where we are today and it took longer than what we thought it should take, but for good reasons, for great reasons. The store has a drive through, the store is one of the most – is on one of the most dynamic traffic drivers for any retail store and then the Department of Transportation expressed concern about the traffic we draw into the store that they required us to get the new parking, an extra park sport, which we did. We aligned on the data, which we did, we resubmitted and then we are not waiting for an approval that literally could come any day. We were actually hoping that while you are doing the call today we could share the news of Lodi, but it is imminent at any point right now Noel.

Noel Atkinson: Okay, great. And then just to follow-up in New Jersey, so you mentioned in your prepared remarks that there will be wholesale availability, hopefully this year, so you can do the thumbs up here and for the 30 days it will be able to provide some wholesale to other dispensaries. But once you get your presuming three stores up and running, do you still see that you'll have availability of product from your able to wholesale or you are going to keep pretty much everything in.

Jason Wild: We believe that we will have a supply to sell wholesale as well. Obviously, the adult use kick-off has been delayed versus what we had originally thought. Originally we thought it was probably going to happen around November. Back at that point we were prioritizing, building inventory for our own stores, but at this point we have significant inventory of product itself to our own medical patients, for our own stores and to be able to sell wholesale. So we intend on being able to serve both markets. On top of that we also, like I believe firmly that your retail stores, you shouldn't only try to push your own products on customers. They – I think the way to build the most loyal customer base at retail is to sell customers the products that they want, not the products that you make the most money on. So we are also planning on stocking many of the other brands that are cultivated and manufactured across the state. We will be stocking those brands as well at our stores, which you know also frees up some inventory for us to sell wholesale across the state.

Noel Atkinson: Okay, great. Thank you very much.

Jason Wild: Thank you, Noel.

Operator: Next question will be from Andrew Semple at Echelon. Please go ahead.

Jason Wild: Hi Andrew!

Andrew Semple: Good evening! Hi there! Just wanted to ask on the gross margins which were 50% adjusted for the current quarter. I'd like to get your thoughts on the puts and takes on the gross margins for the year ahead, given the large numbers of moving items, including the consolidation of Gage and New Jersey adult use sales potentially beginning in the near term. Any thoughts you could share on margin expectations for ‘22 and whether you believe the 50% level can be sustained or perhaps even improved on in the year ahead.

Jason Wild: Sure! Keith, you want to take that?

Keith Stauffer: Sure. Hey Andrew! So I think directionally I think it’s clear we're still kind of coming out of some of the activities in the back half of last year and sort of climbing our way out of that and rediscovering some scale in Pennsylvania and absorbing the cost there. And so it's not going to be a straight, smooth line up, but we are going to continue to see, we expect to see margins be able to stay at or above those levels. The biggest driver, you said the puts and takes. The real big driver obviously is New Jersey, where we’ll have a very favorable cost structure, very favorable pricing structure in the initial many months of that adult use market. And so New Jersey is going to be a great driver of gross margin for us and then Gage will be – you know we’ll start to kind of bring that into the fold and kind of get our heads around that and come out at some point with more visibility for you all. But that might be you know a slight offset to something like in New Jersey that will be definitely a tailwind to call out. So, all-in-all we do see that we’ll be able to make continued progress on the gross margin front.

Andrew Semple: Great! Tank you Keith. And just a quick follow up here. Have you made any CapEx budget plans for the year ahead and if so, would you be able to share those.

Keith Stauffer: Yeah, I can take that one as well. So the major projects will be the first which is well under way, which is the Hagerstown expansion; and then the second that we talked about a little bit on the call here is, the soon to start expansion in New Jersey. So those will be our two major CapEx projects. I think directionally you can think about those projects being larger spend items than our last of couple year trends of CapEx, and then on top of that add in more from a retail perspective with Gage. So those are kind of the three big levers on the CapEx line for us this this year.

Andrew Semple: Great! Thank you so much.

Jason Wild: Thank you.

Operator: Next question will be from Howard Penney at Hedgeye. Please go ahead.

Howard Penney: Thanks very much for the question. I just had a margin question as well. I was wondering if you had attempted to try to quantify what the reset and pay in Pennsylvania cost you from a revenue and/or margin standpoint, and how you thought that would – I think you may have answered this, but how that may influence margins next year. Thanks.

Jason Wild: Yeah, I don’t know if we have specifically quantified it. Keith, you want to take a shot with that?

Keith Stauffer: Yes, it’s a tricky one to say a specific quantification, but surely I mean we saw the impact in our in our Q3 results as that was where we may be bore the brunt of it. We got some recovery in Q4. There's some sort of accounting technicalities of what goes to the P&L, what cost gets capitalized and how that ebbs and flows each quarter. So I think taking a step back from all that, there could be some ups and downs related to PA, but over the course of the next several months we're going to see that facility continue to gain scale given the quality that we are seeing and the ramp back up in sales. And again, it won't be a smooth straight line, but it will go in the right direction as we go through the year here.

Operator: Did that answer your question Mr. Penny?

Howard Penney: Yes, awesome! Thank you so much.

Operator: Thank you.

Jason Wild: Thank you.

Operator: And at this time I would like to turn the call back over to Mr. Wild for closing comments.

Jason Wild : So, thank you everybody for joining our Q4 call. We look forward to our next call, our Q1 call in a couple of months. Hopefully New Jersey will have launched and we’ll be able to give you all more detail on that, as well as a whole lot more detail on how we are going in Michigan with Gage. Thank you so much.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time we do ask that you please disconnect your lines.