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spk00: Good evening, my name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrasen's 4th Quarter and Full Year 2023 Financial Results Conference Call. Joining us for today's call is Jason Wild, Executive Chairman, Ziad Ghanem, President and Chief Executive Officer, and Keith Stuffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook and estimates and assumptions relating thereto, and the company's expectations regarding its new market opportunities like Ohio, the benefits of its listing on the Toronto Stock Exchange, the benefits of the company's plans to file tax refund claims for past years, and other financial and operational matters. Each forward-looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance. Additional information regarding these factors appears under the heading Risk Factors in the company's Form 10-K, filed with the Securities and Exchange Commission, or the SEC, and other filings that the company makes with the SEC from time to time, which are available at www.sec.gov, on Cedar Plus, and on the company's website at www.terrasend.com. The forward-looking statements in this call speak only as of today's date, and we undertake no obligation to update or revise any of these statements. Also, during the call, the company will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release and filings, which you can find on the company's investor relations website, or on the FEC and CJ Plus websites. I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.
spk13: Good evening, everyone, and thank you for joining us. 2023 was a record year for Terrasen. We made substantial progress across virtually all facets of our business, including significantly improving our margins, transforming our balance sheet, materially lowering our interest expense, delivering positive operating and free cash flow, acquiring four high-performing dispensaries in Maryland, and successfully listing on the TSX. We grew net revenue 28% year-over-year to $317.3 million, achieved gross margin of 50.3%, and delivered adjusted EBITDA from continuing operations of $68.8 million, an increase of 77% year-over-year. Generating positive cash flow is also a major priority for us. In 2023, we generated positive cash flow from continuing operations of $31.1 million and positive free cash flow of $23.4 million. This was the first time in Terrascent's history that we accomplished these two financial milestones. Our efforts to transform our balance sheet in 2023 contributed to improved cash flow generation. From its peak in late 22, we substantially paid down our debt while also materially lowering our interest expense. Federally, we are awaiting updates regarding the DEA's response to the HHS Schedule III recommendation, which could present significant opportunities for U.S. cannabis operators. We remain optimistic about the potential benefits that rescheduling could bring to cannabis companies if approved. including tax relief leading to significantly greater profitability and cash flow, increased access to institutional banking and lending, and an overall decrease in the cost of capital. At the state level, the governor of Pennsylvania has been increasingly vocal about endorsing an adult use program and requested legislators to put a bill on his desk by June 30th with full adult use rollout scheduled for January 1st, 2025. Pennsylvania represents a very large market for us with a current medical market size already over 1.2 billion and an adult use market expected to surpass 2 billion. We are vertically integrated in the state with our largest cultivation and production facility and a six-store retail footprint that's ready to successfully capitalize on an adult use rollout just as we did in New Jersey and more recently in Maryland. Regarding taxes, after initiating a comprehensive evaluation in early 23 and based on legal interpretations, we have changed our tax position related to the applicability of IRS Section 280E, which will result in amended returns and expected refunds of approximately $26 million. Keith will provide a more detailed update on this topic. As it relates to our debt that matures at the end of this year, we've been working through a competitive process which includes both existing and potential new lenders and are pleased with the discussions thus far. Just as we accomplished to date, we continue to have a goal of reducing our interest expense. We expect to have further news to report on this front by our next earnings call. While we continue to focus on driving operational excellence within our current business, we have been evaluating many compelling M&A opportunities in recent months to add best-in-class assets at very attractive multiples. These opportunities include going deeper in states where we operate, where licensing limits allow, and also wider by adding additional states to our footprint. The environment for cannabis operators continues to be challenging with punitive taxes, high debt loads, and challenging capital markets conditions. This has led to a multitude of opportunities to acquire assets in many of the most attractive states at terms that are wildly accretive and that would have been unheard of two years ago. We like to say that we have a wide open map, meaning we have ample greenfield opportunity of attractive new markets to enter. This is a huge advantage versus our competitors who have reached their caps in many of the most attractive and profitable states. We expect that this will continue to drive a higher rate of growth and improve margins in our business, just as it did for us in 2023. As an example, we entered last year with zero retail presence in Maryland and were able to acquire some of the most attractive dispensaries in the state at favorable terms and with a limited competitive tension from other bidders. Just as we were focused on hitting the four dispensary cap in Maryland prior to adult use, we now have our sights set on entering Ohio prior to their commencement of adult use. With a population of approximately 12 million, we think the opportunity in Ohio is substantial. Compared to 9 million in New Jersey and 6 million in Maryland, employing our adult use playbook in Ohio could result in an even larger business for us relative to Terrasen's other top-performing markets. We plan to leverage our Michigan corporate infrastructure in a similar manner to the way we integrated our Maryland assets in our Northeast infrastructure last year. This would leverage our corporate SG&A in the Midwest and make both Michigan and Ohio more profitable for us together than either would be on a standalone basis. We are in active discussions with multiple parties in the state to ensure that we have the ability to enter the Ohio market in time for adult use via an accretive transaction. We would expect any acquisition to provide cash flow immediately. The additional benefit of our ample greenfield opportunity is that it has allowed us to explore larger transformational deals. In the past, I've said that we are focused on being the best, not the biggest. But as we have engaged in discussions on these potential transformative opportunities, I now see a path to Terrasen becoming not only one of the best, but also one of the biggest. I look forward to sharing more on this as appropriate in the coming weeks and months ahead. In summation, I'm extremely proud of what our team accomplished in 2023. It was a monumental year for Terrasen. We grew our business to new levels at the highest rate amongst public companies in the industry. We strengthened our operational performance. We blazed a new trail by being the first plant touching U.S. operator to list on the TSX. Played a leadership role in the case filed against the U.S. Attorney General. We went deeper and vertically integrated in Maryland. We reduced our debt and interest expense and we became significantly cash flow positive for the first year in our history. Now I'll turn the call over to Ziad to provide an update across our key markets. Ziad?
spk01: Thank you, Jason, and hello, everyone. I share Jason's enthusiasm regarding our performance in 2023 across virtually all measures. This is a reflection of our operational excellence, our attractive lineup of states, the strength of our brand, the quality of our products, and the retail experience. Let me drill down deeper as to how we achieve these results within each of our key markets. Starting with New Jersey, this continues to be our largest and most profitable market. With strong momentum, robust margins, and increased footprint opportunities due to state program regulatory changes, this state remains a key market for us. In the fourth quarter of 2023, while the number of retail store openings has accelerated, according to recent BDSA data, Tarasand has improved its market share position to a virtual tie at number two with a 17.5 percent share compared to a number three position in the third quarter. Naturally, as the market has evolved, our revenue mix in the state has increased proportionally towards wholesale versus retail. On our last call, we talked about our wholesale business in New Jersey doubling Q3 versus Q2. In the fourth quarter, our wholesale business once again grew an additional 25% quarter over quarter and more than upset the retail decline, resulting in sequential growth in total for New Jersey in the quarter. We have successfully maintained high gross profit, EBITDA margin, and cash flow, predominantly due to our high cultivation yields, low cost structure, and leading brand and retail experience. We also have an opportunity to expand our retail footprint in New Jersey under state legislation that enables existing operators to take stake in up to seven additional social equity qualifying dispensaries. This is a key focus for us, and we have been very active in discussion. Given our cultivation capacity and operational efficiency, we believe the potential to increase our retail store count in New Jersey from three to 10 will further increase margins and profitability. Turning to Maryland, the state launched its adult use program in July and is expected to reach $1.7 billion by 2027. We became fully vertically integrated in anticipation of adult use, and today we are operating with a state-of-the-art cultivation facility and four retail dispensary locations, which we believe collectively are among the highest performing retail footprints in Maryland. Our Q4 retail revenue in Maryland remains strong. We are also near completion on the relocation of our Parkville location to a new large storefront and conveniently located near the White Marsh Mall, a high traffic retail center. While delayed from our original Q4 2023 plan, We expect to be operational at this location in early Q2 of this year. In the fourth quarter, gross margin in Maryland declined compared to the previous quarter. In December, we experienced cultivation challenges related to equipment malfunction, which led to a crop failure. We changed SOPs and reframed our team members. I'm happy to report that our recent harvest have surpassed our standards across yield, THC potency, terpene levels, and flour quality. However, the product output from that incident led to higher discounting and therefore a negative impact to gross margin in the fourth quarter. Maryland gross margins in the quarter were also impacted by temporary underabsorption of fixed costs in non-flower production due to scale up in this area of our facility. We are increasing output of non-flower products to meet our growing wholesale business and our increased verticality in our four dispensaries. The increased output is expected to partially improve margin in Q1 and more fully absorb fixed costs into Q2. In Pennsylvania, both retail and wholesale grew revenue for the second consecutive quarter. The team has done a great job optimizing within a relatively mature medical market. Our legend brand, which we introduced into the Pennsylvania market earlier in 2023, continues to perform well. Our Valhalla Edible brand has also performed well in this newly allowed product format, which was approved for the sale in the state in early 2023. We have reduced our inventory position and more effectively balanced our supply with demand to the point where we now have activated additional grow room to meet the current demand. As we have mentioned, we believe Pennsylvania is a large market opportunity for us and adult use appears to be on the horizon. Pennsylvania has a population of 12 million and is expected to become a $2 billion adult use market by 2028, according to DBSA. Governor Shapiro recently voiced his endorsement for an expedited adult use cannabis program by January 1st, 2025. We applaud his support for the cannabis industry. And lastly, in Michigan, we have focused our efforts on operational efficiency to drive gross profit margins above 40%, thereby enabling us to achieve EBITDA profitability. Gross margin has improved from 28% in Q2 to 36% in Q3 to 40% in Q4. However, in order to achieve this margin level, we had to stay disciplined on discounting and promotion, which caused us to walk away from lower margin revenue. As a result, retail revenue declined sequentially while wholesale remained relatively stable. Michigan remains a top focus of ours since the state is the second largest candidate state in the country with over $3 billion in annual sales. Today, we have 19 retail locations, soon to be 20, with the planned opening of our second location in Detroit happening this month. We are also actively pursuing opportunities to go deeper in the market, which will further leverage our SG&A. As Jason mentioned previously, Ohio also presents an attractive opportunity to leverage our Michigan corporate infrastructure to drive improved profit margins. In closing, I am thrilled with the progress we have made across all of our geographies, which led to our record performance in 2023. And I am more excited than ever about how we have positioned ourselves for even greater success in 2024. I would now like to turn the call over to Keith to provide a financial update.
spk09: Thanks, Liad. Good afternoon, everyone. The results that I'll be going over today have already been filed on both CDAR and EDGAR, and all results that I will reference today are stated in U.S. dollars. Net revenue for the full year 2023 totaled $317.3 million, compared to $247.8 million for 2022, an increase of 28%. This industry-leading growth was mainly driven by achieving a leading market share position in New Jersey. the launch of Maryland's adult use program, as well as the acquisition of four retail dispensaries in that state, and growth in retail sales in Michigan. Net revenue for the fourth quarter totaled $86.6 million, compared to $69 million for the fourth quarter of 2022, representing a year-over-year increase of 25.5%. This growth was driven by acquisitions in Maryland and the commencement of adult use, a more than doubling of our wholesale business in New Jersey, growth in Pennsylvania in both retail and wholesale, and growth in Michigan wholesale, partially offset by a decline in New Jersey and Michigan retail. Gross margin for the full year, 2023, was 50.3% as compared to 41.0% for the full year, 2022. This 930 basis point improvement was driven by yield improvements and lower costs in New Jersey, adult use sales in Maryland, various margin optimization efforts in Michigan, enabling achievement of 40% gross margin and an 1,800 basis point improvement from the beginning to end of the year, and cost optimizations in Pennsylvania. Gross margin for the fourth quarter of 2023 was 48.2%. as compared to 44.6% in the fourth quarter. The 360 basis point year-over-year improvement was driven by the same state-by-state drivers that I just mentioned for the full year. In the fourth quarter, gross margin in Maryland declined compared to the previous quarter. In December, as Ziad mentioned earlier, we experienced cultivation challenges related to equipment malfunction which led to a crop failure. The product output from that incident led to higher discounting in the quarter. Maryland gross margins in the quarter were also impacted by temporary underabsorption of fixed costs in nonflower production due to scale-up in this area. We are increasing output of nonflower products to meet our growing wholesale business and our increased verticality in our four dispensaries. The increased output is expected to partially improve margin in Q1 and more fully absorb fixed costs in Q2. General administrative expenses for the full year 2023 were $115.2 million compared to $115.6 million in 2022, representing a decline in G&A expenses year over year relative to a 28% growth in revenue. G&A as a percent of revenue was 36.3% compared to 46.6% in the prior year. 2022 included a 10 million reserve for bad debt related to one customer in Michigan. G&A for the fourth quarter of 2023, excluding stock-based compensation and depreciation and amortization, was 25.4 million compared to 32.9 million in the fourth quarter of 2022. G&A as a percent of revenue, also excluding stock-based comp and depreciation and amortization, was 29.4% in the fourth quarter, thereby achieving our stated goal of 30%. This compared to 47.6% in the fourth quarter of the prior year. The fourth quarter of the prior year included the $10 million reserve for bad debt related to one customer in Michigan. Gap net loss from continuing operations for the full year 2023 was 82.3 million compared to a net loss of 299.4 million in 2022. 2023 included 58 million of non-cash impairment charges, and 2022 included 311.1 million of non-cash impairment charges. These charges were recorded against goodwill intangibles for our Michigan and California businesses. GAAP net loss from continuing operations for the fourth quarter was $41.8 million, inclusive of $57.7 million of non-cash impairment charges, compared to a net loss of $2 million in Q4 2022. The non-cash impairment charges were recorded against Goodwill and Intangibles for our Michigan and California businesses. Full year 2023 adjusted EBITDA from continuing operations, a non-GAAP measure, was $68.8 million compared to $38.8 million in 2022, resulting in an increase of 77% year-over-year as compared to an increase in net revenue of 28% year-over-year. The year-over-year increase in adjusted EBITDA from continuing operations was driven by the growth in revenue and improvements in gross margin while also maintaining G&A relatively flat year-over-year. Adjusted EBITDA margin from continuing operations for the full year was 21.7% as compared to 15.7% in 2022, an increase of 600 basis points year-over-year, and an even greater improvement when looking at the trend during the second half of the year. The year-over-year improvement was driven by the progress I described earlier in gross margin and optimizations of G&A. Fourth quarter 2023 adjusted EBITDA from continuing operations was $19.6 million, representing a 22.7% adjusted EBITDA margin, compared to $12.2 million and a 17.7% in the fourth quarter of 2022. The year-over-year improvement of 500 basis points was driven by gross margin improvements across our states and decreased G&A expenses relative to revenue growth of 25.5% year-over-year. Turning to the balance sheet and cash flow, cash and cash equivalents, including restricted cash, were 25.3 million as of year end, compared to 28.5 million as of the end of the third quarter. Cash flow from operations in the fourth quarter of 2023 was 9.4 million, compared to 7.3 million in the fourth quarter of last year. This represented our sixth consecutive quarter of positive cash flow from continuing operations. CapEx spending was $1.5 million in the fourth quarter, primarily related to capacity expansion at our Maryland facility. Free cash flow was a positive $7.9 million compared to $2.9 million in the fourth quarter of last year. During the quarter, we made payments of $4.1 million for debt pay down and $4.7 million for distributions to our New Jersey partners. Cash flow from continuing operations for the full year 2023 was 31.1 million compared to a negative 21.8 million in 2022. Free cash flow was a positive 23.4 million compared to a negative 61.5 million in 2022. This was the first year in our history of generating positive cash flow from continuing operations and free cash flow. We are very pleased to reach this important milestone as a company of achieving positive cash flow for our first full year. This cash flow positions us well as we are in the midst of conducting a competitive process with both existing and potential new lenders to refinance 120 million of debt that matures at the end of this year. We are pleased with the discussions thus far and we expect to have more news to report by our next earnings call. Regarding taxes, after initiating a comprehensive evaluation in early 2023 and based on legal interpretations, we have changed our tax position related to applicability of IRS Section 280E. This has resulted in the reclassification of $59.2 million of tax liability as of year-end to long-term liability and an uncertain tax position on our balance sheet. We will soon be filing amended returns for calendar years 2020, 2021, and 2022, and expect to receive approximately $26 million of federal and state refunds related to 2020 and 2021. Our current income tax liability as of the year end is $4.8 million, and we plan to make payments as an ordinary taxpayer going forward without 288. 2023 was our second year as a U.S. filer with the SEC. Financial and legal compliance is a bedrock of our culture and values as a company. I am proud to report that we have once again certified to our internal controls over financial reporting with no material weaknesses. This is a testament to the hard work and focus of the entire Terrasun team, and I want to thank everyone involved in this effort. Looking into Q1, we expect typical seasonal trends to impact revenue. As a result, we anticipate a 5% to 7% decline sequentially, resulting in year-over-year revenue growth of around mid to high themes for G1. This will result in adjusted EBITDA growth of 20% to 25% year-over-year. To summarize, our fourth quarter and year-end results mark another period of sector-leading year-over-year revenue growth. In addition to this strong top-line performance, we have maintained positive cash flow over several consecutive quarters and continue to reduce our debt levels. We look forward to sharing our continued progress on the business and on our balance sheet work during our next quarterly call. This concludes our prepared remarks.
spk10: I'd now like to turn it over to the operator for questions.
spk00: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. If you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Frederico Gomez from ATB Capital Markets. Please ask your question.
spk04: Hi, good evening. Thank you for taking my questions. First question on the margin side, I don't know if you can help us quantify how much of that margin decline quarter-by-quarter was due to the Maryland equipment malfunction. You know, how much of that impacted the margins? And then Also, in terms of on the revenue side, that malfunction, how much did it impact revenue in Maryland for the quarter? Thank you.
spk09: Hi, Fred. This is Keith. Thanks for the question. On the margin front, all of the decline quarter over quarter, essentially all of it, you can earmark to the Maryland issues that we outlined. And in terms of revenue, as it relates to the need to discount, it was about a million and a half dollars of revenue related to that.
spk04: Thank you. And then on Michigan, you mentioned, you know, retail revenue declined sequentially, given that you're trying to not, even your disciplined approach to prices, I guess. your outlook for the year, do you expect that market to continue to be challenging in terms of competitors lowering prices and that could impact your sales further for this year? So any color on the Michigan market and how do you expect that to revolve this year? Thank you.
spk08: Hi, Fred. This is Ziad. First of all, I want to thank the Michigan team for the job they have done in 2023 to get us to the goal that we have set for gross margin. While challenging, especially in the first year, in the initial year or so in Michigan, now we have a clear strategy there. It's the second largest market in the country. It has unlimited license structure. We have built a strong foundation to maintain that healthy margin structure. in the state and the strength of our brand and partner brands. We next are focusing on how do we expand further our presence in the state and capitalize on that solid foundation and increase our presence in the state and improve our market share. We see every day the competition that takes place in Michigan. we are determined to stay disciplined in Michigan to stick to our principles, our pricing, and our brand approach, no matter what the competitions across the street are doing. In addition, we mentioned it in our prepared remark, with us declaring our interest and our determination to enter Ohio prior to AdultU's launch, we will leverage that regional presence between Michigan and Ohio to create the same structure we have in the Northeast.
spk10: Thank you very much. I'll have that back to you.
spk01: Fred?
spk00: Thank you. Your next question is from Eric DeLaurier from Ted Callum's Pepito Group. Please ask your question.
spk15: Fred, thank you for taking my question. I was hoping to get a bit more color on the Maryland equipment malfunction. It was a bit of a surprise to me, kind of given that Maryland was overseen by the experienced New Jersey and Pennsylvania teams. Was this equipment unique to Maryland in any way? And, I mean, it sounds like this is sort of fully remediated. It doesn't sound like that equipment needs to be replaced, but maybe you can just help us confirm that. Thank you.
spk08: Yeah, Eric, hi. This is Ziad. Yes, it was surprising and disappointing for us as well. It was new equipment, but we took that opportunity or we took it seriously where we have reset our SOPs. We have retrained our team and learned from it. And since then, we have actually harvested in the same – location harvest that performed extremely well against our yield, against our flower profile, and against our terpene levels, with cost that is extremely efficient. Now, it was different equipment than what we used in our other grows. Look, we're disappointed in this, but we'll put it to good use to avoid it in the future.
spk15: I appreciate that response there. And then just on the guidance as it relates to the gross margins, at least within Maryland, sort of improving a bit quarter over quarter into Q1 and then sort of fully improved into Q2 as it relates to the underutilized non-flour production. Just kind of taking everything into account with the pricing that you're seeing in all your markets, when this non-flower production does kind of get fully utilized, do you expect gross margins to kind of return to that low 50s area that we've seen in Q2 and Q3 of 2023? Or, you know, is a bit more modest, like high 40s kind of the right area to be thinking about on a go-forward basis? Thank you.
spk09: Yeah, hi, Eric. I'll take that. This is Keith. It's really, I would point more to the latter. So there's going to be, you know, we want to be cautious. We want to be realistic. We expect that New Jersey will continue to tighten and we'll have to compensate for that. We do expect improvement in Maryland as we cycle through the scale up there in the non-flower area. So So there'll be puts and takes, but high 40s is where we're seeing things sort of in that range. I wouldn't necessarily completely write off 50%. I think we could get there, but I wouldn't want to write that and set that in stone.
spk15: That certainly makes sense to me.
spk06: I appreciate the help here. Thank you. Thank you.
spk00: Your next question is from Matt Bottomley from Canaccord Genuity. Please ask your question.
spk02: Good evening, everyone. Thanks for taking the time here. Just wanted to follow on to some of the previous commentary there on what to expect from a margin recovery in the next little while. I think taking your commentary on what to expect in Q1 on a year-over-year basis, it would seem like, just kind of looking back at the envelope of what it looks like you guys did in Q1 from an adjusted EBITDA, it would seem like you're still implying Q1 will be an EBITDA margin of probably less than 20%. So, you know, we're expecting a bit of a rebound from the absorption. How much of that decline is seasonality versus some of the Maryland issues that you were previously speaking to?
spk09: Yeah, hi, Matt. I'll take this as well. This is Keith. Yeah, so just from the quarterly decline due to the seasonality and revenue, we're going to lose a little bit of leverage in Q1 on SG&A and lose a few points there in that That essentially explains what we got into. So, yeah, I kind of reiterate my point around margin. We expect margin similar to Q4, but SG&A will lose a little bit of leverage there.
spk02: Got it. Okay. And then the other question I had was just kind of encouraging to see some discussion on M&A. It hasn't happened in a little bit on these earning calls. But if you kind of look at even if the private markets or other public entities have seen Valuations decline, so have a lot of the public equities. So when you try and balance, you know, what you might use as consideration from an M&A standpoint, and then the fact that you want to get into Ohio ahead of adult use, but also refinance the debt, I'm just curious what is priority in terms of the timing of those things.
spk08: Yes, hi, this is Zia. I'll take this one. Look, from an M&A perspective, first we have built a strong foundation in our five states where we exist today. we believe now is the time for us to focus on further expansion. We feel, like we said in our prepared remark, we have significant greenfield opportunity. So we declared that, similar to what we declared getting into Maryland before adult use, we now have declared that we will go in Ohio before adult use, and that will be our top priority, and we will deliver on this. We have reviewed multiple opportunities and can't wait to share further news when the time is right. And as I've mentioned before, Ohio also fits well into a Midwest regional structure where we can better leverage our Michigan management infrastructure that we already have built. Now, from a transformational deals perspective, we have our focused footprint, our reputation, for operational excellence and the right sponsorship. And we have complementary nature of our footprint with other footprints out there. All this has led to opportunities that we alluded to in our prepared remarks that we could be transformative. Now, similar to what we've done in Maryland, after we listed on the TSX, we have used our stock as a currency. And sellers have looked at our stock as currency, and we've done it in Maryland, and the conversations are very similar.
spk02: Okay, appreciate all that.
spk14: I'm sorry if there's more. Yeah, it's Jason Wild here. Yeah, I would just add any all-stock deal would be very, very accretive. I mean, we obviously don't love the performance of the stock over the last year or two, but when you can buy excellent assets at many multiples below where you trade, then it's obviously accretive on a per-share basis. basis. We're also talking about or looking at, at least on the ones, the state-level ones, you know, in places like Ohio. We're also looking at similar deals to what we did with Hilaria years ago, which is a minimal amount of cash up front and the rest of it structured in an earn-out, say, you know, after the first full year of REC or something like that. Okay. Thanks, Jason.
spk10: Sure.
spk00: Thank you. Once again, ladies and gentlemen, that is star one. Should you wish to ask a question? Your next question is from Noel Atkinson from Paris Securities. Please ask your question.
spk03: Hi, guys. Thanks for taking our questions, and congrats on some solid results in 2023. So as a normal taxpayer now, that sounds, you know, for a cannabis company, that's pretty impressive. You know, what's your estimated combined U.S. tax rate?
spk09: Steve? Estimated combined U.S. tax rate. You know, honestly, not sure we quite look at it that way, so maybe on our post-call I can just do a little math and get that back to you. But... An example last year. Yeah, I'm just trying to think of... Yeah, no, why don't we... I mean, I'm happy to... to share that with you maybe when we have our post call. But suffice to say like we're no longer paying 22% or 23% combined federal and state on gross margin. So now a quarterly tax of about of at our scale which would have been 9 or 10 million now as an ordinary taxpayer we're more like two to three million a quarter, so it's substantial and that 59 million that we reclassified to uncertain tax position takes all that into account.
spk03: Okay, great. In terms, I might have missed this, just in terms of the Maryland output, when does that get back to normal in the market? Is that Q2 or is it largely there already?
spk09: Um, so it's largely there already. So, so Q4, uh, we, we bore the brunt of that with the discounting and the clearing of that through, I think, as he had mentioned a few minutes ago, where the harvest, uh, out of the facility have been, uh, have been at our standards, uh, since then. So it was a pretty quick remediation, although it was a, a somewhat of a significant disruption for us in, in the quarter. But, uh, we're through that. And then the other piece of it is, like we said, it's more getting ramped up and fully absorbing the fixed costs in the non-flower part of the facility, which will take a couple of quarters to ramp up that output. And that output will go both towards continuing to increase our verticality in our four stores, as well as building our wholesale business. So that'll be over the course of this quarter that we're in here in Q1 and through Q2.
spk03: Great. And then just last one, if I may. In terms of the Q1 quarter-over-quarter seasonality, are there any states that experience this more heavily than others?
spk08: Yes, I would say, this is Ziad, I would say, you know, Pennsylvania, both year-over-year and quarter-over-quarter has been a bright spot for us. We continue to be up in both comparison. And, you know, we have six stores in Pennsylvania that are still averaging close to more than 9 million per store. So that is a state that we are so looking forward when it turned to recreational to become as big as, if not bigger, than New Jersey. So Pennsylvania is good. New Jersey, as we have mentioned, we feel that we have absorbed most of the retail decline just by the count of stores that open close to our stores. And we have in Q4 made up for that decline in retail, more than made up in decline in retail with wholesale. So that seasonality is seen in the New Jersey, both on the wholesale side and retail side because wholesale and retail follow each other since they end up in retail. So I would say New Jersey and a little bit of Michigan. Those would be the two places.
spk06: Okay, great. Thanks very much. Thanks, all. Thank you.
spk00: The next question is from Andrew Temple from Ashland Capital Partners. Please ask the question.
spk05: Hi there, good evening. Thanks for taking my question. First off, just want to go into the Q4, or sorry, the Q1 2024 revenue guidance down 5 to 7% sequentially. It sounds like you've had a quick rebound in Maryland cultivation. So is that entirely attributable to kind of the normal business conditions, you know, seasonality, competitive pressures, pricing, et cetera? Or is there any impact at all from that Maryland cultivation? within that Q1 sales guidance.
spk09: Hi, Andrew. This is Keith. Thanks for the question. It's really the seasonality. So we're through the Maryland issue, not to say there aren't other sort of headwinds and tailwinds that are happening, like clearly this macro trend of retail in New Jersey is declining in existing stores as new stores open and then that being offset by wholesale, that continues to occur. And we feel like we did a good job there in Q4 of continuing to grow the wholesale business to more than offset the retail. So we're sort of like isolating those issues and saying that's sort of net-net neutral and coming back to overall more or less saying it's the seasonality Q4 to Q1 that's occurring.
spk05: Got it. That's a helpful perspective. And then while we're on the topic of New Jersey, in the prepared remarks, I believe you cited BDSA data here, pointed to 17.5% market share in New Jersey. I'm assuming that's branded product market share at the retail level. What sort of branded product market share do you think you can maintain in 2024 Can you improve on the 17.5% in the near term, or is that going to be a tougher comp to beat, given it's a fair amount of market share?
spk08: Yeah, I think, look, as more stores open, Andrew, in New Jersey, the market is growing. Our market share, our absolute dollar, will continue to grow with the markets. we have maintained our market share. And it's really done by the principles that we have around our quality, our variety of strains, our brands that we continue to innovate. So we are very confident that we've done a good job. But the real judge on this are the customers and the patients. So whether it's in the wholesale channel that ends up in the hands of the customer or in our retail store, we continue to see high velocity for our products, and we continue to occupy top one, two, three market share in different form factors. So we're very confident that we will continue to grow with the market, and our market share will be maintained.
spk09: Maybe just to add into that a couple of key focus areas that the team is razor focused on is areas where we under index. And so two of those areas are in pre-rolls where we don't have a top three position currently and edibles we're continuing to grow and have strong momentum behind Lana. But we've taken some specific actions with pre-rolls around automation to increase our output capabilities because it's really more of a a supply issue for us than a demand issue. So, we think there's headroom there to continue to grow share while we maintain or grow in the other product formats. Got it.
spk10: That's helpful. Thank you. I'll get back to you.
spk09: Thanks, Andrew.
spk00: Thank you. Your next question is from Mike Reagan from Edselford Equities. Please ask your question.
spk11: Thanks. Quick question.
spk12: Can you provide any sort of insights into the legal interpretations to avoid the 280E taxes right at this point, and any timing on the receipt of when you can get that $26 million in refunds back?
spk09: Yeah, sorry, Mike. Hi, this is Keith. You cut out on the second part of your question. If you could just repeat it.
spk12: Oh, sure. And the second part is just any timing, any anticipated timing You know, you filed for the $26 million any time when any insights on when the IRS would actually mail the check.
spk09: Right. On the first part, definitely it's very legal. We have an outside counsel legal interpretation. I would say generally it's along the lines of the Boies-Shiller lawsuit and some of the same legal aspects that are outlined in that lawsuit. And I think that's enough to sort of get an indication of the position there. And then it's honestly just really hard to say. There's no way of anybody knowing when you're going to get a refund from the IRS. So that's an impossible question to answer. We think that... Based on our filing and everything that you could look at the IRS website and they have published averages like 90% of refunds happen within 20 weeks. But that's all we have to go on. We don't have any inside track there. But we expect to receive the money because we're filing an amended return. And we believe we have a strong basis based on the legal interpretation to receive that money.
spk11: Got it. Great.
spk12: And then on New Jersey, just in the comment about more than making up for the retail declines in wholesale, typically you have to call it twice as many ounces on a wholesale basis to make up for the ounces on a retail basis, or more, whatever the ratio is, because you're selling wholesale. So on that dollar basis, are you actually selling that many more ounces to make it up for on a dollar for dollar, or is it just the volume that's sort of offsetting it?
spk08: Yeah, that's accurate, Mike. The way you described it is we are making up for it on the volume. Our wholesale to retail division is now almost 50-50 in the state.
spk14: Yeah, yes. I'm not sure if it was making up for the volume, or maybe it was. The point is it's in dollars. Yeah, we made it up in dollars.
spk08: Yeah, so that 50-50 is in dollars.
spk14: Yeah.
spk12: Exactly. So actually, if you look at it on the retail value of your flower being sold in New Jersey, regardless of who sells it, you're actually selling a lot more. That's correct. That's correct. Okay. And in terms of just how the – just help understand just any shift in the gross margins as that wholesale grows versus – and the retail declines. Is there sort of anything odd going on with the margin percentages at the top level as those shift?
spk09: There's not. So overall in New Jersey, our margins have remained stable over the past recent quarters. Now over a longer period of time, they've come down since like the very beginning of adult use where the pricing was the most elevated, but they've held pretty steady as we've experienced, especially in the back half of last year, which is Q4 we're talking about here, so Q3 and Q4, and this upswing in wholesale and this shift between wholesale and retail, we've seen total margin, gross margin in New Jersey remain relatively stable.
spk08: Yeah, Mike, this is Ziad. If I could add, we are still seeing a strong pricing that correlates with our quality in New Jersey of around a little bit higher than $4,000 per pound at wholesales. So that has maintained extremely strong for us.
spk09: And the other thing that helps is just more absorption at the facility. We're lowering our costs. We continue to improve our yields. Kind of gets back to your earlier point, like volume-wise, output out of the facility is higher, given what we talked about a couple minutes ago.
spk06: Got it. Great. Thanks a lot.
spk10: Thanks, Mike.
spk00: Thank you. There are no further questions at this time. I will now turn the call back to Jason Wild for the closing remarks.
spk14: Thank you so much for everybody who attended this call. We look forward to updating you all in about a month and a half or so for our Q1 2024 conference call. Thanks for attending.
spk00: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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