TerrAscend Corp.

Good evening. My name is Ina and I will be your conference operator today. At this time, I would like to welcome everyone to the TerraSense 3rd Quarter 2023 Financial Results Conference Call. Joining us for today's call is Jason Wild, Executive Chairman, Zaid Ghanem, President and Chief Executive Officer, and Kit Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook, the company's guidance for fiscal year 2023, and estimates and assumptions relating thereto, and the company's expectations regarding its market opportunities, the benefits of its listing on the Toronto Stock Exchange, 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. Additional information regarding these factors appear under the heading Risk Factors in the company's Form 10-K filed with the Securities and Exchange Commission, or the SEC, and other findings that the company makes with the SEC from time to time, which are available at www.sec.gov 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, we 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, which you can find on our investor relations site or on the SEC website. I would now like to introduce Mr. Jason Wild. Please go ahead, Mr. Wild.

Good evening, everyone, and thank you for joining us. The third quarter of 2023 was a record quarter for Terrasund. Our results and momentum over the last several quarters continued as we posted our eighth consecutive quarter of sequential net revenue growth, growing in the third quarter at industry-leading rates of 24% sequentially and 35% year-over-year. We exceeded our forecast across virtually all of our financial metrics and KPIs. Importantly, gross margins, which had already eclipsed 50% in Q2, increased sequentially to 53.6% in Q3. Margin improvement and management of operating expenses also led to an 89% sequential increase in adjusted EBITDA from continuing operations to $24.2 million, representing a 27% adjusted EBITDA margin. All of this resulted in our fifth consecutive quarter of positive cash flow from continuing operations and positive free cash flow of $7.7 million for the quarter. These results give us confidence and visibility into the remainder of the year. Therefore, we are raising our guidance for net revenue and adjusted EBITDA from continuing operations for 2023 to $320 million and $73 million, respectively. representing year-over-year growth rates of 29% for net revenue and 87% for adjusted EBITDA. The full year 2023 increase in guidance implies 2023 fourth quarter net revenue of 89 million and adjusted EBITDA from continuing operations of 24 million. We expect our Q4 gross margins to exceed 50% once again, Operating expenses as a percentage of revenue is expected to be below 30%, and free cash flow is expected to be positive. The additional scale provided by our recent Maryland acquisitions has further strengthened our financial results and positioned the company to be sustainably free cash flow positive. With this increased scale, we have an even stronger conviction and urgency to further capitalize on our differentiated wide open map. To that end, we are in multiple discussions to expand our footprint from deep not wide to deep and wide. Due to the challenging macroeconomic environment and license limits in many attractive states, asset prices have become extremely attractive. and we are evaluating multiple compelling opportunities. It is important to add that we will be disciplined in evaluating these deals as we look to go deep and wide on our terms. As evidenced by our Q3 results and updated guidance, we are positioned for success with or without regulatory or legal reform. The absence of reform will not keep us from executing on our plan to be a consistent growth and cash-generating business. In fact, we have the highest 2023 year-over-year revenue growth rate in our industry and expect that trend to continue. The capital markets have not been kind to the cannabis industry over the past few years. However, within this difficult environment, we have taken our destiny into our own hands by uplisting to the Toronto Stock Exchange and materially paying down our debt and reducing our interest expense over the past year. Our TSX listing has resulted in increased trading volume, narrowed spreads, improved custody, and increased interest from institutional investors across the world. While our success is certainly not dependent upon regulatory reform, we would benefit immensely from it. However, rest assured, we are taking action to ensure progress is effectuated not just through the legislative and executive branches, but also through the judicial branch. This industry and its employees deserve to be treated equally on a level playing field with every other business, and we are committed to help deliver this well-deserved change. Any progress would supercharge the strong business that we have built, and we believe that we are closer to reform than ever. In fact, we are planning our growth strategy for a possible Schedule III cannabis world. In closing, I'm so proud of our team, their relentless focus on customers and patients, and their desire to be the best. Now, I'll turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello, everyone. Jason, I share your pride in what our team has accomplished thus far in 2023 and our upgraded outlook as we head into 2024. Our year-to-date financial results in 2023, and particularly in Q3, are a result of multiple factors, including our operational excellence, our attractive lineup of states, and our wide open map. As Jason mentioned, we performed extremely well this quarter across virtually all measures. Let me drill down deeper as to how we achieved these results within each of our key markets. Starting with New Jersey, this state continues to be our largest and most profitable market. According to BDSA, in August, we moved from a number three to a number two market share position. In September, we made further progress, achieving an 18.6% market share only two-tenths of a percent from the number one slot. Based on our team's obsession with delivering the highest quality products to our retail and wholesale customers, the continued strong velocity of our recently launched Juana and Legend brands, as well as multiple new product launches in the coming months, we are confident that we will attain the number one market share position in the near term. On the supply side, our cultivation yields have increased in the state by roughly 50% since January, enabling us to materially grow our wholesale business, which nearly doubled quarter over quarter from an already healthy position. We also now have the opportunity to add additional retail doors given the recent signing by the governor of a bill that will allow existing operators to acquire a stake in up to seven diversely owned dispensaries. This is now a top M&A priority, just as getting to our four dispensary limits in Maryland was in Q2. Speaking of Maryland, this was our first full quarter of adult use sales, and we are thrilled with the results so far. This market is currently estimated to be on an annual run rate of $1 billion and continues to grow. We are leveraging the same strategy in Maryland that we have successfully implemented in New Jersey. With four retail locations, including two of the top performing stores in the state, we believe that we have one of the top retail market share positions in the state. We expect to drive further sales growth once our relocated Parkville dispensary is open in Q1. This new larger 3,900 square foot dispensary will be conveniently located near the White Marsh Mall, a high traffic retail center. Our Maryland wholesale business more than doubled from Q2 to Q3 driven by strong demand for our extensive portfolio of brands and new product introduction, as well as our increased penetration of dispensaries across the state. On the supply side, we are thoughtfully expanding cultivation to satisfy market demand with additional capacity coming online in the spring. With attractive margin and market structure similar to New Jersey, Maryland is generating significant cash flow for the company, and we expect additional improvement from further verticalization in our own retail stores and continued strong growth in wholesale sales going forward. Turning to Pennsylvania, this will be the next market in our portfolio to turn adult use. With a population of 13 million people, compared to 9 million in New Jersey and 5 million in Maryland, PA is already a $1.2 billion medical market. Once PA turns adult use, we expect it to become our number one state. Until then, we are proud to have taken the steps needed to optimize the operation. During Q3, our entire Pennsylvania business returned to growth. Same-store sales grew at our six locations by 6% sequentially and 8% year-over-year, while our wholesale business grew 20% sequentially and 10% year-over-year. Gross margin also improved sequentially, despite operating below capacity driven by sales growth lowered costs, and optimized utilization. In Michigan, our focus has been on gross margin expansion and achieving EBITDA profitability. We have an incredible opportunity in Michigan. With over $3 billion in sales, it is the second largest cannabis state, and it also has the highest per capita consumption in the country. In a historically challenged market from a pricing perspective, we have already improved our gross margins by 1,800 basis points from when we acquired the business, eclipsing 40% in September. These dramatic improvements were driven by reduced discounting, maintaining our premium pricing, increased verticality, a reduction of cultivation and manufacturing costs, and fully operationalizing our state-of-the-art lab, resulting in expanding our product portfolio. Today, we have 19 retail locations, soon to be 20, with the planned opening of our second location in Detroit early in 2024. Now that we have built a strong foundation we are evaluating multiple opportunities to expand our retail footprint to gain further scale and leadership in this unlimited licensed state. In closing, I am thrilled with the progress we have made across all of our geographies, which led to the record performance in the quarter, and I am more excited than ever about how we have positioned ourselves for the future. I would now like to turn the call over to Keith to provide a financial update.

Thanks, Ziad. Good evening, 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 third quarter totaled $89.2 million, compared to $72.1 million for the second quarter and 66.2 million during the same period last year, representing industry-leading growth rates of 23.7% sequentially and 34.7% year-over-year. Retail revenue for the third quarter was 66.1 million versus 58.3 million in the previous quarter and 53.5 million in Q3 of last year, representing a 13.3% sequential growth and a 23.8% year-over-year growth. The sequential growth was driven by adult use implementation and three acquisitions in Maryland, and a 6% sequential growth in same-store sales in Pennsylvania. The year-over-year growth was driven by growth across Maryland, Pennsylvania, and New Jersey. Wholesale revenue was $23.1 million in Q3 compared to $13.9 million in the previous quarter and 12.8 million in Q3 of last year, representing a 66% sequential increase and an 80% year-over-year increase. The sequential growth was driven by a nearly doubling of the business in New Jersey, a more than doubling in Maryland, and a 20% growth in Pennsylvania. The year-over-year growth was broad-based, driven by New Jersey, Maryland, Pennsylvania, and Michigan. Gross margin for the third quarter increased to 53.6% compared to 50.2% in Q2 and 47.0% in Q3 of last year, representing a 340 basis point improvement quarter over quarter and a 660 basis point improvement year over year. These improvements were driven by progress across all states. In New Jersey, we maintain the healthiest and strongest margins in our portfolio. In Maryland, margins improved driven by increased utilization at our Hagerstown facility and improved verticalization as we've begun to integrate the three newly acquired stores. In Pennsylvania, increased sales and more optimized and stabilized cultivation and production costs drove material margin improvements. And last but certainly not least, in Michigan, we eclipsed our targeted 40% mark exiting Q3 and have plans in place to sustain that level. We have been taking actions over the past number of quarters to optimize our operations and are now seeing the benefits of these actions in our gross margin results. Consequently, we expect to continue to deliver gross margin above the 50% mark. General and administrative expenses in the quarter, excluding stock-based compensation and depreciation and amortization, were 30.8% of revenue. a reduction of 870 basis points sequentially from 39.5% in Q2. This result is predominantly due to tight control of costs with third quarter spending of $27.5 million compared to $28.5 million in the second quarter, while also incorporating three newly acquired Maryland dispensaries into our structure. Tight control of spending combined with a 24% sequential growth of the top line led to this strong sequential gain in operating leverage. Gap net loss from continuing operations in the third quarter of 23 was $8.4 million compared to a net loss of $12.9 million in the second quarter. What I'm most proud of for the quarter was our adjusted EBITDA result, which grew 89% sequentially and now puts us at an entirely different level, enabling sustainable cash flow generations. Adjusted EBITDA from continuing operations for the third quarter was $24.2 million, representing a 27.1% margin, compared to $12.8 million, or a 17.8% margin in Q2. The quarter-over-quarter growth and margin expansion was driven by strong revenue growth, gross margin expansion, and operating expense leverage. Turning to the balance sheet, cash and cash equivalents, including restricted cash, were 28.5 million as of September 30th, compared to 34.5 million as of June 30th. Net cash provided by continuing operations was 9.4 million for the third quarter, representing the fifth consecutive quarter of positive cash flow from continuing operations. CapEx spending was 1.7 million in the quarter, primarily relating to automation investments. Consequently, free cash flow was $7.7 million for the quarter. During the quarter, payments were made related to $5.7 million of debt pay down, $3.8 million of success fee in New Jersey, and $3 million for dispensary acquisitions in Maryland. No cash income tax payments were made during the quarter. As Jason mentioned earlier, Today we raised our full year 23 guidance for net revenue and adjusted EBITDA from continuing operations to $320 million and $73 million, respectively, representing year-over-year growth of 29% in net revenue and 87% in adjusted EBITDA from continuing operations. This net revenue growth puts us at the top of the industry. The adjusted EBITDA from continuing operations guidance represents a 22.7% margin for the year. Translated to Q4, the guidance implies net revenue of $89 million and adjusted EBITDA from continuing operations of $24 million, representing a 27% margin. We also expect gross margin to continue to exceed 50%, G&A expenses to be at or below 30% of revenue, and free cash flow from continuing operations to be positive. To summarize, Q3 marks our eighth consecutive quarter of sequential revenue growth and sector-leading revenue growth year-over-year. We have successfully improved P&L metrics over several consecutive quarters and improved our cash flow to positive consistently as well. We reduced our debt by approximately 40% and interest expense by approximately 30%. This progress has reduced our leverage ratio to approximately two times our current EBITDA run rate and 0.6 times our current revenue run rate. In closing, I'm extremely pleased with these results that we have accomplished this quarter. This quarter has been the strongest in over two years at TerraCent. We have achieved the gross margin operating expense as a percent of revenue and adjusted EBITDA margin levels that we set out to deliver over a year ago. We believe we are now well positioned with strong fundamentals and ready to capitalize on our wide open map by pivoting from a deep, not wide, to a deep and wide strategy. We look forward to sharing our continued progress on all those fronts. This concludes our prepared remarks. I'd now like to 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 the star followed by the 1 on your telephone keypad. You will hear a three-tone prompt acknowledging request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the 2. If you are using a speakerphone, please leave your handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Frederico Gomez from ETB Capital Markets. Please go ahead.

Hi. Thank you for taking my questions. Congratulations on the great quarter. So I just want to touch on your comment about being ready to go wide and deep at this point. I guess just what sort of markets are you looking for in terms of expansion given the success of your entrance into Maryland with that'll use. So is Ohio one of those new markets that you could enter, you know, through acquisitions?

Yeah, absolutely. First of all, hi, Frederico, and thank you for the kind words. Yes, in terms of our open map, I mean, there's a lot of attractive states out there. Ohio is certainly one of them. You know, there's other very attractive states along the East Coast that are also, you know, going to be... going adult use over the next couple of years. So we think that there's a big opportunity to go wider that way or even do more transformative type transaction where it brings us into multiple states at once. And then additionally, we want to go, maybe we should have even said deeper and wider at this point, because we also are looking to go deeper in New Jersey by investing in up to seven social equity dispensaries. And in Michigan, there is a very large opportunity, as everybody knows, it's an unlimited license state. And we think we could go much deeper in Michigan and further drive, you know, even improved margins over where we are right now there. Thank you.

And then just a follow-up. In terms of your performance in Pennsylvania, you know, a return to growth there, I'm just wondering the drivers behind that. Is it related more to, I guess, market conditions improving in that market? Or, you know, how much of it is just your improvement in your own operations? You think that's sustainable? And does that improvement there change your strategy for PA.

Rodrigo, hello. This is Ziad. Our PA performance was very positive, and it was the result of a lot of tackling and blocking that happened in the state by the team, really starting by managing everything we could on the COGS side, continuing to put the quality product, launching innovative new products, partnering with some of the winning brands. So really it's our playbook in Pennsylvania and really going after the customers in a targeted way, not in a blank discount and really increasing the basket size, maintaining the frequency of the trip. The price is stable for us. We still commend a premium price for, in the state. The state overall is flat. We've seen some of our competitors seeing pressure in the state. We are really dialing in every lever in our operation. So that was the outcome that we've seen both on retail and wholesale. As far as our strategy in Pennsylvania, as we've mentioned in our prepared remarks, it will become our biggest state when it turns recreational. And for us to be turning the results positive that we turned them, I think we're that much more excited.

Thank you very much. Congrats again on the great quarter, Habakniku. Thank you.

Thanks, Rodrigo.

Thank you. And your next question comes from the line of Eric Desloriers from Craig Harlem Capital Group. Please go ahead.

Great, thank you for taking my questions and congrats on the impressive results this quarter. Jason, I think in your prepared remarks, you mentioned that you're in fact now preparing for a Schedule 3 world with your growth plans. Just wondering if you could expand on that a bit. Yeah, how does that potentially change your growth plans? What would make sense under Schedule 3 that perhaps wouldn't make sense under the current regulations? Thanks.

Yes. So part of it is we do think that Schedule 3 is something that could be relatively imminent, say, before the end of the year. We think there's a good chance of that. So we're just looking at the business and saying, you know, what if we had roughly, you know, $11 million a quarter less in taxes or tax liability? And there's just there's a whole lot more that you could be doing. You could be putting, you know, once we have the benefit of that, we can be putting that extra cash towards expanding capacity in some places that we could use it sooner rather than later. We could use it to pay down debt. We think that any refinancing of debt would be at a much more attractive rate. That's sort of the double benefit that we get from a rescheduling is not only do we not have the 280E liability, But us and the rest of the industry would be such better credits from a cash flow perspective that that should drive significantly lower interest rates on debt. We could obviously go out and do more M&A because the numbers just work better when you don't have that tax liability in terms of paying tax on gross profits. And then we've even talked about – The fact that if all of this did happen and our stock was still sort of where it is now and didn't seem to be reflecting that improvement and the fundamentals of the business, then maybe we would take that extra $10 or $11 million a quarter and put a big chunk of it towards a buyback. I mean, there's just so many – we'd have so many more options with all of that, you know, sort of extra profitability.

Got it. Yeah, that definitely makes sense. Next question for me. Just wondering what your CapEx plans look like going forward. You seem to be in a great position in virtually all your states. You know, obviously M&A kind of coming up to the forefront in terms of, you know, potential use of the cash here. But just on the CapEx front, are there any, Any other projects to call out? Any other, you know, production facility expansions plans to be aware of? Thanks.

Hi, Eric. Keith here. A couple that I think we talked about in the past and we're progressing on, one that we're really in the midst of is turning on some more rooms at our Hagerstown facility in Maryland. And we were deliberate about making sure everything is full steam ahead in Maryland and then pulling that trigger, which we've now done. So early next year, that will come online and give us a lot more capacity and supply into that market and grow our wholesale business there, but also allow us to further go vertically in our four retail stores and maximize the margin there as well. And that, by the way, order of magnitude is a few million dollars over the next number of months. So- not going to hugely move the needle. And then we've been able to sort of delaying maybe as it sounds like a negative word, but we've been able to hold back on investing in additional capacity expansion in New Jersey because of the 50% increase that we've realized in yields. So we feel like we're in a really good position to continue to, like we said here, we've doubled the our wholesale business in New Jersey quarter over quarter. And we expect to continue to grow that into Q4 and beyond with the capacity that we have. So that project probably comes later next year and it's probably order of magnitude 10-ish million dollars. Again, kind of spread over a few quarters. And that's about it. The rest of our footprint is fully built out and fairly new. So there's not really any maintenance capex to speak of either. So Those are the two things on the docket for us.

Awesome. Appreciate the color. Congrats again on the strong results.

Thank you. Thanks, Eric.

Thank you. And your next question comes from the line of . From , please go ahead.

Hi. Good evening. Congrats on the quarterly results. Nice to see New Jersey continuing to be a strong market for you guys. My question is based on our conversations with your peers that have recently reported in the past few days and the market now heading into about a year and a half through the adult use program launch. And with the new stores coming online, a lot of your peers are reportedly starting to see a lot of pressure on the MSO retail market share in the state. And so how has this kind of impacted your retail performance more recently? And if this has impacted any internal conversations that you guys might be having in terms of the allocation of branded products that you might be sending through your vertical retail chain versus the wholesale accounts?

Yes, this is Keith. I can take that. Zia, I'm sure, can add in. So we've expected all along that eventually we would feel pressure on the retail side of the business in New Jersey as more and more doors open statewide. And we felt that very minimally in the quarter, in Q3, and has been offset multiple times over by the growth of nearly doubling of our wholesale business. And we expect that trend to continue. So we do expect logically further pressure on our three stores as more and more doors open, but more than offset by the wholesale business. And then In terms of the second part of the question on how vertical we are, we feel like we're optimized at this point. And Zia, maybe you want to add in here in terms of our mix, which is well over 50%, but we always make sure it doesn't go too high to make sure we have the right selection for customers and patients in our store because that's really what it's all about is focusing on the customers and the patients.

Yeah, Keith, I think you covered it. The only thing I want to add, we come in with our strategy. We know we have this right strategy, but it really is not verified and confirmed until the customers and the patients in New Jersey continue to cause quick velocity on our products, both in our stores and at wholesale. As I've mentioned in my prepared remarks, we have gained market share in New Jersey, driven by by everything that we shared and we are now at number two market share and almost tied with number one and knowing the team in new jersey being the same team that launched adult use in maryland will be the same team that will launch adult youth in Pennsylvania. I know that they will not rest until we gain and get that number one spot. So, look, we say it with a lot of joy, a lot of excitement, but it's the quality of the product and it's the mix of the product that is really causing that success. And we will continue to build on it. We'll learn from anything that does not work and we'll take it to every state we are in.

Great. Thanks for the caller. And just a second question here about the guidance. So historically, Q4 sees a lot of promotional activity, and this has been pointed out by the peers of yours that have been reporting the past few days. And they also have indicated that this will likely result in a decline in the Q4 revenues. But given that Tereson's current guidance is calling for essentially flat revenue and adjusted EBITDA to come in at 424, I guess, are you planning to implement any of these promotional activities in the next quarter at all that might move the revenue and adjust the down a bit sequentially?

Yeah, we are comfortable with the guidance that we put out there for the fourth quarter. Every company is different. In terms of our footprint, it's really a state-by-state story, and we have a nice balance of tailwinds in our favor and limited headwinds, and we feel like we have good momentum and are comfortable with that guidance without having to do anything out of the ordinary, extra discounting, extra promotions, or anything like that.

Yes, seeing what we're seeing, being in that quarter, I want to confirm our confidence and our guidance.

Thank you. Congrats on the quarter again.

Thank you.

Thank you. Once again, should you have a question, please press star, then the number one on your telephone keypad. And your next question comes from the line of Andrew Semple from HLN Capital Markets. Please go ahead.

Good evening and congrats there on the excellent Q3 results. First question here, I just want to go back to organic growth opportunities, actually, namely in Michigan. Do you see any potential for organic growth in the Michigan markets, either from a capacity or a retail standpoint? Or is your preference to grow in that state via acquisitions?

Yeah, thanks, Andrew. Retail sales in Michigan over the last few quarters have been up and down. Last quarter, we highlighted to you that the same store sales were up because we saw that momentum. This quarter, sales were softer quarter over quarter. But it's store by store. Some of our stores are growing quite significantly. Others are under pressure in that area where more stores have opened. I think between Q2 and Q3, we see an incremental of almost 40 stores opening. that have opened and Detroit has allowed adult use. So some of those stores that are close to that MSA are seeing some of the pressure. We continue to work store by store on optimizing the program and the execution to drive the growth. But maybe the most important point in this is despite the pressure on retail sales, the gross profit dollars in Michigan in this quarter were at an all-time high. And that's because of our focus, our purposeful focus on the gross margin. So while some stores are growing, some stores are under pressure, we look at Michigan as a state that has the potential to be one of our most contributing state when it comes to cash generation. And that is due to multiple conversations on the M&A side that are taking place. And that was our thesis when we first went into Michigan. As big as the state is, unlimited license state, as we went in, we fixed the fundamentals, and now we are ready to really go deeper in Michigan. And we are discussing possible scenarios that will allow Michigan to be one of our biggest cash generating state in our portfolio.

Great, that's helpful and good to hear. I also want to go back to the guidance which you have raised twice now and by meaningful amounts since the Q2 results. Obviously, it feels like you were pleased and perhaps surprised by maybe the strength in Maryland as well as the momentum in the New Jersey market and elsewhere in the portfolio. I'm just wondering if any of the strength recently has been a factor of pricing in any of your states, notably what has happened to pricing in Maryland, and whether that's been a function behind some of the guidance increases that we've seen over recent months.

Hi, Andrew. Keith, so maybe I can take the first part, and Zied, if you want to comment on the pricing. But just overall, I think, well, first of all, we like to be cautious and set expectations and then make sure we can meet or beat expectations, and we feel like we're now in that cycle. And a year or two ago, it was sort of the other direction. So we have our arms around the business. We We, uh, especially in, in New Jersey with regard to, uh, to, to the wholesale business, uh, that that's probably where we got the most upside relative to the guidance. And, and I would say just overall, um, on pricing, no, nothing material in one direction or another. Uh, Michigan's been slightly positive. Pennsylvania has been slattish stable. Uh, New Jersey's been, uh, maybe with slight pressure emerging a little bit, and then we've seen a lift in Maryland since the beginning of adult use in prices. Anything to add?

No, nothing else to add. Thanks, Keith.

Great. That's very helpful, and congrats again, and thanks for taking my questions. Thank you. Thanks, Andrew.

Thank you. And your next question comes from the line of Mike Morigan from Excel Share Equities. Please go ahead.

Hey, everyone. Great quarter, and thanks for taking the question. So you mentioned planning for the post-2D world, so I have a sort of slightly different question on it. Obviously, you mentioned getting a tax shield, which, you know, when you can deduct interest that every other business in the world enjoys. But do you see any or anticipate any changes to sort of the margin structure that you're currently seeing in sort of the more than 50% gross margins and below 30% SG&A margins as as you think about how to reallocate, you know, 21% of gross profit to not the IRS?

Yeah, I think, hi, Mike. I think just building off of Jason's comments earlier, that's just another element of the scenarios that we're planning through. It's hard to predict exactly how things will play out and how competition will take moves on the pricing front and what kind of moves we may or may not want to take. But with that additional fuel, so to speak, that could potentially drive down prices and drive demand and drive to a larger market really would be the ultimate goal there. So, yeah, I mean, again, it's hard to kind of gameplay all that out, but that's certainly part of the equation.

No, it makes sense in terms of, you know, you can make up the You can leverage SG&A if you get the larger market as well at higher volumes, even at lower gross margins for overall higher, you know, net margins at the end of the day. And then a quick question on just Michigan mentioning getting the margins back to 40%. Sort of, I think it was sort of the normal level. Is that sort of where Michigan's gross margins can stay, you know, absent the 280E discussion we just had, you know, or run rate? Or can those actually improve from here and maybe get closer to the 50% that the overall is saying?

Yeah, Mike, the level that we are in is a sustainable level. We will continue to optimize and we will continue to squeeze every point on the margin front. But we should think of Michigan being in low to mid 40s from a margin perspective. And the The driving force behind this, unfortunately, is there are many operators in Michigan that are doing severe discounting and really burning the furnitures down to extend the runway. And we will continue to stay disciplined. We will count on our product mix. We will count on our quality. And we will count on our premium pricing adjacent to the value of brand that still has a very high quality to combat that environment. And we believe that they will not be able to do it for a long time. And that's why we think low to mid 40s is where the margin will be.

Great. Thanks a lot.

Thank you.

Thank you. And your next question comes from the line of Noel Atkinson from Clarice Securities. Please go ahead.

Hi, guys. I just want to echo everybody else's sentiment about a great quarter, and thanks for taking our questions. Just a couple quick ones from me. So, can you give us a sense of, you know, we've talked about this in the past, but scale of the production expansion that you might be able to achieve from this $10 million project in New Jersey?

Yeah, Noel, hi. Ziyad here. Look, initially, we could have almost increased by 70%, 80% our current capacity with that project. We had by far the best and the cheapest virtual expansion by absolutely spending $0, and the team doing an outstanding job increasing our Output by 50%. And that's what Keith was referring to. We were able to double our wholesale volume. We're sitting on a healthy inventory. We see what's common. We see the performance of the plant. We'll see the mix. We'll see the yield. We're seeing the THC average. We're seeing the terpene profile. So that gives us all the confidence that we are good for Q4, Q1, and Q2 to continue the trend that we showed in Q3. But the expansion that will come in later in 2024 will give us further an extra 70% or 80% of the capacity. And we will do it thoughtfully, and we will do it – We'll continue to monitor the supply and demand in the state to make sure that we keep that balance in check. Great.

Do you have a sense of how significant Ohio visitors are to your Michigan portfolio?

We do. We monitor this extensively. carefully. We have had we have few border stores, but the distance is very convenient. The brand and the mix and the partnership with cookies and some engage in launching our brands we feel will give us a protection. But it's not it's not a sizable business that that the announcement in Ohio gave us any egg or any sour taste. Actually, we got excited when we saw the result in Ohio. Because as you can assume, we are having conversation, as we mentioned, that adding states and having a Midwest region and having Ohio and Michigan together. So the news was not worrisome at all at us. We see ourselves growing in a way that we have the Northeast, having Maryland, Pennsylvania, and New Jersey hubed. and having the Midwest, having Michigan and hopefully Ohio. So we feel pretty good.

And then just finally, I've heard multiple times through this earnings call optimism about sort of ongoing growth in wholesale in New Jersey and just ongoing improvements overall here. Do you consider your implied Q4 guidance to be conservative?

Look, we want to put a budget that we can meet and we will not trust and we will not attempt not to beat it. We feel it is knowing what we know today and using the data, using the trend, this is a legitimate budget that we have. If you challenge me and you bet me a cheesecake whether we're going to beat it or not, I think the team will take the bet that they will try to beat it, and we will try everything we can to beat it. Great.

All right, that's it for me. Thanks a lot.

Thank you. Once again, that is Tara and Juan to ask a question. Mr. Wild, there are no further questions at this time.

Please proceed.

Thank you, everybody, so much for being here to listen to our third quarter conference call. We are obviously very proud of the progress that we've made and that we reported here in Q3, and we look forward to reporting even more progress in Q4 in a few months. Thank you very much.

Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you all for participating. You may all disconnect.