Ascend Wellness Holdings, Inc.

Good evening and thank you for standing by. Welcome to AWH's first quarter 2023 earnings call. I would like to hand the conference over to your first speaker today, Rebecca Quar, Head of Investor Relations. Please go ahead.

Good evening and welcome to Ascend Wellness Holdings earnings call for the first quarter of 2023. The presentation that accompanies this call can be found on our website. www.awholdings.com slash investors. Before we proceed, I would like to remind you that there are several risk factors and other cautionary statements contained in our SEC and CDAR filings, including our annual report on Form 10-K for the year ending December 31st, 2022. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements or information. These forward-looking statements or information are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements or information reflect management's current view only. We undertake no obligation to revise or update such statements or make additional forward-looking statements in the future. except as required by applicable laws. References may be made during today's call to future-oriented financial information and outlooks, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as forward-looking statements or information. While we believe that such estimates have been prepared on a reasonable basis reflecting best estimates and judgments, the actual financial results of the company may vary from the amounts discussed herein, and such variation may be material. During today's call, we will be referring to non-GAAP measures such as adjusted gross profit and adjusted gross profit margin, adjusted EBITDA and adjusted EBITDA margin, as defined and reconciled in our earnings materials in the appendix of the presentation. These non-GAAP measures, as defined by AWH, may not be comparable to measures with similar titles used by other companies. Certain information that may be mentioned during this call, including industry information and estimates, is obtained by third-party sources. including public sources. There can be no assurance as to the accuracy or completeness of such information. Although believed to be reliable, management has not independently verified any data provided by third-party sources. On today's call, we have Abner Curtin, Executive Chairman, Frank Perullo, President and Interim Co-CEO as of today, Daniel Neville, Chief Financial Officer and Interim Co-CEO. And with that, I'll turn the call over to Abner starting on slide four.

Thanks, Rebecca.

Good evening, everyone, and thank you for joining our first quarter 2023 earnings call. As you are all aware, Ascend has experienced significant growth in recent years. Since our first full year of operations in 2019, our revenue has grown at 141% compounded annual growth rate. Today, we have 2,000 proud Ascenders spanning 31 dispensaries and six cultivation facilities. across the Midwest and East Coast, including our most recent acquisition in our seventh state, Maryland. Our priorities are shifting from managing hypergrowth to more moderate growth focused on continuous optimization and cash generation. We have started this next chapter during Q1 by generating cash from operations for the first quarter since the company inception. Today, I am pleased to announce that after an extensive search led by Russell Reynolds, the board has appointed John Hartman as new CEO of Ascend, effective May 15th. For the next phase of our growth story, the company is transitioning from day-to-day management from a founder-led team to a sophisticated organization led by a professional management team that has experienced leading large organizations successfully before. John brings a wealth of experience and expertise in leadership strategy and operations. John is a proven leader that has a history of leading larger companies to operational excellence, in competitive environments. Not only does he have experience leading tough turnaround situations, but he's also led corporations in building market share and streamlining operations. John was president of Bye Bye Baby, a $1 billion retail segment with 140 stores, where he led the transformation and delivered double-digit growth of the segment during his tenure. Prior to that, John served for seven years as CEO of True Value Company, a $12 billion wholesaler with 4,500 retail stores, where John led the transformation resulting in the successful sale to private equity. His experience and expertise will be instrumental in leading Ascend to its next phase of growth. We are happy to have John on board to help us take the business to the next level. We look to him to lead the company to operational excellence in the cannabis industry and are confident that under John's leadership, we'll be able to continue driving value for our shareholders, customers, and employees. In conjunction with this appointment, Frank Pirillo, co-founder, who previously served as president and interim co-CEO, will continue to serve on the board and will transition to a strategic advisor for the company, focusing on regulatory issues and license acquisition efforts. And Dan Neville, who previously served as director, chief financial officer, and interim CEO, will resume his role as chief financial officer. As co-founders, Frank and I will continue to add value and share our expertise from the board of directors but we are pleased to have a new leadership team of the day-to-day management. In addition to strengthening our management team, the company has added to its board of directors. Also effective May 15th, John, as well as Sam Brill, a leading debt investor, will be elected to the board. Sam has significant experience having served on multiple public and private boards and will serve as lead independent director and chair of the compensation committee. We're confident that both John and Sam will provide valuable guidance and expertise to our board. These changes reflect our commitment to strong governance and leadership, and we're excited to see the positive impact they will have on our company's growth and success.

Let's move on to slide five.

Q1 of SEND achieved a major milestone by generating cash flow operations for the first time since our company's inception. I'm immensely proud of our team for this momentous achievement. Looking ahead, we remain confident in our ability to generate cash flow operations for the full year in 2023. Given the capital markets environment, this will be a critical milestone for us as we position ourselves to be able to self-finance. Our balance sheet is our priority, and we are pleased to have a strong liquidity position. This positioning allows us to selectively grow via acquisition for the right opportunities. There are an increasing number of distressed assets for sale as many public and private operators struggle to navigate the difficult capital environment. remain focused on identifying accretive and leveraging transactions to help us scale, while others are not in a position to do so. A great example of this is the Maryland acquisition, which we closed two weeks ago. We purchased four dispensaries in Maryland at an increase of multiple in today's medical environment. Meanwhile, Maryland is expected to begin allowing adult use sales in July of this year, which would render the transaction significantly more accretive within just three months of closing.

We continue to look for opportunities similar to this.

The past year has been challenging for cannabis operators and investors alike. Valuations of all multi-state operators are at a meaningful discount, providing a potential investment opportunity. Stock prices of multi-state operators are down nearly 90% compared to they were two years ago. While the enterprise value to adjusted EVTA multiples are at an all-time discount to many of the are at an all-time low. Further to that, AWH is trading an additional discount than many of its peers. Custody challenges continue to plague the industry and make it impossible for most institutional investors to access the space. Over the past few months, one of the few U.S. banks that custodied plant-touching stocks was acquired and made the decision to stop serving as a custodian for U.S. vitamin stocks. This move left many investors scrambling for solutions. The industry is looking forward to regulatory catalysts that will provide banks and institutional investors with better access and visibility to the sector. Although these hurdles can seem incessant, there remain multiple pathways in place signaling a potential regulatory catalyst. Last month, for the first time, safe banking was reintroduced into both chambers of Congress, suggesting the continued desire to get something done legislatively. This is the first time the bill has been introduced on a bipartisan basis in both chambers simultaneously. There is speculation there could be executive action that would instruct federal prosecutors to deprioritize the enforcement of the controlled substance act. Additionally, we anticipate progress when the review of cannabis as a Schedule I drug is completed, although the timing and outcome of this rescheduling efforts are uncertain. Meanwhile, at the state level, cannabis becomes more and more a part of daily life with more than 60% of the population living in states where cannabis is legal. Further to this, We're seeing some peers testing the market for uplifting possibilities for the TSI, given the current regulatory environment. We will be monitoring these developments closely to see if their access to capital and liquidity increases materially on the TSI. If successful, we plan to be fast followers in pursuing a path to uplifting. I will now turn the call over to Frank to review the operational highlights from the quarter beginning on slide six.

Thank you, Abner. Good evening, all.

Q1 was a solid quarter on the revenue front where we delivered record revenue and a sequential increase that beat expectations. Despite our top-line growth, our margins were under pressure this quarter as we faced some production challenges in our New Jersey cultivation facility, which I will address later. We continue to implement cost-saving measures throughout the business to offset these headwinds. In the meantime, let's move on to slide seven, to review the operations in detail, beginning with an update of the retail business. We continue to make great progress in the retail business. Retail revenue increased 31% compared to last year, driven by the conversion of three stores in New Jersey to adult use, consolidation of two dispensaries in Ohio, and opening of two dispensaries in Pennsylvania. When we first started, we were laser focused on growth over everything else. However, over the past several quarters, we've been concentrating on efficiencies across the organization and have successfully optimized staffing throughout the retail networks, which has helped offset pressures on margins. We also have been making great progress towards achieving our goal to have 50% of our retail revenues come from the products that we produce. We ended the quarter with 49% of our retail revenues being self-sourced. We are proud to be close to achieving this balanced target to enable us to benefit from the vertical margins while still providing our customers with a wide variety of offerings. Our outlet model is resonating with our customers. Within the quarter, we opened outlets in New Bedford, Massachusetts and Grand Rapids, Michigan. Subsequent to the quarter, we opened our ninth dispensary in Illinois in Tinley Park as an outlet store. We now have five of our 31 dispensaries that are opened as outlets where we offer everyday low prices or flour at a fraction rather than daily deals. In general, our outlets are grossing revenues above state averages as a whole, and they're getting off the ground quicker. Our new Bedford dispensary in particular is a great example of the outlet model. The site is in a great area, near two highways, ample parking, and ample points of sale. It is located in a market with price-conscious customers who are hunting for value offerings. As we mentioned on our last call, our Southern Illinois retail stores face an expected decline when Missouri commenced adult use sales in February. Declines in Southern Illinois seem to have stabilized. and the impact of Missouri remains consistent with what we previously reported in March. We saw the initial outflow of customers early on in February, but have now seen a steadying month to month without further degradation. The opening of our dispensary in Tinley Park, Illinois, combined with the aforementioned benefits of New Bedford have helped to make up for the revenue losses incurred in the state. The New Bedford store alone has made up for 60% of the revenue declines in Southern Illinois. And we have one more dispensary license in Illinois that we expect to open in Q1 of next year to further close this gap. We were pleased to close on our acquisition of four dispensaries in Maryland a few weeks ago and are working to integrate these assets into our business as we gear up for the highly anticipated start to adult use sales expected this summer. We closed on April 27th the day after we received approval from the commission, and the very next day we were swinging hammers to remodel the stores and improve customer experience ahead of the anticipated adult use sales in July. Looking ahead, we are on track to open three dispensaries in Ohio in Q3, a third dispensary in Pennsylvania in Q4, and our 10th dispensary in Illinois in Q1 of 2024. We continue to site locations for our three remaining Pennsylvania licenses and our prioritizing location over everything else. Let's move on to slide eight to discuss the wholesale business. Gross wholesale revenue has grown 54% to $58 million compared to last year as we have meaningfully expanded our cultivation capabilities, sales networks, and product offering. We continue to make great strides each quarter. We are also pleased to report that during the quarter, we successfully harvested our first crop from Smithfield, Pennsylvania facility and completed the first sale of AWH branded products under our Simply Herb brand at our Scranton and Wayne, Pennsylvania dispensaries. In Illinois, we have steadily expanded our customer base and are now supplying AWH products to all 17 newly opened social equity licenses and continue to have nearly 99% penetration in the market. As additional licenses become operational, we will continue to work diligently to establish and cultivate these relationships. Furthermore, we are starting to see the benefits of the process and headcount optimization efforts we have put in place over the past two quarters, which are improving our productivity at our Barry facility. In Michigan, we have seen a significant improvement since resetting the cultivation operations in Q3. Our yields have almost doubled since our lows, and we have brought our own product back to our shelves. In Massachusetts, our intercompany demand has skyrocketed as we opened New Bedford and realized growth at our Newton and Boston stores. Our third-party sales also saw a meaningful increase in the quarter as our value brand, Simply Herb, continues to capture market share. In New Jersey, our wholesale revenue grew north of 40% sequentially as we expanded our wholesale networks and enhanced our offering with new products and form factors, including the 1906 effect-based drops. While revenue is growing steadily and we continue to serve our customers, we have encountered yield challenges with the expansion of our cultivation facility in New Jersey, which have impacted our margins. While we have initiated corrective measures, we would like to address these challenges in greater detail on slide 9, given their impact on our margins. In the second half of 2022, we hurried to expand our cultivation facility to support outuse needs of our retail stores and customers. While we were originally producing moderate yields and decent testing cannabis, we started to see a decline in quality and yields beginning in February of this year. A variety of environmental and cultivation challenges led to this decline, and today our average cultivation yields in New Jersey are 48% below the average for the rest of our network, rendering our useful pounds harvested meaningfully lower. The lower yields impacted our gross profits by about $1 million a month beginning in March. We have initiated an end-to-end review focused on improving our environmental controls and are making significant management changes. It is expected to take a few quarters for these changes to flow through the harvest cycles and begin to improve our quality and yields. Every new phase of every facility has its own startup challenges, and we are confident that we will overcome these production challenges with the time knowing we have successfully turned around facilities before. In the past, we've had our share of challenges with other facilities, and now they're some of our best performing grows across the network. Now, despite these production challenges impacting our cost per pound, Our New Jersey wholesale revenue growth remained impressive, and we continue to generate enough supply to meet the demands of our customers. We maintain sales into over 90% of the market in New Jersey and continue to gain traction. Now I will turn it over to Dan to dive into the financials in more detail, starting on slide 11. Thanks, Frank.

Good evening, everyone. In Q1, we delivered sequential revenue growth in a competitive environment, but saw pressure on margins related to Missouri's impact on southern Illinois and the phase two startup issues we experienced in New Jersey. Cash is king, and I'm pleased to report that we generated cash from operations for the first quarter since the company was founded. Total system revenue increased by 4.9% sequentially to $141 million, while net revenue, which excludes intercompany sales of wholesale products, increased 34.2% year-over-year and 1.9% quarter-over-quarter to $114 million. This sequential revenue growth was driven by the strength of the two outlet stores we opened in the quarter, a full quarter of adult use sales in Fort Wayne, New Jersey, and growth in wholesale sales in New Jersey, Massachusetts, and Illinois. This growth was partially offset by the headwinds facing our southern Illinois retail stores as a result of the start of adult youth in Missouri during the quarter. Retail revenue decreased 2% sequentially to $83 million driven by the start of AU sales in February in Missouri. These declines were partially upset by growth from the opening of the new Bedford, Massachusetts dispensary, which made up 60% of the revenue lost in southern Illinois. Despite the retail revenue decline, retail transactions across the business grew 7% sequentially and were above a million transactions for the second quarter in a row. Gross wholesale revenue increased 16% sequentially to 58 million, driven by growth in wholesale sales in Massachusetts, New Jersey, and Illinois. Net wholesale revenue, excluding intercompany sales, increased 13% sequentially to 31 million, driven by third-party sale increases in New Jersey, Mass, and Illinois, partially offset by declines in Michigan due to a de-emphasis on third-party sales in that market. Although we had production challenges in New Jersey, our New Jersey wholesale revenue remains strong, with wholesale sales up 42% quarter over quarter. Despite the positive revenue and cash flow outcomes, our margins were under pressure this quarter, largely due to the operating deleverage we saw in our southern Illinois stores and the issues we experienced ramping our phase two cultivation expansion in Franklin, New Jersey. While southern Illinois is now stable and still a great business for us, we expect margins to remain below normal for the remainder of the year as we work through these production issues in New Jersey. We see the New Jersey issues impacting profitability by approximately $1 million per month, or $69 million for the remainder of the year. Adjusted gross profit decreased 11% to 47.6 million, and adjusted gross profit margin decreased 600 basis points sequentially from 47.7 to 41.7%. The declines were driven by production challenges in New Jersey, as well as lower margins in our Illinois retail business. Our adjusted EBITDA was 23.3 million, which represents a 42% increase year-over-year, but a 17% quarter-over-quarter decline. Our adjusted EBITDA margin for Q1 was 20.4%, which represents 118 basis points year-over-year increase, but a 473 basis points decrease sequentially. The declines were driven by the above-impact gross margin, partially offset by workforce optimization and other cost actions. We are laser-focused on driving cost savings across the business. Let's move on to discuss the balance sheet on slide 12. We remain committed to maintaining a robust balance sheet as our top priority. At the end of the quarter, we had $73 million of cash and equivalents. Our net debt was $251 million with no near-term maturity. We are happy to report that we have achieved positive cash flow from operations for the first time this quarter, a significant milestone for our company. In Q1, we generated nearly $6 million of cash flow from operations. Although we remain on target to generate cash from operations for the full year 2023, We expect some lumpiness in Q4 as we make our 2022 federal tax payments. Net cash from investing was a use of $6 million, driven by $10 million in growth capex to support completion of the phase two cultivation expansion in New Jersey and several dispensary openings. This growth expense was partially offset by $13 million in sale leaseback proceeds received from amending our New Jersey lease with IIPR. We also made our final payment of $8 million related to the Midway acquisition in Illinois in the quarter, which decreased our seller financing obligation. We intend to invest a total of $25 million of net capex for the full year as we continue to build out our retail pipeline, particularly in Ohio and Pennsylvania, and as we remodel the Maryland stores ahead of the start of adult We used approximately $1 million of cash in the quarter for financing, driven by the repayment of debt related to the Illinois minority buyout. We continue to be laser focused on further optimizing our cost structure, tightly managing working capital, and generating cash as we expand the business. We look forward to welcoming John on board as CEO and are excited for what is in store for the rest of 2023. Thank you all for joining the call this evening and your continued support of ASCEND. With that, I'll turn it over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 1. If you want to withdraw your question, please press star 2. Your questions will be pulled in the order they are received. Please remember that you can only ask one question and a follow-up. One moment, please, for your first question. Your first question comes from from Seaport. Please go ahead.

Thanks for taking my question. I guess I wanted to drill down a little bit more on the impact in New Jersey. From a sales standpoint, obviously looking into the second quarter, who would expect a little bit of a rebound. Is that rebound that we typically expect in the second quarter going to be impacted by current inventory levels in New Jersey?

Thank you for the question. Frank, why don't you run through where we are from a business and inventory point of view, and then, Dan, you can drill down into the economic impact.

Sure. We remain in a strong inventory position, both at our retail outlets and our cultivation facility. And, you know, again, we are producing cannabis out of that facility every month. The yields are just lower than we would hope to expect. But generally speaking, every day we are supplying our customers, both at the retail and wholesale, with all the products, the full port, including flour, vape products, and edibles. So a strong inventory position will not affect any sales over these coming months, including Q2. Okay.

Yeah, and I think on the margin side of things, Sonny, just to give a little more clarity in terms of the impact here. So, you know, we kind of have a double whammy on the cost front because we doubled the canopy within that facility. And so we brought on additional heads on the cultivation side of things as well as the production side of things. And so our cost increased with that doubling of the canopy, but we yielded the same amount of biomass despite doubling that canopy. And so that impacts not only the cost on the cultivation side of things in terms of driving up our cost per pound harvested, but also our production costs. because the facility is producing half the units we anticipated. We still grew the wholesale business by 40% quarter over quarter. And if you look at our margins, if we had held the margins that we saw in Q4 in Q1 on this bigger base of business, it would have been a $4 million positive variance to the EBITDA results that we produced. And those margins in New Jersey and QFAR are in line with the rest of the facilities in the network. Unfortunately, though, you know, it takes a while for these low yields to work themselves through. So it's going to get a little worse before it gets better in terms of the financial impact. We'll bear kind of the full brunt of this in Q2. And that'll be an incremental $3 million impact, a million bucks a month. And then it starts to get a little bit better in Q3. And then we're fully to the other side in Q4. The plus side is, you know, business is going well. We grew 40% quarter over quarter. We have a bunch of new products in market that have got good traction and are selling well. So this is really a temporary impact to the margins. And while it won't turn around as, you know, we're going to try to get it turned around as quickly as we can. You know, it's never quick enough for us. But this isn't a structural issue. And we should be back to achieving the yields and the costs that we have achieved across the rest of the network in Q4.

You know, I like to say, you know, we, you know, we wish we were making widgets. You know, growing plants was a little bit tougher. And when we've expanded facilities, sometimes there's a bump in the road, and that's what we're experiencing here. But business is great in New Jersey. It's our second most profitable business. We wanted to point out exactly Dan's point, which is there's $4 million of additional profit just waiting for us when we straighten this out over the next growth cycle.

Okay, I guess just for an unrelated follow-up, You guys seem to be gaining a lot of traction in the Simply Herb brand. I just wanted to see where Simply Herb is relative on a revenue basis as a percentage, and then whether it's been rolled out to all your markets and if there's additional form factors that you guys are exploring in that category.

Frank, do you want to go through the positioning of where we stand on Simply Herb? And, Dad, I don't know. We don't really give out breakout, but maybe you can give a sense of where we are between Simply Herb.

Yeah, that's right, Abner. And I'm sorry, what would you like, other than the breakout, what question did you have specifically on Simply Herb?

Just checking to see where you guys stand in terms of rolling it out to all your markets and if there's other form factors you're working on.

Yeah, great. Simply Herb is currently in all of our markets where we have vertical operations except for Ohio. We have just launched it in Pennsylvania. That happened this quarter. In the rest of our markets, we have flower offerings in Simply Herb, everything from three and a half gram up to ounces. We will be releasing vapes, vape products from the Simply Herb line later this quarter, and that will be in a majority of our markets. We do focus on larger offerings, 14-gram, 28-gram, across all of the flower segments, flower, popcorn, and ready-to-roll shake. And it's been, you know, a really great driver for our outlet stores particularly.

Yeah, and I'd say, as Abner said, we don't really get the breakout there, but where we're seeing, I think, increased adoption on the Simply Herbs side of things is in the more price-sensitive markets. So you look at Michigan and Massachusetts, which are a bit more developed with a bit more price-sensitive customer, you're actually seeing Simply Herb outperformed the ozone brand within those markets. So it's been a strong contributor across all of our markets, but particularly in those very value-conscious markets, it's done exceedingly well.

Yeah, I mean, I would say, you know, the customer wants to eat wheat. Like, it loves a value product. And we're embracing that on both the wholesale and retail side. And we're taking significant market share. And so we know there are some other MSOs doing that, some people reacting to it. That's all great. We think we're doing a great job for the customer. The success of our outlets shows that. And the success of Simply Herb shows that. I mean, for us to be growing wholesale like we are, and growing the outlet business and really basically getting that number one share in places like Scranton and New Bedford, which are developed markets years later, is just, you know, I think a huge pat on the back to our retail team and wholesale team for pulling together this strategy.

Great. I'll turn it back. Thank you.

Your next question comes from Matt McGinley from Needham. Please go ahead.

Thank you. I have a follow-up on the gross margin side. So if New Jersey was a $1 million impact, and I think you said it was only in March, that would have only been around 90 bps of a headwind in the quarter. Can you help quantify the other drivers of the decline, which I think you noted were price decline and decline in Illinois transactions? And if this is a million-dollar-a-month impact and price decline overall in New transaction decline in Illinois doesn't improve, which I don't know if that's part of your assumption into the next few quarters, but I would assume they probably wouldn't improve. Does that mean your second quarter adjusted gross margin rate will be at least two points lower quarter-by-quarter from New Jersey than what you printed here in the first quarter?

Yeah, so to go on some of the other factors impacting things, so we did have – There's about a 250 BIP impact related to southern Illinois as well. So that's the other big factor there wasn't, you know, wasn't just New Jersey quarter over quarter. It was also, there was also an impact related to the southern Illinois cannibalization that we experienced and the decremental margins there. Um, and I think on, I think you're pretty spot on, on the gross margin side of things. So, um, somewhere in that 200, 250 bit range, uh, next quarter is probably the, the additional impact that we'll see, uh, in Q2. And again, I say that, you know, that's only from the run rate too, as well. So, The analysis that I kind of walked through with Sunny, you know, if we had achieved margins that are in line with where the rest of our cultivation facilities and where we were in Q4, combined with the revenue growth, we actually had, you know, it's a bigger impact than what we saw flowing through in the quarter.

um we obviously took the hit um but that doesn't account for the 40 sequential increase that we saw in the wholesale side of things as well right okay um and on that wholesale side go ahead i would just say just that that that that starts to reverse pretty aggressively we hope in the q3 as we both have the benefit of maryland uh adult use sales and kind of a new growth cycle coming out of New Jersey, which will start to hit, we hope, kind of late third quarter. So, you know, we see it kind of bottoming in the second quarter and then bouncing back very strongly as that comes on. And then in the fourth quarter, we have a bunch of stores opening. So, you know, we see it as a short term blip related to this one issue.

And you noted that the wholesale program was up 13% quarter of a quarter. I should say the net wholesale was up pretty significantly. And I think that that was primarily driven by new customers and some of the value product. Were there any one-time benefits like inventory liquidation that would have moved that up in the quarter? And should the revenue there, given that if it is from new customers and growth in the value brand, Should we expect that wholesale revenue to grow or be flat, I guess, into the second quarter?

Yeah, I think... I'm sorry, Adam, you want me to handle that?

I think, Dan, why don't you just go through the numbers?

Yeah, so I think there are a couple things impacting the net number, and one of those is Massachusetts. So we didn't have, we only had New Bedford for half the quarter this quarter. That store has done exceedingly well. That is actually going to impact our revenue numbers on the Massachusetts side on a net basis. But it will be due to us selling product into our New Bedford dispensary and driving vertical margins. So you'll still capture the margins there. you won't capture it on the wholesale side of things as much. There were no one-time items in the quarter. There was no inventory liquidation. We're in a good position on that front, as we said last call. I would expect wholesale revenue to be relatively flat to slightly up, driven by growth in the underlying business. as additional social equity stores come online in Illinois and New Jersey. We're selling into basically I think every account that is opening on the social equity side of things in both of those markets. We're starting to see strong reorders from those folks. But that's going to be partially offset by the increasing verticalization that we have in Massachusetts. and a little bit more verticalization in Illinois with the opening of our Tinley Park store.

Thank you.

Thank you. Your next question comes from Russell Stanley from Beacon Securities. Please go ahead.

Good afternoon. Thank you for taking my question. Maybe if I could just follow up on your comments around Illinois and the new stores coming online. I think I asked this last quarter, but I guess, can you give us your latest view on the number of new stores you expect to see get open in 2023? I think we, as you noted, 17 stores out of the 192 licenses that went out last year. Just wondering what kind of cadence you're expecting for the rest of 2023?

Yeah, I'll turn it over to Frank on that. But I would say we continue to be disappointed by the pace. Obviously, I think the delay in the license is really a lot of these guys lost their real estate, and it's really hard to raise money to open these stores. And I think that's the headwinds that they're facing. But I'll turn it over to Frank for the details.

Yeah, thank you, Abner. You know, I think an additional 20 to 30 stores will open over the course of this year. As Admiral mentioned, the headwinds, these license holders are facing Bolton Capital and trying to navigate the real estate waters have been very tough, and I don't see it getting easier. Now, also just add this to the list of pressures is the state law requires those stores, the actual legislation requires those stores to be open one year from issuance of licenses. Uh, the Illinois legislature, um, you know, puts the gavel down on, I believe it's may 19th and currently there isn't a bill, um, to extend that deadline. Um, it's, it's unclear if IDF PR, the Illinois regulatory body has the authority to do so considering it's in statute, not in reg. Um, so I think people are scrambling to extend those deadlines and try to get additional call it 180 plus days added to that, that regulatory timeline. since many of these licenses were issued in the summer, July and August. So we're hoping to see that extended by the powers that be in Illinois and get these stores open as quickly as possible. But again, I'd say 20 to 30 additional stores are what we see likely by the end of the year.

Got it. And if I could, just to follow up, just on the 10-week perk opening, I know it's a brand new, but can you, apologies if I missed it, can you comment, I guess, on what the initial performance looks like, your expectations, and I guess, you know, is the 10th site also planned to be a retail, an outlet location?

I'll take that one, and Tinley Park is opened above our expectations. You know, as I noted, our outlet stores you know, tend to get to that state average quicker than most of the other stores that open. We have opened with a bang. I think we opened about a month ago now. And, you know, we're working our way to that state average in Illinois. And I think it's been, you know, a success for sure. And I'm sure, was there another question there, the follow-up?

Yeah, it was, no, it was whether the 10th Yeah, if that's going to be an outlet, if you envision that being an outlet style store as well.

You know, we're working on the siting of that store. I think, again, it depends on where we site that location, what approach we'll take. We, again, are looking to have that completed relatively in short order and get that store open in Q1 of next year.

Great. Thank you. I'll get back to the queue. Thank you. Your next question comes from Bobby Robinson from Canaccord.

Please go ahead.

Thanks for taking my questions. So just a couple of quick ones. In terms of the outlet stores, can you talk a little bit about the profitability of those stores versus the rest of your network? What's the kind of delta there, if any?

Let me give you a macro, so it's a little frank chime in as well.

I mean, they're lower price stores, but they also attract a price conscious customer. So that customer is going for, in a lot of cases, a lower margin product, even if there's higher margin products on the shelf. So maybe there's a five to 10 point margin reduction, but we see a significant gain in sales. And so we think our gross margin dollars are significantly higher. That's why in saturated markets, you know, we've been able to go into saturated markets and become the number one store. Sometimes, in some cases, reasonably quickly, you know, we have one outlet store that's doing, you know, 3X our base projections, a massive uplift. So we think the gross margin dollars are significantly higher than they would be otherwise. And interestingly, you know, we just, we're the only ones doing everyday low pricing. and it really resonates with the customers. So we're very happy with the outcome, particularly as you enter into saturated markets.

Okay, great. And then just on the three Pennsylvania store openings in 2024, I know you're still working on getting sites there, but any sense for timing in terms of when they might hit that year?

Frank, do you want to take that?

Sure. I mean, we're actively citing those stores currently. I think that within this year, we'll have sites nailed down and start swinging hammers on most of those projects. If not, that might bleed into Q1. But I think, and again, you know, Dan and I are working on this together. I'll let him correct me. I think the goal is to get those stores open all of them by Q2, Q3, probably likely Q3 of next year, I think. Is that fair?

Yeah. I mean, look, we have three of the four remaining sites cited. You know, one of them is zoned by right. Two have to go through a special use process, which adds a little bit of time to it. You know, we want to make sure we get through the special use. Things can go awry, but so far, so good. And one of those is a ground up. So I would say that the cadence next year for those three is probably, you know, early Q1, Q2, early Q3 for the last ground up build. Hopefully we can beat those expectations. I will say candidly, we We were looking for, you know, and always have been looking for A-plus sites. We want to site these stores for adult use in Pennsylvania. So one turn off the highway, high traffic counts, 50-plus parking spots with good visibility. We've got those sites. You know, originally entering the late-stage medical market, I don't think we expected the performance that we've seen out of the stores in Scranton and Wayne. or expected that type of performance. So we're trying to hurry up and get those built and open as quickly as we can, given that the opportunity set there is a lot better than we originally anticipated.

Great, thanks. Thank you.

Your next question comes from Andrew Semple from Egalon Capital Markets. Please go ahead.

Hi there, and congrats on the Q1 results. First question is on Massachusetts, where it appears you reported both pretty good gains on both the retail and the wholesale business. I believe you were expecting some incremental capacity to come online in Q2. Did some of that arrive early that allowed you to both expand wholesale and retail simultaneously? Could you comment on that, whether there's any more capacity expected for the remainder of the year? Did some come early? Frank, you want to take that?

Sure. The capacity has come on. It did not affect, did not come in time for Q1. And I mean, with New Bedford performing the way it's performing, you know, we probably would like more capacity. So again, we're working to increase yields and get as efficient as we can. But, you know, New Bedford was a pleasant surprise and helped work any ounce of biomass that we have in Massachusetts growing and being processed through our stores and with the wholesale growth. Dan can quantify it any further if he wants, but, you know, those additional pounds are coming on now.

Yeah, and I think... Fortunately or unfortunately, there's no shortage of flour in Massachusetts. So any gaps that we've had, we can certainly address on the bulk side of things and then fill in that capacity later. But thus far, we haven't seen any issues with being able to fill both sides of the equation.

This sets us up quite strongly, though, because this allows us to be short weed in mass, allows us to have a place to put the additional capacity, which is a really good place to be in a competitive market. So we're excited for the capacity to come online. We have homes for that product as soon as we can get it out the door.

Great. Thank you. Next question. Just on the guidance that was issued last quarter, just want to make sure we address that. Don't believe I saw it reiterated. Apologies if I missed it, but you were previously calling for 15% revenue growth and EBITDA growth year-over-year in 2023. Just wondering how that stands today. Looks like you're off to a great start on the revenue side. Q1 up 34% year-over-year. EBITDA side is obviously a a big cloud here with the New Jersey impact. Could you maybe comment on the guidance you put out with the prior quarter results? Sure.

You've hit it right on the head. We feel very good on the revenue side, and we're a little uncertain on the EBITDA side. We're not withdrawing guidance. We're not reiterating guidance. We have highlighted that there's a $6 million to $9 million total impact from New Jersey We think we've got some positive factors here, including potentially Maryland, wholesale, et cetera. We're going to work our hardest to make those up. But we have identified a $6 to $9 million EBITDA impact, you know, from this one issue. And, you know, it's our job to try to find ways to offset that as we move forward. And we'll see what happens here.

Great. Appreciate the additional cover there. I'll get back into you. Thank you. Thank you. Ladies and gentlemen, there are no further questions at this time. This concludes your conference call for today.

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