TerrAscend Corp.

Good evening, my name is John and I will be your conference operator today. At this time, I would like to welcome everyone to Terasen's first quarter 2024 Financial Results Conference Call. Joining us for today's call is Jason Wild, Executive Chairman, Zia Ghanem, President and Chief Executive Officer, and Keith Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook, including the company's expected financial results for the second quarter of 2024, and estimates and assumptions relating thereto, and the company's expectations regarding its new market opportunities like Ohio, the benefits of the company's tax steepened claims for past years, the expectations regarding regulatory reform and the potential benefits thereof, 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 of future performance. Additional information regarding these factors appear under the Heading Risk Factors in the company's Form 10-K filed by 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 .sec.gov, on Cedar Plus, and on the company's website at .terra.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 our quarterly report on Form 10-Q for the quarter ended March 31, 2024, which you can find on the company's investor relations website or on the SEC and the Cedar Plus websites. I would now like to introduce Mr. Jason Wilde. Please go ahead, Mr.

Wilde. Good evening, everyone, and thank you for joining us. We're pleased with how 2024 has started. Net revenue was in line with the guidance we provided during our year-end conference call in March, while adjusted EBITDA and cash flow exceeded our -over-year growth and margin expectations. Net revenue for the quarter totaled 80.6 million, an increase of .1% -over-year, and adjusted EBITDA from continuing operations totaled 16.2 million, an increase of 33% -over-year, representing a .1% adjusted EBITDA margin compared to .6% for the same period the prior year. Our focus since 2022 has been on cash flow generation, and I am gratified to see how this measure has vastly improved. We generated sufficient cash in excess of our accrued taxes in the quarter, including the uncertain tax position related to 280E taxes. We delivered our seventh consecutive quarter of positive cash flow from operations totaled 13.3 million compared to 10.5 million for the same period last year, and another quarter of positive free cash flow of 10.5 million compared to 8 million a year ago. Our improved margin profile at cash flow generation during the first quarter of 2024 was due in large part to continued improvement in each of our core markets and steps we took last year to substantially pay down our debt and materially lower our interest expense. We're actively in the process of exploring additional opportunities to approve our balance sheet and are well underway in a competitive process to refinance a substantial portion of our debt. We have seen significant interest in this process from both existing and potential new lenders. Also, with the recent news regarding the DEA's decision to reschedule, additional potential lenders have emerged and existing lenders have become more constructive on the sector given that the rescheduling would eliminate 280E taxes and dramatically improve net income and cash flow. We will continue to advance this refinancing process to a close and will provide additional updates as appropriate. Regarding M&A, on our last fall in March, we disclosed our intention to enter new states such as Ohio. With a population of approximately 12 million and adult use implementation imminent, we think this market has substantial growth potential and presents operational synergies with our current footprint. We mentioned our intention to enter the state before the start of adult use. The state has been moving very fast to implement the program and we still have no read intention of entering as expeditiously as possible. The state is moving faster, so we're moving faster. Entrance into this new market and potentially other Midwest states will allow us to leverage our existing Michigan infrastructure in a similar manner to how we quickly and efficiently integrated Maryland into our Northeast infrastructure last July. This would leverage our SGA in the Midwest and has the potential to make both Michigan and other new Midwest states more profitable for us combined rather than as a standalone entity. We're in active discussions with multiple parties across multiple states and we expect any acquisition to provide immediate cash flow. We can't wait to share further details on this when erect. The additional benefit of our ample Greenfield opportunity is that it has allowed us to explore larger transformational fields. 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 Terrace M 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 weeks and months ahead. From a federal perspective, I'm optimistic that there are multiple potential paths to cannabis reform and we're not solely relying on Congress to take action as we have been in the past. The recent news that the DEA is moving to reschedule cannabis to schedule three is a groundbreaking event for Terrace M and the entire cannabis industry and its stakeholders. This will result in the elimination of punitive tax treatment and will likely enable greater access to capital at a lower cost. Overall, rescheduling will be a significant step towards leveling the playing field for the industry. The bottom line is we just want to be treated like every other business and the equal tax treatment that we're scheduling with Gray is a substantial milestone towards accomplishing this goal. To that end, a federal judge in Massachusetts recently agreed to hear the David Bowie lawsuit seeking equal treatment for cannabis businesses. The oral arguments are scheduled for May 22nd. We have been a foundational supporter of this lawsuit and this represents positive development in the process. Additionally, last quarter, based on legal interpretations, we changed our tax position as it relates to 280E applicability and we expect refunds totaling approximately $26 million. In closing, we're pleased with our first quarter results. We have the right team, high performing assets, strong cash flow and ample greenfield opportunity to pursue additional growth. 2023 was about operational excellence and strengthening the foundation. 2024 is about expansion by capitalizing on the current environment and entering into attractive states on accretive terms which was not possible two years ago. Now I'll turn the call over to Ziad to provide an update across our key markets. Ziad?

Thank you, Jason, and hello everyone.

We had a strong start to 2024. Let me walk you through how we perform in each of our key markets. Starting with New Jersey, this continues to be our largest and most profitable market. Since commencing operations in the state, we have consistently maintained a top three market share position according to BDSA data. As the market has evolved, similar to Q4, our revenue mix has trended proportionately towards wholesale versus retail. Last year, wholesale revenue doubled from Q2 to Q3, then grew another 25% in Q4 and remained strong in Q1. We have maintained strong growth profit margin, EBITDA margin, and cash flow New Jersey largely due to high cultivation yields and product quality, our low cost structure, an efficient retail labor model, and a leading brand and retail experience. We are exploring opportunities to expand our retail footprint in New Jersey under state legislation that enables existing operators to take up to seven additional social equity qualifying dispensers. These discussions remain active and we see the potential to increase our retail store accounts in New Jersey, which would further increase margin and profitability. Turning to Maryland, retail revenue remains stable while wholesale revenue grew 22% sequentially. We are still in the early inning of the adult use program in Maryland and we expect to continue to grow our wholesale sales as we ramp up our capabilities and provide a full product assortment into the market. In fact, we just recently completed an extension doubling our cultivation capacity with first harvest expected mid-year. Growth margin improved quarter over quarter as we increased our yield, rent production of our manufactured goods, and increased verticality in our four Maryland dispensaries. We expect further growth margin improvement in this market throughout this year. With our -the-art cultivation facility and four retail dispensary locations, we believe collectively we have one of the highest performing retail footprints in Maryland. With the upcoming grand opening later this month of our Parkville location to a new larger store front and higher traffic retail center, we expect to solidify our retail positions in the states. In Pennsylvania, I'm really proud of the results that our team has accomplished. We experienced a decent old climb at retail. Wholesale revenue grew both sequentially and year over year at rates of 23% and 80% respectively. The strong growth speaks to the caliber and breadth of our products and brands. For example, our Legend and our Valhalla edible brand were key drivers to this performance with 10% and 54% quarter over quarter growth respectively. We have reduced our inventory position and are more effectively balancing our supply with demand. In fact, lower inventory levels and higher demand for our products has enabled us to operationalize additional growth rules in the quarter. As we stated before, we consider Pennsylvania to be a large market opportunity for us, particularly as the state prepares for adult use. During the first quarter, Pennsylvania's governor, Josh Shapiro, formally called on lawmakers to follow other states' lead and finally legalize adult use in the state, endorsing support for an expedited adult use cannabis program by January 1st, 2025. With a population of 12 million, Pennsylvania is expected to become a $2 billion plus adult use market by 2028, according to VDSA. And lastly, in Michigan, our main focus is on improving operational efficiency and driving growth margins to establish a solid foundation from which to expand. In Q1, we once again achieved our goal of 40% growth margin. Retail sales declined sequentially due to expected seasonality as we had previously communicated. As the second largest cannabis state in the nation, with over $3 billion in annual sales, Michigan remains a top priority for us. Today, we have 19 retail locations, soon to be 20, with the planned opening of our second location in Detroit scheduled for Memorial Day weekend. We are actively pursuing opportunities to go deeper in this market. As Jason noted, Midwest states like Ohio represent an attractive opportunity to leverage our Michigan corporate infrastructure to drive improved profit margins and cash flow. In summary, I am pleased with our progress across all of our geographies, which drove solid first quarter results. We expect to achieve even greater success over the course of 2024. I would now like to turn the call over to Keith to provide a financial update.

Thanks, Ziyad. Good evening, everyone. The results that I'll be going over today have already been filed on both CEDAR and the SEC, and all results that I will reference today are stated in U.S. dollars. Net revenue for the first quarter totaled $80.6 million, an increase of .1% compared to $69.4 million for the first quarter of 2023. Full sale revenue for the quarter was $26.9 million compared to $14 million in Q1 of last year, representing a 92% increase year over year. Mainly driven by a doubling of wholesale revenue, driven by increased demand for our brands across new store openings in New Jersey, and an 80% increase in Pennsylvania, driven by performance of our Legend Flour and Vahala edible brands. Retail revenue for the quarter was $53.7 million compared to $55.4 million in Q1 of last year, representing a 3% decline year over year, mainly driven by new door openings in New Jersey and reductions in unprofitable revenue in Michigan, offset by growth in Maryland. Growth margin for the first quarter was .0% as compared to .8% in the first quarter of last year. The year over year decline was driven by channel mixed shift in New Jersey and scale-up of the estimated costs in Maryland, partially offset by improvements in Michigan. While gross margin declined year over year in New Jersey, absolute gross margin levels remain very strong two years into adult use in that state. In Michigan, we achieved our goal of 40% gross margin for the second consecutive quarter. On a quarter over quarter basis, we also made improvements to gross margin in Maryland. DNA expenses for the first quarter of 2024, excluding stock-based compensation, were $26.5 million compared to $26 million in the first quarter of last year. DNA as a percent of revenue, also excluding stock-based compensation, was .9% in the first quarter compared to .5% in the first quarter of 2023. Net loss from continuing operations for the first quarter was $14.9 million compared to a net loss of $19.2 million in the first quarter of last year. The improvement was driven by revenue and gross margin growth while maintaining DNA expenses relatively flat. First quarter 2024 adjusted EBITDA from continuing operations grew 33% year over year to $16.2 million. Representing a .1% adjusted EBITDA margin as compared to $12.2 million and .6% in the first quarter of last year. The -over-year improvement of 250 basis points was driven by DNA expense leverage partially offset by the 80 basis point decline in gross margin. Turning to the balance sheet and cash flow, cash and equivalents including restricted cash were $25.7 million as of March 31 compared to $25.3 million as of December 31, 2023. Cash flow from operations in the first quarter of 2024 was $13.3 million compared to $10.5 million in the first quarter of last year. This represented our seventh consecutive quarter of positive cash flow from continuing operations. Apex spending was $2.8 million in the quarter primarily related to capacity expansion at our Maryland facility. Free cash flow was $10.5 million as compared to $8 million in the first quarter of last year. During the quarter we paid down $9.8 million in debt. We continue to work through 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 have received significant indications of interest from existing and new lenders for various structures. Our overarching goal is achieving the lowest cost of capital possible. We look forward to providing further updates on that front. Looking into Q2, we expect -over-year revenue growth of 11 to 13 percent with gross margin and G&A rates similar to the first quarter. As a result, we anticipate -over-year adjusted EBITDA growth of 20 to 25 percent. 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. I'd now like to turn

it over to the operator for questions. Thank you. Ladies

and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you are using a speaker phone before pressing any keys. One moment please for your first question. Your first question comes from the line of Fredico Gomez from ATB Capital Markets. Your line is now open.

Hi, good evening. Thanks for taking my questions. First question is on New Jersey. You mentioned it's your largest, most profitable market and the revenue mix there continues to shift to wholesale. So just curious with that shift, what impact does that have to margins and in terms of your continued growth at the wholesale level, how much more capacity you have there? Thank you.

Hi, Fred. This is Keith. I can start and see I might have a couple further comments. So this cycle that we've been seeing, we've been anticipating for several quarters now. So it's been three or four quarters where as the dispensary count in the state started to increase about a year ago, we knew obviously that would put pressure on our retail stores and we would get an offsetting benefit on wholesale. So that's been happening. That's been unfolding. Throughout that period of time, our gross margins importantly have stayed relatively stable. And really that's thanks to a number of different initiatives that we were preparing for all along in terms of continuing to improve our yields, which we've talked much about over the past year or so. Continuing to add automation into our facility, which we've done a lot. I'm amazed every time I go and walk through the facility how much more automation we have there. And just other cost reductions and efficiencies that we've been able to realize. So that's all helped offset the impact. There's definitely an impact because of course retail pricing is at a premium to the wholesale pricing. Now the other thing that's sort of muted the impact is that the dynamic that's happened over time is that retail prices have come down quite significantly as the store counts have increased, while wholesale prices have remained pretty steady. So that's sort of to some degree muted the impact of that mixed shift as well. Anything to add to that, Ziad?

Yeah, Keith, I agree with all this. Fred, the only thing I will add is the right way or how I like to look at it is beyond the gross margin. It's to look at the EBITDA margin between wholesale revenue and retail revenue. Keith talked about the pricing holding stronger because of the supply demand in New Jersey. It is a much easier and cheaper revenue to accomplish in wholesale because you are skipping the two most expensive aspects of retail. That's the store rent or lease and the labor model that do not exist in wholesale. So when you look at an EBITDA level you don't see that trade-off.

Perfect. Yeah, thanks for that. In Pennsylvania, strong wholesale growth. It appears that you would be gaining market share in that market. So I'm just curious how much upside you think there is there in Pennsylvania. We know that's been a challenging market in the past, but is the environment improving and what's the upside here for you?

Thank you. Yes, thank you. Pennsylvania is the most exciting market for us because what we're hearing about legislative changes. I'll get to your question in a second, but I want to share that today, collectively as an industry, we had some good meetings and we've had representatives and senators from both sides of the aisle agreeing that Pennsylvania is ready for adult-use lunch. But the environment in Pennsylvania overall is a stable environment. Patient count is flattish, revenue in the state is stable, pricing is stable. So it is really a battle of brand, quality, variety, and ground game for our wholesale team. That combination is what has caused the success in our wholesale. But the real impact that we will see in Pennsylvania is hopefully at the beginning of the year when it goes recreational and we'll capitalize with all the work that we have laid on the ground this year.

And all the extra capacity that we can still... Hi, it's Jason. I would just add to that we still have significant capacity that we could add in Pennsylvania. We brought on several rooms in the quarter to meet demand, but they're still... As we've disclosed many times before, our Pennsylvania canopy is equal in size to the canopy in all of our other states combined. Once rec starts, we've got this facility to be putting out and recognizing multiples of the revenue we currently is realizing.

Thank you.

Your next question comes from the line of Noel Atkinson from Clarese Securities. Your line is now open.

Good evening, guys. Well done in Q1. Just a couple from me here. So the opening of the White Marsh store that's coming in this month, what do you see in terms of potential positive impact there?

Yes, I know. We're excited about this store. It was one of

our smallest stores. We are moving to a high traffic area. We're forecasting conservatively for that store, but what we are excited about the most in Maryland is the combination of three things in the state. One is the new store, as I described it. Second, the expansion of our cultivation facility and doubling in size of our output. And then the opportunity that we have from wholesale and verticality. Because we started those stores and we closed on them close to July 1st, we have not accomplished yet our goal or our desire from a verticality perspective. So that trifecta together with the new store is where our growth in the second half of the year, when the first harvest comes in in August, will really cause Maryland to crank on all cylinders for us.

Great. Just next, you mentioned that wholesale pricing in New Jersey stores remains quite strong supply-demand sort of imbalances there still. What do you see or what are you expecting in terms of production expansion by competitors or just in the overall market in New Jersey over the rest of the year?

Yes, wholesale is accurate. The wholesale pricing average for the state, believe it or not, is still exactly where it started two years ago and it's holding strong. We are commending a premium to that price and that is because of our quality, our brand, and our partnerships. We're keeping an eye on the new cultivators that are coming in the state. It's definitely so much slower than the retail expansion. I think the supply and demand model will stay in equilibrium and the retail store, the wholesale demand, will continue to exceed what's coming online from a cultivation perspective. Then the new cultivator will have to start from behind versus us starting a few years ago, establishing the brand equity, establishing the quality, establishing the efficiency. At the end of the day, New Jersey residents, customers, and patients will have to declare the loyalty to which brand. We feel pretty good with the dynamic that we have in New Jersey and the data continues to show us every quarter and prove that for us.

Great. Then finally, Jason, could you maybe talk a little bit about the rescheduling process and how fast it's moving? We've heard from some other folks in the industry over the last couple of days on that. Any insight there would be helpful.

Sure. I think the rescheduling, obviously we got the news a few weeks ago and it seems that the DEA has confirmed that they concur with schedule three and it goes on to the next step of the process. I certainly am not a regulatory expert but it seems like the next step is getting the write-up and the approval from the OMB. I hope that that happens pretty soon. I mean, that's an office, it's really called the White House Office of Management and Budget. If they are on sides with the White House and have been following what's been going on, then they shouldn't be a shock to have it dropped on their desk. I'm hopeful that the whole process and that the final rule could be enacted by the end of this year. But even if it doesn't, from what I understand, the progress and the process would continue even if there was a change in the White House. In terms of other, the other thing I would add is just, I'm just excited that we've got multiple paths towards some type of regulatory relief. It's like two or three years ago it was only safe banking. We know what's happened with that and how the industry has been treated from that perspective. But now, and I would have been shocked if you told me this three years ago, now we've got the DEA rescheduling sort of in process. We've got the case in Massachusetts, the David Boyce case against the U.S. Attorney General. A couple of weeks ago, the judge in Massachusetts did agree to secure the case. That was definitely a positive development. We're looking forward to what happens come May 22nd in terms of the first day of the oral arguments. What excites me about that is it's just another shot on goal, so to speak. But also, if rescheduling happens, I think that it would be, it might be harder to get back the back taxes. It would certainly, it seems like it would fix taxes going forward if we have rescheduling. But if we want our money back, then a win in the David Boyce case should help ensure that. And also, a win in the David Boyce case would not, even if we go to schedule three, it's still illegal. We could still have banking issues and other things. A David Boyce case where essentially the CSA, the Controlled Substances Act, doesn't apply to state legal cannabis operators would be a whole different story and a whole lot better of a story.

Okay, great. Thanks very much.

As a reminder, if you have a question, please press star one on your telephone keypad. Your next question comes from the line of Andrew Semple from Echelon Capital Markets. Your line is now open.

Hi there. Good afternoon. Thanks for taking my question. And congrats on the Q1 results. First off here, just want to home in on gross margins. They were at a mid-50s level in 2023. Understand that you had a bit of a temporary cultivation issue in Maryland. In Q4, and you're investing more production capacity in that state as well. Do you think you could be comfortable getting above a 50% gross margin figure again at some point in 2024? And how are you expecting margins to play out through the balance of this year?

Hi, Andrew. It's Keith. Thanks for the question. Yeah, so first of all, for the quarter, we're happy with the results. It was in line with what we expected. It was in line with more or less what we guided. We do expect kind of here in the near to medium term, meaning like this year, that the margin level will be in that sort of 48 to 50% range. We did get it. We didn't get it to mid-50s, so just to clarify that, in 2023, full year was 50.3%. It peaked at 53 point something in Q3. That was definitely our most favorable quarter with Maryland going adult use and a number of other things moving in our direction in that quarter. But overall, in the short term, we're seeing 48 to 50. New Jersey, like I mentioned earlier, remains very strong. And we expect that we have the fuel to have that continue. Michigan, we talked about second consecutive quarter of gross margin at 40, which is an important part of the equation for us. Maryland, I'll just clarify Maryland because we did have the disruption in last quarter. That's behind us. Maryland improved quarter over quarter, like I noted in my prepared remarks. We expect Maryland to continue to improve with the expansion that we're doing and a number of other initiatives there. Then last but not least, PA, we did have some one-time cost in PA. Not hugely material, but did impact a little bit in Q1. That's just really related to what Jason alluded to. We brought some additional grow rooms on, and there's some one-time cost related to that. And that's really a good thing because we've effectively balanced supply and demand in Pennsylvania. Demand's up as we talked, wholesale's up, retail's stable. And so Pennsylvania's been solid for us. And then finally, to round it out, back to our hyper focus on M&A and everything we've been talking about M&A. So what would really help us is once we get some of these things done that we're alluding to, then that can take us to above the 50% mark that you were asking about.

Yeah, Andrew Ziad here. I just want to add earlier, Jason, Keith, and I were talking about our five-year anniversary coming here in June of entering the US. And we were talking and reflecting about our growth and some of the margins level that we accomplished in only five states. We are very excited about the next phase of our journey of our company and the growth that will take us to not only be one of the best companies from efficiency perspective, but also to improve that margin as we double in size and more. You know, I just want to mention from an Apex perspective, just by adding Maryland in July and launching adult use, while we grew revenue year over year by 16%, our absolute dollars and Apex only grew by 2%. And that is leveraging some of the fixed costs that we have as a public company. And that revenue that we will be bringing will allow us to reach that second level that we talked about and those margins both on the growth and EBITDA level.

That's great. Very helpful, Kolar. And also looking forward to some of those announcements that you're looking to make more progress. And maybe just a final question would just be on the wholesale outlook for the year ahead and the pace of that. It tends to be a little bit of a more lumpier segment. So just what are your thoughts in terms of how the pace of wholesale builds in New Jersey? And it sounds like you're expecting a larger bump in Q3 from Maryland with new cultivation capacity. How that state also continues to trend for the balance of the year?

Yeah, Andrew, it's a great question. Wholesale is really in our DNA. And it started four or five years ago in Pennsylvania. In my opinion, for wholesale to be productive and to be successful, there are two main steps that needs to be accomplished. And I'm very pleased to see that the team is really delivering on both those. Step number one is a ground game for selling, creating and entering new distribution points, creating that first order, showing why we should be on the shelf using data from our stores. And we've done a fantastic job accomplishing that first step. The second step is more important. That is the patient and the customer believing in this product when they buy it and coming back and becoming a loyal customer and patient for those products. For that to happen, you need quality. And we are very happy with our quality. Brand portfolio that is diverse, that attend to different segments in the states. You need ongoing innovation and being ahead of the industry on bringing that excitement and those innovations to the market in order to acquire new customers and retain the one that you have. And I'm very pleased with what the team has done on both those fronts.

That's great. Thank you. Your next question comes from the line of

Mike Rigan from Excel Short Equities. Your line is now open.

Okay. Thanks for taking the question. I guess in terms of potential acquisitions in Ohio, as you know, you've closed the Maryland acquisitions before adult use sales actually start. In Ohio, it seems like it's sort of a moving target, but it seems to potentially come forward closer to June. I guess, what are your thoughts on sort of closing those acquisitions before the sales actually start versus how you judge that versus maybe a lower price if it's a month or two later? How does that thought process go?

Yes. Hi. Thanks for the question. This is Jason. As we mentioned, or I think as I mentioned in the script, the state in Ohio seems to be moving faster, so we're moving faster. I mean, we're working with the same urgency that we did in Maryland to get three deals done in just two or three months before the adult use rollout on July 1st. I would say we are still running as hard as we can towards being in Ohio and having a deal signed by the time the program starts, and we're going to do our best to get it done. But we don't necessarily see that if we missed the start of the program by weeks or a couple months that it would materially change the type deals that we're looking at or the terms of the deals that we're negotiating.

Great. Then just to understand in terms of the integration of the verdict in Maryland of the stores to make them sort of more vertical, is that it's definitely a margin opportunity, but is that also a revenue opportunity as well, or is it more just expanding the margins to sort of integrate those with more verticality?

It's both. It's both. It's more of a margin play, but if we believe, and if you believe with us, with our thesis that our brand and our quality and our retention and acquisition of our customers will help and will win against others, then we will be able to grow revenue both because of that verticality in our stores and in the wholesale channel. So I see it as both, but mainly it's a gross margin play.

Got it. Okay, great. Thanks a lot.

Thanks, Mike.

Once again, as a reminder, if you have a question, please press star one on your telephone keypad. Your next question comes from the line of Eric Delorier from Craig Hallam. Your line is now open.

Great. Thank you for taking my questions. First one from me, it's on M&A here. So understood, you have this wide open map. Biggest focus on specific geographies, obviously Ohio, and profitability levels are also kind of front of mind when you're analyzing targets here. But wondering, are proprietary brands of potential targets also an important factor? And I guess just more broadly speaking, do you feel that your brand portfolio is fully built out? Do you see the need, for example, to have more value brands? Just kind of wondering, I guess, on both those fronts there, brand portfolio and M&A and how that's coming together. Thanks.

Yeah, Eric Ziad here. We see a direct correlation between the brand portfolio and M&A. Few examples here. One example around our own brand and another example about a partner brand. When it comes to our own brand, Gage in Michigan has a very strong brand equity. And Gage does pull from Ohio. So we see in a Midwest region, even beyond Ohio, that we will be successful adding brands like Gage Country to the new state and partnering with the new brands that the acquisition target has. Another example is our partnership with WANA. In my mind, it's a perfect marriage of an MSO and a brand because a real good partnership or a relationship is when it's dual, when it's both ways, when both players make one and one equal more than two. In this case, WANA had an established brand equity in Maryland. We were new in the market. We were able to leverage that brand to open the majority of the doors and start growing our wholesale business. The opposite happened in New Jersey where WANA was new to the New Jersey patients and customers and they leveraged our presence and our first mover advantage to gain market share. And we both went together. So it's a combination in adding the right mix of brands to have the right offering to the customers and the patients. And we are sticking with our strategy, which is a premium strategy and a value strategy that live together on

our shelf supported by the right partners.

That's helpful.

And I guess you kind of touched on it here with the strategy of barbell premium and value. Do you feel that your proprietary brands lean more towards the premium side than value? Are you happy with the balance that you have now? Do you prefer having this higher mix of proprietary brands on the premium side of things than on value? I'm just wondering how you view that overall tradeoff between premium and value with your proprietary brands versus third party.

Thanks. It's state by state and segment by segment and it's rural versus urban. And we look at it and we look at the data at different levels to make sure that we have it right. We don't pretend that we understand what the customer wants in each area, but we learn from the behavior. We learn from the average basket size. We learn from the loyal versus the super loyal versus the super super loyal. So we take all that learning, but yes, we are more convinced than ever that that mixture of premium and value brand is what's right for us. And we do skew higher for our premium brand and our specialty quality flowers that continue to deliver for us.

Right. And Eric, this is Jason. The only thing I would add to that also is even when you're talking about a brand's value, it's got to be consistent because there's lots of brands out there that are valued just because they're inconsistent. They don't care enough to put the best product in the bag that they possibly can. That's not what we're talking about here. We're talking about largely a lot of the way we're allowed to pass along a lot of that value is bigger package sizes, things like that. But the goal is also to be consistent in value all the way through, obviously, our skews that are more on the quality end.

Yeah, that's a great point, Jason. Those value brands are being produced in the same facilities that are indoor with consistent, repetitive quality. Right.

Right. Right. Oh, and just Eric, back to your question about, like, as we're looking at M&A, if we're focused on brands or if that weighs highly in sort of what we're looking at, I would say, at least as it relates to places like Ohio and some of these other new states, I feel like it's more about retail footprints and retail footprint that's going to be there day one for the start of rec. Those seem to be the stores that do the best even two years into a program or four or five years in are the ones that were open for day one. And we also, we want to do that from the perspective of stepping in and being one of the operators with large retail share, similar to what we did in Maryland with our four stores.

Makes a lot of sense to me. Appreciate the color. Thank you for taking my questions. Once again, if you have a question, please press star one on your telephone keypad. There are no further questions

at this time. I will now turn the call back to Mr. Wilde. Please continue.

Sure. Thank you so much to everybody for dialing in today. We can't wait to share the news of our next quarter on our next quarterly call. And hopefully we'll have some exciting news in between now and then. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.