TerrAscend Corp. (TSND) Earnings Call Transcript & Summary

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to TerrAscend's First Quarter 2021 Investor Call. As a reminder, I would like to advise listeners and participants that today's call is being recorded, and a copy of that recording will be available following the completion of the call. I would now like to hand the conference over to your first speaker today, Dan Foley, SVP of Treasury. Please go ahead.

Thank you, Joanna. Good morning, everyone. Welcome to TerrAscend's First Quarter 2021 Conference call for the 3-month period ending March 31, 2021. Joining us for today's call is Jason Wild, Executive Chairman; Keith Stauffer, our Chief Financial Officer; Greg Rochlin, Chief Executive Officer of Northeast Operations; and Jason Marks, Chief Legal Officer. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute 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 results are detailed in TerrAscend's MD&A and other periodic filings and registration statements. These documents may be accessed via the SEDAR database. I'd like to remind everyone that we began reporting results in U.S. dollars this quarter. And as a result, all figures in our prepared remarks are in U.S. dollars unless otherwise noted. Please note, this call is being recorded today, Tuesday, May 19, 2021. I would now like to introduce Mr. Jason Wild. Please go ahead.

Good morning, everybody. Welcome to our -- thanks for joining us today. Sorry about that. Since our last conference call in March, we have made progress on many fronts. We just posted quarterly -- record quarterly results. We entered the Maryland market, doubled our dispensary footprint in Pennsylvania and continue to invest in organic projects to lay the foundation for strong growth beyond '21. Due to the significant progress, we are increasing our full year guidance. Net sales are now expected to exceed $300 million up from our prior guidance of at least $290 million, and adjusted EBITDA is expected to exceed $128 million, up from our previous guidance of at least $122 million. This would translate to more than a doubling of our net sales and almost tripling of our adjusted EBITDA year-over-year. Few companies are experiencing the explosive growth we are currently delivering with our operations. Our targeted investment strategy is yielding growth and margins that are among the top of our peer group. We continue to invest in our existing operations, while pursuing accretive acquisitions to fuel continued growth. Overall, 2021 is shaping up to be another banner year for TerrAscend and its shareholders. Now on to the results. Our continued focus on execution and operational excellence delivered yet another quarter of strong top line growth, gross margin expansion, SG&A leverage and positive cash flow generation. Our profitability continues to be among the highest in the industry, with adjusted EBITDA margins reaching 42% in Q1. Taken together, our Northeast operations in Pennsylvania and New Jersey represented around 80% of our Q1 net sales. Also with the recent closing of HMS in Maryland and KCR in Pennsylvania, the significant majority of our expected '21 business mix is anticipated to come from these 3, high growth, highly profitable, limited license markets. Turning to an overview of our operations. As I mentioned, we closed the acquisition of KCR on April 30, which doubled our dispensary footprint in Pennsylvania. We've hit a mid- single-digit adjusted EBITDA multiple for KCR, and it will be immediately accretive. This acquisition gives us more contact points with our patients, diversifies our customer base and will enhance margins through deeper vertical integration. Cultivation and production output at our Pennsylvania facility continues to scale. Output as measured in grams per square foot of canopy space continued to improve, enabling margin expansion in our operations there. We continue to distribute our branded products to 100% of the dispensaries in the state. The power of the brand and our wholesale distribution can be seen in recent third-party data, which showed TerrAscend having built a clear leadership position in the important flower category, which makes up nearly half of all product sales in the state. Our country brand now represents 28% of all flower sales in the state, 1,000 basis points ahead of the nearest competitor. In addition, our Ilera branded tinctures are #1 in that category. It is clear from this data that demand for our products is robust. As such, we are currently expanding our existing production capacity in Pennsylvania to further fuel growth into 2022. As we integrate our 3 new dispensaries, sales at our 3 existing Apothecariums in Pennsylvania have continued to perform well. Our number of active patients has grown more than fourfold from Q1 of last year, with our average order size continuing to be very strong, leading to extremely robust retail throughput. And sales per square foot at these locations. As we move through '21, we are excited about the future potential of the Pennsylvania market. While we maintain a leadership position in branded cultivation and manufacturing and have expanded our retail presence with the addition of the KCR dispensaries, we are continuously working on new and innovative products formulations and form factors that will appeal to both our patients and to our wholesale customers. Pennsylvania remains 1 of the top cannabis markets in the U.S., and we continue to believe there remains tremendous potential upside from here. Turning to New Jersey. We continue to execute on our growth strategy. And with the passing of adult-use legislation, we are extremely well positioned in this emerging and underserved market. Our current cultivation and processing business in New Jersey is now fully operational, and we are prepared to meet the expanded market with a broad array of high-quality products when adult-use sales begin later this year. As to retail operations, we're pleased with the ramp-up of our first medical dispensary at Phillipsburg, which opened at the end of 2020. Our second dispensary opened in May in Maplewood, a town in Northern New Jersey located within the densely populated commuter corridor of New York City. We're extremely excited about the Maplewood dispensary size, aesthetic and throughput capacity. When combined with our cultivation and processing capabilities, the Maplewood location is set up to be one of the top performing dispensaries in the U.S. Our third dispensary location is on track to open in late summer in another densely populated town in the Northeast part of the state. All 3 dispensaries will be branded as Apothecarium. Our 120,000 square foot cultivation and processing facility is now delivering high-quality flower and manufactured products to both our Phillipsburg and Maplewood retail stores as well as the wholesale market in New Jersey. We expect our business to continue to ramp in Q2 with an acceleration of this growth in the second half of 2021. In Maryland, we entered the market on May 3 with the closing of the HMS Health acquisition. Our entry into the $600 million medical market in Maryland further strengthens our foundation on the East Coast. We look forward to leveraging our scale, strong portfolio of brands and our veteran Northeast operations team who oversee our New Jersey and Pennsylvania operations as well. Over time, we expect to achieve full vertical integration and assume a leadership position in this growing market. As part of this plan, we will soon begin a significant expansion of our existing capacity. Which we expect to complete by the end of this year. This expanded capacity will enable us to better address the underserved Maryland market, consistent with our approach to other core Northeast markets. Turning to the West Coast. The operating environment in California is improving as COVID restrictions abate. Our Capitola and Berkeley stores are ramping up, and our existing flagship dispensaries in the Bay Area are showing signs of tangible recovery. At our San Francisco stores, transaction volumes were up 14% month-over-month in March. And in April, our 420 sales were up 67% year-over-year. Our Apothecarium stores were the only Bay Area dispensaries that were part of the U.S. launch of Seth Rogen's Houseplant brand demonstrating that the Apothecarium is a trusted retail partner and a premier retail experience. In March, State Flower recorded its best month of sales ever. State Flower is a popular brand within our California Apothecarium dispensaries, representing approximately 30% of flower category sales. In Canada, the progression of our business continues, and we see further signs of success of our clear and focused strategy, which is aligned with current market conditions. Our Indigo Daze continued its strong performance in Ontario and was a top-selling SKU during the first quarter. We also saw a positive reaction to the launch of our retrograde 3.5 gram jar SKU in Nova Scotia and British Columbia, where it was the top-selling SKU for the last week of March. With our improved commercial focus and streamlined product portfolio, we are confident that these positive trends will continue. To summarize, we believe our first quarter results demonstrate the outstanding fundamentals that exist in our business. We once again delivered record results and expect 2021 to be a banner year for TerrAscend. With the strong footprint we have established in Pennsylvania, New Jersey and now Maryland, we are poised for continued growth. We look forward to updating you on our progress throughout the year. I would like to now turn the call over to Keith Stauffer, our CFO, who will discuss the financial highlights for the quarter as well as detail our financial guidance. Thank you.

Thanks, Jason. Good morning, everyone. As a reminder, the results I'll be going over today can be found in our financial statements and MD&A on SEDAR. This quarter, we transitioned our reporting currency to U.S. dollars. So all figures discussed this morning are in U.S. dollars unless otherwise noted. Net sales increased 106% to $53.4 million versus year ago and increased 8% sequentially. This significant year-over-year growth was driven by cultivation expansions in Pennsylvania and California, the initial ramp-up of sales in New Jersey and the continued growth and ramp up in our 3 Apothecarium and dispensaries in Pennsylvania and the 2 new locations in California. Regarding net sales by channel, we grew our branded manufacturing business by 121% versus a year ago, while our retail business increased 77%. The higher growth of branded manufacturing was driven by cultivation expansion in Pennsylvania and California, while retail growth was driven by new store openings in Pennsylvania, California and New Jersey. It is important to note, branded manufacturing with its healthier EBITDA profile, represented 72% of our revenue mix this quarter. This percentage represents the highest mix in the industry and is a key pillar of our business model and strategy as a brand and manufacturer first. Adjusted gross margin for Q1 was 65% compared with 60% in Q4. Note that adjusted gross margin is a non-GAAP measure, which excludes fair value of biological assets and excluded a Q4 inventory impairment in Canada. There were no adjustments to gross margin this quarter. The 500 basis points of sequential improvement in gross margin was primarily driven by greater mix of higher-margin business in Pennsylvania and the initial ramp in our New Jersey operations. We have maintained our strong focus on cost control with SG&A dropping 1,200 basis points year-over-year to 30% of net sales. While SG&A did increase 7 percentage points from Q4, about half of that increase was related to onetime legal and severance costs, while the balance of the increase was related to planned investments in personnel systems and other capabilities to enable future growth. While some quarters will show more improvement in SG&A as a percentage of net sales than others, we expect the overall downward trend to continue as we continue to scale our operations throughout the year. Overall, we remain at or near best-in-class levels of SG&A leverage in the sector and our strategy to go deep, build scale and leverage our cost structure teams and capabilities remains a central focus. Q1 adjusted EBITDA was $22.6 million, representing a 42% adjusted EBITDA margin. Just to recap our quarterly progression, adjusted EBITDA margins improved throughout 2020 from 14% in Q1 to 24% in Q2 to 35% in Q3, at 40% in Q4 and now 42% in Q1. These significant quarter-by-quarter improvements are a clear indication that our focus on depth, scale and cost control is driving profitability levels that are among the highest in the industry. We see room for further margin expansion as we ramp up our New Jersey business and continue to expand and gain efficiencies in Pennsylvania. Turning to the balance sheet. We ended the quarter with a very strong $234 million in cash as a result of the $175 million equity offering that we closed in January. This level of cash balance is among the highest in the industry. In Q1, we generated $13 million in cash from operations, while CapEx spending during the quarter was approximately $8 million. As a result, we generated a positive $5 million of free cash flow for the quarter, our second consecutive quarter of positive free cash flow generation. Due to the timing of tax and CapEx payments going forward, free cash flow may continue to fluctuate on a quarterly basis. However, for the full year, we expect that our cash flow from operations will be sufficient to largely fund our organic expansion plans. Including payments subsequent to quarter end for the acquisitions of KCR and HMS totaling $42 million as well as the final Ilera earnout payment in June of $30 million, we expect to have approximately $160 million in liquidity on our balance sheet to continue to execute on our M&A agenda. Also of note, during the quarter, we received approximately $8 million of net proceeds from warrant exercises. We expect to receive approximately $40 million of additional proceeds from warrants that expire in January of 2022, and approximately $50 million of proceeds for warrants that expire in August of 2022. Lastly, before turning the call over to questions, I will take a few minutes to discuss our updated '21 outlook. 2021 is shaping up to be a very exciting year for TerrAscend, and we expect to continue to achieve rapid growth. The drivers that I will highlight here are also expected to result in continued expansion of margins. New Jersey will be a leading growth driver for us throughout the year as we realize the full capacity of the operation. It is important to note that we do expect the scaling and growth in this new capacity to be back half weighted as the operation continues to come fully online for the remainder of the first half of the year. For New Jersey retail, Q1 was the first full quarter of operation at our Phillipsburg dispensary. Our second dispensary in Maplewood opened on May 7, and our third dispensary will open later this summer. With our expanded cultivation capacity and growing retail footprint, we expect to see robust growth through this year in New Jersey, especially in the second half. Finally, we are excited and prepared for adult-use sales to begin in New Jersey, hopefully later this year. However, we do not have any of that opportunity built into our guidance for the year. In Pennsylvania, Q1 was the first full quarter following the completion of our increased cultivation capacity. Also, construction is currently underway to further expand our cultivation capacity by an additional 30-plus percent. This expansion is expected to be completed later this year and will be a key driver of growth for us in 2022. Finally, the acquisition of KCR closed on April 30 and will begin to contribute to our consolidated results. Pennsylvania remains our largest market and is an anchor for our expanding Northeast strategy. In Maryland, the acquisition of HMS began contributing to our sales as of May 3. Note that our 2021 guidance does not contemplate any expansion of the Maryland assets, though, as Jason noted, we will soon begin the expansion of our cultivation and processing operations in Maryland. This expansion is expected to contribute to results beginning in early 2022. In California, we will fully annualize the late 2020 expansion of our state flower cultivation facility, and we'll see continued growth at retail with the further ramp-up in our fourth and fifth California stores in Berkeley and Capitola, which opened in the second half of 2020. We are also cautiously optimistic about some early indications of COVID impact subsiding with some recent sales trends that we have observed with our California stores. Finally, in Canada, with our optimized business, we expect to see positive contributions to both sales and EBITDA growth in '21. We converted from Canadian dollars to U.S. dollars as our reporting currency effective this quarter. Also, our work continues with preparing TerrAscend to become a U.S. domestic filer with the SEC under U.S. GAAP later this year. In addition, we are preparing to meet the requirements necessary for our securities to trade on a major U.S. exchange. If law should change in the future to permit us to do so. As a result of these strong growth drivers, we are raising our guidance for 2021. Net sales are expected to exceed USD 300 million, and adjusted EBITDA is expected to exceed USD 128 million leading to an expected full year EBITDA margin of 43%. Overall, we remain very excited about our recent financial performance. And growth trajectory in 2021 and beyond, and we look forward to providing progress updates in future quarters. I'd now like to ask the operator to open the call for questions. Thank you.

[Operator Instructions]. First question comes from Vivien Azer at Cowen.

Jason, I was wondering if we could just start off with you providing an update on your CEO search, please.

Sure. Absolutely. So recruitment is still underway. I've interviewed several good candidates, but we haven't found the right fit as of yet. This remains a priority, but we don't feel any pressure to hire anybody on any sort of shortened time table. As you can see, business is strong, and the executive team has really stepped up across the board. Many or most of the operators that we have here have been a major part of our success up until this point, and they are continuing to drive the business in a really strong and efficient way. So we're continuing to look, but we don't feel like there are any sort of shortened time tables or that this is a higher drill in any way, we're going to wait and find really what we -- somebody that we think is really sort of the perfect candidate or as close to perfect as we can find.

Understood. That's great. And then either Jason or Keith, can one of you guys quantify what the sequential retail trends were in California specifically, just trying to unpack how much of the total decline was really just coming out of California in isolation.

Sure. Keith, do you want to take that?

Sure. Vivien, not sure about the sequential decline, but -- and we don't necessarily break out specific store level data. But I would characterize California as being stable. And as I mentioned in the prepared remarks actually, in recent weeks, over the last month or 2, we've actually been seeing some signs of recovery as commuters and tourists and so forth and the situation, broadly speaking, starts to improve.

Okay. Understood. And last one for me, please. In terms of the 3 new stores that you guys acquired in Pennsylvania, can you kind of just dimensionalize the productivity of those stores relative to the 3 existing stores that you have in that market?

Maybe this is time for Greg to jump in here, who runs our Northeast operations.

Thank you, everybody. Yes, my pleasure. The KCR stores are actually performing just about equal to our other 3 Apothecarium stores in Pennsylvania, and we're really bullish on our future potential there especially once we get the synergies completely in place. So we're really, really proud of the team at KCR and the accretive nature that it's given us in our Pennsylvania retail business.

Next question comes from Matt McGinley at Needham.

My question is on New Jersey. Can you help me understand the type of revenue ramp that we should expect in that state, I guess, primarily on the wholesale business from the first of the second quarter? I know those facilities were largely ramping in the first quarter, and you -- it sounded like in your prepared remarks, you wouldn't really hit a full run rate until later in the year. But can you help us understand when we would hit kind of steady state for revenues in that business in New Jersey. Is that sort of steady ramp with a bump up in -- bigger in the back half? Or is that something that really doesn't hit normal until '22?

Keith, do you want to take that?

Sure. So Matt, you have that pretty much right, and we were trying to, in our prepared remarks, kind of signal that, that it will be ramping through the first half, Q1, of course, and this quarter in Q2. And then it would be quarter-by-quarter really getting to kind of a run rate level exiting the year. So it's going to be a pretty dramatic ramp, but concentrated in the back half of the year.

Got it. And on the gross margin side, that was a pretty impressive step-up in gross margin rate, and it sounded like that was primarily based on the efficiency increases you're getting out of Pennsylvania. Just making sure that nothing would happen in terms of the acquisitions with Maryland and the dispensers in Pennsylvania that would reduce that rate. So thinking that through into the second and third quarters, would -- do you think it would be around that 65% rate for gross margin, assuming any other variables in the business don't impact that and drag it down?

Yes. So the way to think about that is there'll be headwinds and tailwinds based on business mix. And you're right, the retail stores, as you know, are typically below average, especially below our average, given our concentration of branded manufacturing mix, as I mentioned. But then we'll continue -- the tailwinds will be New Jersey continuing to ramp at a very -- at an above-average margin and Pennsylvania also continuing to show productivity and cost-per-pound improvements. So that's kind of how we model and forecast things. And net-net, we don't see taking any material step backwards.

Next question comes from Pablo Zuanic at Cantor Fitzgerald.

Can I ask just the first question regarding overall market trends that you're seeing in Pennsylvania, some companies that disclose numbers seem to point some to some softness, either because of one-off issues in the first quarter regarding weather or just the market reaching a certain level already. And at the same time, there's a lot more stores opening, right? So I'm guessing revenue per store is being capped in some cases. Can you just talk about that in general, for the state. We don't -- the Headset data is there, but it's not entirely reliable in my opinion. So just exactly. Just some color on Pennsylvania if you can, please.

Sure. I think, Greg, this will be a great question for you to answer.

Certainly. Thanks, Pablo. So we are seeing more stores open as primarily a wholesale operation, that is good for us. We continue to see growth in our retail stores. It has slowed a little bit last year, it was just gangbusters, as you can see from my numbers, our growth in our retail stores, so it's incredible. We have come from more, I'll call it, normalized growth in our retail stores. But with the advent of additional stores, our wholesale growth continues, which is great. And we've seen Pennsylvania has been such a strong market with over 580,000 patients at this point in time. We do see continued growth in that market. And we still have about 1/3 of retail stores able to open that haven't opened yet in the -- marketplace. So we expect that growth to continue.

And at that point, you're not seeing any softness at all in wholesale prices that remain strong or even going up. Can you comment on that? Wholesale prices.

The flower prices haven't dropped whatsoever. Some of the non flower has come down a very small amount, but there's still been great strength in the pricing in the PA market, especially comparative to other markets in the country.

Right. And I guess, Jason, just a more general question. But regarding the contingent stake that Canopy also 20%, does that affect in any way your ability to raise capital in the future? Or if you want to do an equity raise, you can just adjust the terms with Canopy? Can you talk about that in general?

Yes, sure. There's no impact whatsoever, but we're not limited by anything we want to do on the capital raising side. We don't currently have any plans to raise capital. But Canopy's stake does not preclude us from doing anything, and we don't need permission or anything like that.

Okay. And the very last one, as we're beginning to see more M&A in the sector and of different types, I suppose. I know everyone talks about depth in key states, but it seems that the assumption is that investors will also pay for breadth, right, being in more states. And right now, most 3 states, now 4 with Maryland, how are you thinking about that in terms of having more states in the portfolio versus adding more there for you?

Sure. We're going to continue along with our strategy, which has been to be very, very selective in terms of adding additional states. There are probably 10 states right now that we can go find accretive deals, earnings accretive deals, but they're not all necessarily strategic. So we really are setting a higher bar for ourselves, where it has to not only be an accretive deal, but something that is a very strategic and it puts us in a position to win. So that's why we're -- our view is we'd like to add 1 to 2 states over the next 12 months or so, preferably in the general vicinity of where our other locations are because we think it actually is an advantage to have our people be able to get in a car and go over and see people and go see our stores and our facilities and things like that. We're working on multiple deals on that front to potentially enter an additional state or 2. And then we are also looking at going deeper in the places where we are. We're looking for more dispensaries in Pennsylvania. We're looking for dispensaries in Maryland. We think that those were just to give us that extra scale in those states that we'll continue to be able to drive the strong margins that we're driving. But overall, Pablo, I would say we don't feel any pressure to have more breadth in terms of being in -- having more pins in the map, where, as you know, we're much more focused on making sure that we're a top player in the states where we play because we just we think if we're more focused, like I said, it gives us a better chance of winning. But it also makes us focus our CapEx dollars and builds more scale in those limited -- in that limited number of states where we are. And therefore, it gives us better margins in the near term, as you can see from today's results. But even over the long term, as these limited license states get more competitive, we think that there to get -- there could be the point where pricing comes down to a certain price where a smaller subscale operator to no longer turn a profit at that price, and we would still be able to drive strong margins at that price if we got some of the best scale in the state.

Next question comes from Kenric Tyghe of ATB Capital Markets.

Jason, just with respect to Pennsylvania, you're looking to sort of flesh out that footprint at retail. Can you speak to the path to 15 stores, whether it has or you expect it will get more expensive, the closer we get to potential recreational use legalization and really your visibility on that path to 15. Does that sort of stay largely unchanged? Is it improving? Just any insight you can provide on the sort of the evolution there and the path to current tax in the state would be great.

Sure, sure, absolutely. So we do -- we are currently trying to find more stores. As I mentioned, we have a few potential deals on that front, nothing that's far along enough for us to announce, but we are seeing opportunities. I don't think that prices are going up or there will be -- that they'll be going up in the near term, we've actually started to feel like we're seeing the opposite I think if I can back -- if I can pull back from Pennsylvania, maybe Massachusetts is an even better example of what's going on in these limited license states on the East Coast. Because so many of them -- or practically all of them have caps on either dispensaries or cultivation canopy. The fact is that in a state like Massachusetts, which is a great state in the cannabis industry. The fact is practically all of the other buyers are already capped out in Massachusetts. If you look at the top 10 market cap MSOs, I believe every single one of them is already capped out or right near our cap in Massachusetts other than TerrAscend. So we actually have seen that opportunities for deals in Massachusetts, the prices are actually going down because there are simply not enough there -- there's no buyers left that can pull off a $100-plus million deal. So this applies to -- in Pennsylvania as well. Maybe the operators are already capped out at their dispensary cap in PA and therefore, we see prices holding steady and, hopefully, going down as opposed to going up.

And then, Jason, could we just switch to Maryland. Obviously, a market that people are spending more time looking at and so speaking to. Can you just sort of take us through, to your mind, the appeal and where you -- and when I say the appeal, having just closed that acquisition, how you think about the urgency to your capacity expansion? Are you completing it through a year, but essentially, the question is, are you more or less excited about the opportunity in Maryland now than you were 3 or 6 months ago? And how should we think about your sort of mature footprint maturity in the state?

Sure. I'd love to have Greg add to this one because I know he is just so excited about Maryland.

That would be my pleasure, Jason. Thank you. So I live in Maryland, which is why Jason threw it over to me. So I'm very excited about the Maryland opportunity. I would say that Maryland, as Jason mentioned, we believe very much in going deep before going wide, and we think that Maryland is going to be just a fantastic state for us. It has great synergies with our Pennsylvania and New Jersey assets. As far as our capacity, our people and the location as far as the -- and the opportunities and the similarities of the state from makeups of product mixes, et cetera. So we are, I can say without any hesitation much more excited today, now that it's actual versus theoretical. We acquired a great team at HMS, and they're doing a great job. And we think our future expansion opportunities are really solid and that we can be a top-tier player here, just like we are in Pennsylvania and New Jersey. So we're really excited about it. Great opportunity.

Next question comes from Glenn Mattson at Ladenburg Thalmann.

Curious, Jason, on your thoughts on just when we get to your best guess as it stands today, where we get to adult rec in New Jersey. I know there's a lot of -- the state regulators want to get the medical market fully supplied and all that. So just your sense of like how long for you to meet that requirement and what your feel is and sense on the rec in general?

Sure. I mean we're going under the assumption that it flips over to rec at some point before the end of the year. It doesn't -- it has not been -- rec revenues have not been included in our guidance. But we're just assuming that it happens before the end of the year. If it happens sooner, say in the fall, then that will be great for TerrAscend. We are prepared to fully -- be able to fully supply our stores, and we think that we will be able to supply the wholesale market as well in addition to fully supplying those stores. So we are -- we will be ready. It's just a matter of when the whole program is -- gets kicked off. Greg, did you have anything that you'd like to add to that?

The only thing I'd add, Jason, is as we are now growing in both our greenhouse and our indoor facilities in New Jersey, we are able to help supply the entire marketplace. And we're hoping with the -- as Keith mentioned, as we really get to full production coming to Q3 that we're really allowing that medical program to be fully supplied, which will help, of course, move into the adult-use market. So we and I believe the other players in the marketplace are trying to do our part to help this program move forward in a speedy manner. So we're really optimistic again in New Jersey as well.

Great. That's helpful. Keith, you mentioned on the margin side, obviously, great performance in the quarter. You said that there were kind of pulls give and takes going forward. But it seems like there's more benefit coming, given that as New Jersey ramps, that will be better margin. And as the Pennsylvania acquisition comes into the fold, you'll get good margin on that side, and California is improving. So in general, maybe can you just think about like what's the upper end of where margins could be, say, I don't know, next year, when all these assets are producing at their highest level highest case?

Yes. Glenn, I'll reiterate a little bit what I said earlier and just to make sure. So like I said, net-net, we don't expect any negative impact, material negative impact going forward in the quarters. I also wouldn't model too much positive continuation either. So I would say 65% is a very high level. And that's kind of with the puts and takes, like I mentioned earlier, there may be some improvement. But roughly, let's say, stabilizing in the near-term at that level, and we expect the rest of the year really, from an EBITDA standpoint, to get more improvement from SG&A leverage, as I mentioned in my prepared remarks. And so I know that wasn't your question, but more there, maybe less on the gross margin side in the near term, given some of the mix impacts from like KCR coming in with retail gross margins being lower than that average.

Great. And then 1 more would be just on the guidance. So raised guidance, but then there's also a couple of acquisitions in there. So if I just look at, let's say, like the Pennsylvania acquisition, I think you said you paid like a mid- -- like $70 million, and it was like a mid-single-digit multiple, which would imply something to the tune of like $10-ish million in EBITDA and so maybe more, maybe less. But that if you got 7 months out of that business, that would equate for most of the increase. And then you also have Pennsylvania and other stuff. So maybe is there a little to conservatism there or something else that I'm missing or maybe I'm not doing the math, right?

Yes. Jason, do you want me to take that?

Sure.

Okay. Yes. So just to clarify there, Glenn. So HMS was already in our guidance, okay. That's important to understand. And then yes, KCR is a key driver of the change. And I think your math is broadly correct. And there are other moving parts here and there as we go through weeks and months, but that's largely the right takeaway.

Next question comes from Andrew Partheniou at Stifel GMP.

Congrats on the quarter. Just wanted to maybe talk about New Jersey following up earlier questions. And maybe more focused on your stores given in the past, you've talked about the big change that you would expect and a switch to turning on rec is just higher vertical integration and more sales going through your own stores. With that in effect and your recent store opening in May having been quite a large store. Could you talk about how much torque should we kind of expect on your store's productivity before it reaches full capacity?

Sure. In terms of the specific stores, when we can get to full capacity? That was the question in Jersey?

Yes, in comparison to where you're at now.

Yes. Well, first of all, there's -- yes, there's certainly a huge amount of upside versus where we are now, especially in Maplewood because it's only been open for a couple of weeks. But what I would say is we think this Maplewood store has -- we have the capability to have 15 points of sales at that store, which when we talk about high throughput, a 15 point-of-sale store is generally -- can push through to your over $35 million or $40 million in annualized revenue. We're, obviously, nowhere near that right now because we just opened, and our view is it would not hit those type of numbers under medical. But under rec, we -- especially if we are 1 of the best -- if we have some of the best supplied dispensaries in the state, under rec, we think that those are the type of numbers that we can achieve in those stores. In a store like Maplewood, our third dispensary as well will be a high throughput store in a very high-traffic area of New Jersey. So we think that, that is another one that could have figure of $30 million, $40-plus million revenue potential pretty quickly.

Pretty impressive. And then maybe following on M&A. You talked about less buyers in Pennsylvania to do large deals but you also talked about some potential for tuck-ins or smaller deals. Do you have a preference, one versus the other? Or is it really you're looking at all potential acquisitions there. And you mentioned pricing in Pennsylvania, but could you also maybe talk about more broadly what you're seeing with pricing, especially given the pullback in the market in the last couple of months?

Sure. So you mean pricing in terms of to buy assets, right?

Yes.

Just to make sure I'm clear. Yes. As I mentioned, we've just been getting very excited the last month or so. By sort of -- we've come to the realization or it's become -- we had a theory that we could wait on several of these attractive states because they had low caps that we could wait and really pick our spot. As I mentioned earlier, Massachusetts, I think, is a good example of that. The last 2 deals in Massachusetts. Have been at progressively lower multiples of EBITDA. I believe the last deal in Massachusetts announced about a month ago was at, I think it was 4.5 to 5.0x current EBITDA and even lower number obviously, for next year. And even that deal, that deal ended up taking out the last buyer out of the top 10 MSOs. So we're just seeing -- in states like Massachusetts and other ones, we're seeing really attractive assets, assets where these operators have put in the time and the sweat and lived through some of the pain to get to the point where they now have nicely profitable businesses that are actually -- many of them are actually already cash flowing at this point. And we're just really excited because we can now step in and buy assets like that for mid-single-digit EBITDA multiples and really sort of a leapfrog our way right into -- right up near the top in those states. The other thing we really like about these limited license states is that we don't have to -- or at least the ones in the Northeast is that there are not many dominant players because of the caps in Massachusetts, where you can only own 3 rec dispensaries and 3 medical dispensaries and 100,000 square feet of canopy. We don't have to worry that if we entered some place like there like that, that we'd be competing with a really entrenched strong player that owns 50% of the market just because it's not possible with those caps. So not to spend too much time talking about Massachusetts, I'm only using it as an example. But we think that, that type of situation is starting to play out in several other limited license, extremely attractive states and that we're going to be able to sort of to get into those states at a much lower cost than the existing players or whatever it costs them to buy their way or organically build it and have to wait for the cash flow, we're excited that we can enter there. And immediately have cash flow and enter at very, very accretive multiples.

And just to follow-on that. Do you think that smaller or larger acquisitions are more preferable? Or would you say that both, if the terms are right, then if the strategy is right, would be equally as attractive?

Yes. I would say they're equally as attractive. It depends on which state. I mean we do aim -- we don't like to enter a market unless we think that we could be a top 3 player within the first year or so. So that may relegate us to some larger operators. But I think HMS is a good example where we bought an operation that is not very large. We bought it at a very attractive mid-single-digit multiple of run rate EBITDA. But to a certain extent, we were getting that EBITDA but on top of that, we were getting a piece of paper, the license, which we can now take and transform into a much larger asset. So we'll look at smaller assets, if we think that we can turn them into much larger assets. But also just look at large assets if they're attractive.

Next question comes from Noel Atkinson at Clarus.

Congrats on a strong Q1. First off, you mentioned in the remarks and in the filings, the rev split between wholesale and retail was sort of 72% wholesale, I guess, in Q1, and the rest retail. What do you think your 2021 guidance represents in terms of wholesale-retail split?

Keith?

Yes. Noel, I would say, broadly speaking, it's going to remain in that range. And in past quarters, I think just based on our filings, it's been kind of that 68% to 72% range, and it's going to depend on whether or not there's any other M&A and so forth, like we're talking about. But broadly speaking, it's going to stay in that range.

Okay. Can you talk at all about the performance of your second dispensary in New Jersey after the opening. I know, it's only been a few days, but...

Yes. We're -- I don't think -- it's truly only been a few days. And I don't think that -- I don't even know the specific numbers, but that would not be something that we would share. Generally, we don't give any sort of single store level sales numbers.

Okay. And then the status of your third store in New Jersey, where is it in terms of development process? Have you received zoning approval, and would it be a similar size to your big store in Maplewood.

Sure. Greg, do you want to take that?

Yes, we're finalizing all of the approvals right now, and where this store will be a little bit smaller, but still a nice size store, about 5,000 square feet in our third location. And as stated, we are expecting to be open late summer of this year.

Next question comes from Eric Des Lauriers at Craig-Hallum Capital.

Congrats on the continued impressive profitability here. A question for Greg with PA. So cultivation operations obviously continue to impress. Both from a profitability and market share perspective. Greg, can you help us understand how you think about the trade-off between potency and quantity? Should we think of it more as a quantity game in its early phases and then more of a potency game as competition increases? If so, I would love to hear your thinking of Ilera's competitive positioning from a quality and potency standpoint?

Well let me congratulate you on a really good question. And it's a topic that we talk about quite a bit internally. As markets mature, as we've seen in the West Coast, they're in definitely a, what we call a flight to quality. And it was starting out much more of a quantity race than it was a quality race to some extent. We've always focused on quality, and we continue to do so. And we have made some pretty significant steps, especially in our non-flower production to continue the race to quality and, as you say, potency as well. So we are focused very much on potency both in flower and non flower as well as the diversity that the marketplace wants. So it's not necessarily only high THC, it's the turnkeys, of course, and just the overall quality, again, of the product line and making sure we have a diverse product offering to really hit the market where the market is today and where it's going, not necessarily where it was. So again, a really good question.

Next question comes from Andrew Semple at Echelon.

Congrats on the results. I just want to go back to the gross margins for the quarter. I'm just getting a sense that Pennsylvania was the primary driver behind the quarter-over-quarter increase that we saw in the gross margin level. But I'm also wondering whether first sales in New Jersey had a material impact on the gross margins, if you have any comments on that?

Yes. Andrew, it's both. And you can think broadly speaking, maybe roughly half and half, so have contribution from Pennsylvania continued improvements and half from New Jersey.

Okay. That's great color. I appreciate that. And then looking at New Jersey in the months and quarters ahead, mean, obviously, you're going to have to make decisions there with what you do with your production capacity in that market. And how much you want to allocate to your own stores? Do you have an early sense of what kind of proportion of your own shelf space you'd like to reserve for your own branded products relative to third party products? Or is it still a little bit early to make that call?

Greg, do you want to take that?

Yes. Yes. That's -- again, that's a great question. A lot of it depends on what other grow processors are producing in the marketplace. So what we'd like to do is give our customers and our patients a variety of products so that they are really, again, getting the medicine or the products that they want and need. So depending on what is being produced from others that will help determine how much of our own product will be on the shelf. We want to make sure that we have a robust product offering if that means that we need to supply more, that's great, and we can do so. If we can kind of spread it around and supply the other dispensaries and have supply from the other GPs, then we'll look at that. So some of that will really be determined on what happens in the next let's call it, 6 months or so.

Yes, the only thing I would add to that, though, is we believe that we can fully supply our stores and additionally supply the wholesale market based upon the capacity that we have. So that would be -- even if it ended up skewing much more towards us, needing to sell a larger percentage of our own products in our own stores just because there's not enough supply of others' products, we can still fully supply our stores and have additional product for the wholesale market.

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. I will now turn the call back over to Jason Wild for closing comments.

Thank you. So yes, thank you, everybody, for joining our Q1 call. We look forward to our next call in August to report our 2Q results. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. And enjoy the rest of your day.