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Edited Transcript of TER.CD earnings conference call or presentation 20-Aug-20 12:30pm GMT

Q2 2020 Terrascend Corp Earnings Call

Aug 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Terrascend Corp earnings conference call or presentation Thursday, August 20, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Ackerman

TerrAscend Corp. - Executive Chairman & CEO

* Keith Stauffer

TerrAscend Corp. - CFO

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Conference Call Participants

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* Andrew Partheniou

Stifel GMP Research - Analyst

* Chris Damas

BCMI Research - Principal & Analyst

* Eric Des Lauriers

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Kenric Saen Tyghe

ATB Capital Markets Inc., Research Division - MD of Consumer & Retail and Analyst

* Noel John Atkinson

Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation

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Presentation

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Operator [1]

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Good morning, everyone. Welcome to TerrAscend's Second Quarter 2020 Conference Call for the 3-month period ending June 30, 2020. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to TerrAscend's future financial or business performance.

Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect the results are detailed in TerrAscend's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR database.

I'd like to remind everyone that this call is being recorded today, Thursday, August 20, 2020.

And I would like to introduce Mr. Jason Ackerman, Chief Executive Officer of TerrAscend. Please go ahead, sir.

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [2]

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Thank you. Good morning, everyone, and thanks for joining us today. With me, we also have Jason Wild, our Chairman; and Keith Stauffer, our Chief Financial Officer. I'd like to take a few minutes this morning to review our strategic priorities and some of our recent successes, and then Keith will go over our financials. And afterwards, we look forward to taking any questions.

As we announced during our Investor Day earlier this month, we generated $47.2 million in sales for the second quarter, which represents an increase of 36% sequentially. I'm also proud that we are again reporting positive EBITDA adjusted at $11.4 million or a 24% EBITDA margin. This represents $6.5 million quarter-over-quarter increase in adjusted EBITDA and $12 million increase in sales. And this really demonstrates our focus on growing sales, expanding our margins while controlling our overhead costs.

I'm also very happy to report that we generated our first quarter of positive cash flow from operations of $10.4 million. This is a testament to our model of continuing to scale our investments and bearing fruit as we have put a lot of work into scaling our business. It's also a testament to the quality and talent of our entire team. And I can't emphasize enough how proud I am. We've worked really hard to get the right people in the right seats with a common set of core values, and the team is really working well together.

Our U.S. operations represents the single greatest growth opportunity for our business. And in the quarter, they accounted for approximately 90% of our revenue for the third consecutive quarter. We've developed a solid [feet hold] in the United States by investing in high-growth, limited license states, which enable us to go deep and build scale. We are focused on vertical integration to ensure we build an efficient organization that can produce strong margins and reduced reliance at retail and third-party products whenever possible.

Geographically, our current areas of focus are Eastern and Western hubs located Pennsylvania, New Jersey and in California. We will continue though to look for opportunities to expand in other East Coast states. Moving over to our Pennsylvania operations. As you know, earlier this year, we completed the tripling of our Ilera cultivation facility capacity and have already begun to see the benefits of that expansion drive our sales in the current quarter. We expect to see a continuation of this growth in sales and profitability throughout the rest of the year as we have now finished and have planted the additional capacity of 25%, which will be coming to market in the fourth quarter.

We also have opened our second and third Apothecarium dispensaries in Pennsylvania, 1 in Lancaster in April and the other one in Thorndale in early July, and both are doing great. I was also excited to hear that the latest data report from PA Department of Health early this week, which indicated that the retail market for cannabis in the state of PA is now approaching $1 billion in annual run rate on the latest 5 months of sales.

And there's been a lot of debate in the size. It's good to see that number come up from the state because there's really incredible strength in the marketplace. And given that strong growth in demand, we expect a continuation of the overall stability and pricing of our margins.

Moving over to New Jersey. We are in the process of building out our cultivation facilities. Subsequent to quarter end, we did announce that we received approval from the New Jersey DOH to commence cultivation at our New Jersey facility, making our 37,000 square foot greenhouse, the first approved for medical cannabis in the state. Currently, we began planting of this facility and expect the first harvest to occur during the end of the fourth quarter of this year. We are also under construction of a larger indoor growing processing facility as part of our Phase II plan, which will be completed in the fourth quarter this year. This will be fully operationally in market in the first quarter of next year.

In addition, if we look at the overall plan for New Jersey, we do have the ability to build up to 240,000 square feet on the existing New Jersey property. So overall, we feel really good about our ability to take advantage of the strong growth opportunity that the State of New Jersey represents.

We plan to open up our first Apothecarium-branded New Jersey dispensary in the fourth quarter with an expectation that 2 additional sites will come online during the first and second quarter of next year. I also remain optimistic but cautiously optimistic regarding the potential rec ballot in November for New Jersey. We know that there is popular support for it. And if the bill passes, we are -- we -- being an existing operator in the state, this should enable us to quickly capitalize on the expected strong demand.

New Jersey also allows for a very strong full range of products in the marketplace, actually more extensive than Pennsylvania, which doesn't allow edibles and pre-rolls. So I'm really excited about the extensive product line. We will be coming to market in New Jersey. And when you look inside our business, one of the great strengths of our team is the quality and speed of our product development and innovation. They do an amazing job.

Moving over to California. We are focused on driving organic growth in the northern region, where we opened an additional location in Berkeley in quarter 3, bringing our total dispensary footprint in the state to 4. We have another location on our development in Capitola, which we plan to open in the fourth quarter. Our West Coast team has been very successful in applying for licensing, winning and opening up stores in really great locations, and we expect that to continue.

We have also recently completed the expansion of our California State Flower cultivation facility as well as our Valhalla-branded gummies and chocolate manufacturing facility, which enables further integration of our West Coast operations, which will drive stronger margin over time. We expect the State Flower cultivation expansion to hit the market in the fourth quarter. And given the really outstanding unique high-quality of the product, it's really off the charts. We expect to continue receiving a price premium in the marketplace. In addition, we will be rolling out our Valhalla-branded edibles into our New Jersey market in the first quarter and in the Canadian market in the fourth quarter.

Since our last call, we have continued to see strong demand across our business in total, despite the current pandemic. And I would like to reiterate that all of our facilities and dispensaries have implemented strict protocols to protect the health of our employees, customers and patients during these trying times. We have also introduced drive-through and curbside pickup option at selected retail locations across -- and across the company, online revenue at our retail locations since the beginning of the year is up 4x.

And it is really clear that online ordering and delivery will be a very important part of the industry's futures. Customers will expect us to be there at every touch point of their choice in a consistent, intelligent and seamless way. Some of you may know that I spent the last 20 years building a very scaled Internet and delivery business myself, and I'm really excited about our future path to build a world-class omnichannel personalized retail experience for our customers.

During the second quarter, we closed on our oversubscribed $37 million private placements, which has positioned us with a strong balance sheet to complete our investments in our U.S. operations, which are propelling the growth in our business. Some of these planned initiatives include the completion of construction of our New Jersey facilities and continue to expand our retail footprints in New Jersey, California.

I continue to focus on building a world-class management team, and I'm very excited to have recently announced Jason Marks as our new Chief Legal Officer. Jason has more than 2 decades of legal experience and over a decade of global experience with deep experience in the life science industry, and we're thrilled to have him join our team. He's got a really unique perspective, and he's a real rock star.

In closing, I am really excited about the second half of the year and expect to see demand to be strong across all of our businesses.

I would now like to talk -- to turn over to Keith, who will discuss our financial highlights for the quarter, and then we'll open it up to questions. Take it away, Keith.

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Keith Stauffer, TerrAscend Corp. - CFO [3]

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Thanks, Jason. Good morning, everyone. As a reminder, the results I'll be going over this morning can be found in our financial statements and MD&A and are all in Canadian dollars. We finished another very strong quarter financially with continued robust growth in net sales, while also significantly improving profitability and gaining scale and operating leverage. Net sales increased 169% to $47.2 million in Q2 versus year ago and 36% versus Q1. This strong growth was driven by our U.S. business, which delivered $42.5 million in revenue, representing about almost 90% of our total consolidated net revenue. And reflecting TerrAscend's continued focus as a leading U.S. MSO with depth in highly attractive states.

The increase in U.S. revenue was driven by a full quarter's realization of the expansion of our Pennsylvania cultivation capacity as well as by the opening of our new retail store in Pennsylvania that Jason highlighted. Gross margin before gain on fair value of biological assets was 56% compared to 9% in Q2 of last year and 45% in Q1. This improvement in gross margin is the result of the shift to higher-margin revenue opportunities, particularly in our high-margin business of Pennsylvania, as well as the ongoing initiatives we have taken to optimize our Canadian operations to the current market opportunity.

Operating expenses for the quarter were $15.7 million, representing 33% of net sales as compared to 42% of net sales in Q1 and 65% of net sales in Q2 of last year. This significant improvement reflects the strong operating leverage and tight cost control that we're driving across the company. With that being said, we do expect to continue to strategically invest in acquiring the talent and developing the appropriate infrastructure and capabilities that we deem necessary to ensure continued growth, and we will do this in a very disciplined manner. Adjusted EBITDA for the quarter was $11.4 million compared to negative $8.6 million in Q2 of last year and a positive $4.9 million last quarter. Adjusted EBITDA margins expanded significantly from 14% in Q1 to 24% in Q2 as a result of the strong gross margin expansion and operating leverage on SG&A expenses.

Cash flow from operations in the quarter was a positive $10.4 million, the first quarter of operating cash flow positive for the company as compared to negative $22 million in Q2 of last year, and negative $1.3 million in Q1 of 2020. We continue to invest CapEx dollars to build out our existing footprint in the high-growth markets of Pennsylvania and New Jersey. We spent approximately $14 million of CapEx in Q2, mainly related to those build-outs, but also partially related to our retail footprint build-outs that we've mentioned. We expect the peak of this CapEx spending to ramp down by the end of Q3 as we substantially complete these projects. We ended the quarter with $75 million in cash and equivalents, including restricted cash compared to $17 million as of June 30 last year. As Jason noted, in Q2, we announced a $30 million non-broker private placement, which was oversubscribed and subsequently upsized and closed at $37 million. Importantly, we anticipate that the cash that we currently have on hand will be sufficient to fund our current operating needs through the end of the year.

And finally, I'd like to outline our financial guidance for the remainder of the year. Driven by our investments in Pennsylvania, additional cultivation expansion and ramping up of our new retail locations in Pennsylvania, California and New Jersey, we anticipate full year net sales of at least $192 million and adjusted EBITDA of at least $45 million. We also expect to see continued improvements to gross margin, operating leverage on SG&A expenses and expanded EBITDA margins. We expect the phasing profile of the second half to be more weighted towards Q4, mainly driven by the additional cultivation expansion in PA, which is expected to begin to translate to revenue in Q4. We also expect to continue to generate positive cash flow from operations through the back half of this year.

So to close, we're incredibly proud of the results achieved once again in Q2, and we're excited about our plans for continued robust growth in the second half of this year.

I'd now like to ask the operator to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And your first question will be from Kenric Tyghe at ATB Capital markets.

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Kenric Saen Tyghe, ATB Capital Markets Inc., Research Division - MD of Consumer & Retail and Analyst [2]

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Just quickly if I could follow-up, Keith, on the commentary with respect to the outlook. Obviously, a $45 million-plus guide on EBITDA. That's a further increase versus consensus and a nice to have. You've outlined a broad number of initiatives that sort of give you that conviction and support that outlook. But how much of that, if you would have to waste it, really is driven off just how strong Pennsylvania is? And it goes to Jason's comments with respect to the sizing of that market, market opportunity, perhaps being even bigger than you thought it was or would be as recently as a couple of weeks here. Could you walk us through that? I mean, it's a nice problem to have, but just better understanding sort of the biggest of the drivers there and the sensitivities to those drivers for that $45 million plus in EBITDA for the year?

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Keith Stauffer, TerrAscend Corp. - CFO [3]

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Yes, sure. Sure. So yes, I mean, it's definitely largely driven by Pennsylvania. We're seeing very robust growth. We have our 25% expansion that's coming online, as we mentioned in Q4. And so that's going to drive a lot of additional revenue. And as we've indicated in the past, that business is highly profitable. So to a large degree, the EBITDA that we're mentioning is driven by Pennsylvania, and it's also driven by growth in our retail stores that we're opening as well. So those are the key drivers through the back half of the year.

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Kenric Saen Tyghe, ATB Capital Markets Inc., Research Division - MD of Consumer & Retail and Analyst [4]

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Right. I appreciate that. And then, Jason, I'm going to switch to you for a second. Just on Pennsylvania, I guess it's a 2-part question. One being the increase in capacity into that market, both yours and a number of your competitors had a number of people hosing earlier this year in terms of concerns around that supply-demand balance and how supply-constrained, could or would the market remain with the additional capacity being brought on. Could you sort of speak to that dynamic?

And then the second question or the second part would be in terms of competitive intensity, I mean, one of the -- one of your major public competitors obviously recently just closed on the acquisition of the largest private player in Pennsylvania. Could you speak to how or if that changes the competitive intensity for you? Does it require you to sort of perhaps be rethinking how you go to works in Pennsylvania? Or is it really a little bit of carry on with respect to what they can do in the short to medium-term? Or how confident you are in what you're doing?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [5]

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Yes, sure. Yes. So we've always been saying that what we see at a retail level in our customers that Pennsylvania just continues to outpace all expectations at a demand level. So which is why we've had the conviction to continue to expand the operation because we have full confidence that the market can absorb the additional capacity even as additional competitors are coming on.

And as you recall, I believe there's now roughly 80 to 90 dispensaries open in the state. The state has 150-plus license. So we still have quite a runway of additional stores coming online to enhance and continue to grow retail demand. So with that amount of dispensaries coming online over the course of the next 12 to 18 months, we think that -- and with a strong just natural growth in patient counts because the patient counts continue to accelerate. A combination of that, we believe that the market really still can't sustain the increased capacity from us and all of our competitors. So we're fairly bullish that the overall supply-demand balance will sustain itself for a bit of time. So we have a pretty good confidence on that.

In terms of competition, I'd say that I spent most of my life just saying to my team that we just have to be the best in the marketplace, and we're super focused on our customers and understanding what they like and what they don't like and continuously innovating products. And so our approach to the marketplace has really been simple. With our retail partners, we are always going to be there on time. We're never going to miss a delivery. We're always going to -- we're never going to short our customers, and we're going to meet or beat their expectations. And with respect to the quality of the product, the team is just relentless on making sure that we're making the best products we can. We're constantly innovating on a regular basis. So in terms of stepping up the competition, we're going to judge ourselves against ourselves. And the continuous improvement is embedded in our DNA.

We do look at competitive sets to bring it in, but I really have tremendous confidence that we, as an organization, will continue to up our game on a regular basis as a matter, of course. So I feel good about that, and that also gives me confidence in our ability to compete in New Jersey, which, as you know, is roughly the same set of partners and competitors in that marketplace as well. So yes, we feel -- we still feel very good.

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Kenric Saen Tyghe, ATB Capital Markets Inc., Research Division - MD of Consumer & Retail and Analyst [6]

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That's great. Great. You gave some great color. So 1 final quick one for me before I get back in the queue. Form factor evolution, is there -- how would you think about the form factor evolution? Is there a chance that we do see and could see edibles and the like in Pennsylvania ahead of a rec-use initiative? Or do you think that Pennsylvania is unlikely to have any further form factor evolution ahead of a potential rec or adult-use legalization? How should we think about that?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [7]

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Yes. Well, we're not betting on it right now, and I'm not particularly familiar. We are anticipating that rec is a decent probability to come up as a big conversation. So us and a number of players in the industry are coming together to try to have influence on the states and make sure that's a healthy program. But right now, we're not betting on it, but the fact that New Jersey is pretty wide open on those products is really exciting. For us, it just represents an even bigger consumption opportunity. But right now, we're not planning in our plans that, that is going to come to market yet for Pennsylvania.

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Operator [8]

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Next question will be from Eric Des Lauriers at Craig-Hallum Capital Group.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Congrats on a great quarter, great execution. Good to see the operating leverage flowing through. I'd like to focus on M&A. You guys have made clear you'd like to operate in hubs. So somewhere near Pennsylvania or New Jersey, clearly on the radar for you guys. Could you give us any color around maybe timing of M&A or any other insight into the kind of business you'd like to buy? Does it need to be cash flow positive? Is that really where you're looking? Does it need to be EBITDA positive? Do you prefer a more mature business or maybe even buying undeveloped licenses? Any additional color around M&A as it relates to timing of operations would be really helpful, I think.

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [10]

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Yes. Eric, obviously, as you can expect, since we have nothing to announce, I can't make a comment on the timing. What I would say is that we are actively looking. We have an extraordinarily talented team in the Ilera group that is -- that has the capability to take on multiple states. We've added a lot of great talent that we're super excited to have. So I believe our capacity to run additional states is there. With respect to what we're looking for, it's always a combination of not just what you're buying, but what you think you can do with the asset. We've said over and over again that we believe that scale and size is going to matter over time. And that's -- we're going to look for opportunities where we think we will be able to achieve a certain level of scale to have extraordinarily high rates of returns in the marketplace that we operate. And as things may or may not get more competitive over time that we will be the low-cost operator and quality operator in the state. So we're pretty disciplined about that. So when we think about acquisitions, we're going to stick to that and have a view that we can be a meaningful player in wherever we go.

So that's our criteria. And if we don't believe that we can accomplish that, we won't go into a state.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Okay. That's helpful. That's a good segue into my second question. You mentioned great talent you have on the Ilera team. What do you think has really enabled you guys and the Ilera team to achieve that #1 market share in Pennsylvania and such great margins? Is it really just kind of getting there with the scale before everyone else? Is it the focus on great products? Is the focus on low-cost? Can you just kind of give us some insight into what makes the Ilera team so special? And why do you have confidence in places like New Jersey? Or just as you expand with the Ilera team into additional markets, what gives you the confidence and what should investors feel confident in that we can get similarly impressive operations as you expand beyond Pennsylvania?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [12]

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Yes. Well, look, you -- we all know that businesses are nothing more than their people and what they're capable of doing. So -- and I've run teams for over 20 years as the CEO. And it really, really makes a difference, the difference between an A player and a B player. It could be 10x the quality with the right people in the right seats. So what gives me confidence and why are we doing well, I'll go back. It's just the people. I think you heard from Greg at the last meeting. Greg is a great innovator. But excuse my French, he's (foreign language). And he really runs a very tight -- we don't care how big our margins are, he runs a very tight ship. And one of the great things about the team, not only are very cost-conscious and financially conscious, but they also have a great edge with respect to customer and product innovation. I've had the opportunity to spend a lot of time with the team, and I will just tell you flat out, and I've run a merchandising organization for a lot of time -- long time and product innovation is something I know really well. And just the passion of the team to constantly improve and to make great ideas and the number of ideas are coming out. I just know what a good CPG activity looks like.

And having been in grocery, one of the most competitive things, we carried 15,000 products. We manufactured 1,000 of our own products. I know what it looks like. And they're good. And the question is why focus on A players, common set of values. So the team works well together. Be really, really focused on organizing what matters to the customers and just be relentless. And that's what the team does. And so -- and I know all the talent and they're just great. Now as I say, and not just a focus. We've got great talent across the whole organization. While we're setting our focus on Ilera, there's talent all over the country. But yes, they're just great. And I think as you know, from my perspective, you'll hear me talk all the time that talent, talent, talent core values. And we just focus on making sure that every seat is still with the right people.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Great. That's helpful. Well, it certainly has shown so far and looking forward to what else you have on the table.

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Operator [14]

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Next question will be from Glenn Mattson at Ladenburg Thalmann.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [15]

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Sorry. Can you hear me now? Hello?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [16]

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Yes.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [17]

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Okay. So trying to begin to look out into 2020 a little bit. I realize New Jersey is quite a wild card, so leaving that aside for a minute. I want to just kind of think about California and Pennsylvania. So first off, in Pennsylvania, obviously, it's been a great historical growth rate, and you're coming into the next year with a full head of steam given the capacity expansions. But can you just talk to some of the data or the underlying statistics that gives you confidence that the growth rate can continue? I mean it's at a $1 billion run rate now, becoming a little bit of a more mature market. But maybe what you're seeing as far as like how many new doctors are available to write scripts? Or where the demand for the patient count is growing and coming from? So maybe just a little bit more color there on Pennsylvania would be great.

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [18]

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Yes. So I think if you look at the patient counts, it's in the high 300-plus, which I believe is a 60% growth rate in patient counts. And if you look at the nature of the market, and reality is it's really becoming a rec state within a medical context. In terms of the growth of the patient counts, the average age of the patients over the last year has dropped about 10 years. So we're really seeing rec-based users gain cards. And so what -- again, what I'll say about the state, if you look at really strong patient growth, the ability to get cards for a wide range of reasons is very strong. You have retail access. You look at the state, very successful at building out 80-plus stores. And again, we always look at very simple things, which is supply and demand, demand being -- we know that on a per capita basis, Pennsylvania is a very robust state, but continually opening up stores closer and closer to the entire population and where they live in the close drive is just allowing that access.

And again, if you look at the 80-plus dispensaries going up to 150, there is still a lot of room for growth and continuing to create access closer and closer to people's homes for the dispensaries. So those facts with the patient grows, we just have confidence. And you can feel it in the business too, just you can see the robust growth month after month in the dispensaries with more and more customers and new customers coming to the marketplace.

So all that is just giving us continued confidence that there's -- the headwinds, the tailwinds are really there, and we feel that they're there for a period of time. And remember, rec is -- hasn't come yet, but we do believe when New Jersey turns as a neighboring state, that will put some pressure that will further increase the opportunity on top of the great med market that it is.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [19]

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Great. And then in California, maybe can we talk about the market there given the COVID shutdowns and things? And then as far as the new store in Berkeley, I believe the school is starting out virtual in the fall. So what your expectations are there? And then maybe just kind of like how -- assuming that things get back to normal, say, in early 2021, what you could think about as far as what that asset base can do next year?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [20]

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Yes. So you are correct. California, Northern California has had, across our system, the most meaningful impact overall with COVID being in the city. You're correct, Berkeley is virtual. So it's a bit of a -- I'd say, it will be a slower start for that store coming out given that the population isn't there, but it's important for us to get into market and get our brand known in the Berkeley marketplace as our first kind of moving across the day. So if you think about our plan, we've got 5 stores that will be open by the end of this year. We have our expansion of our manufacturing. We have our State Flower operation coming on, and we expect that between the gummies and the flower that will represent a very strong percentage of our shelf will be our own products. Where -- and you've heard me say, our intention is not to be a large wholesaler in that marketplace, given the competitive nature, but to continue to grow our retail sales base and which will leverage more vertical integration for our own shelf in order for us to optimize the profitability in our marketplace.

So when we think about California, it's not going to be as large as the East Coast operations, but the intention is a very slow methodical growth, and increasing our profitability by making sure we're more vertical. And that will allow us to have above-average industry margins by ensuring that we've got our own production. And we're going to stay in Northern California for now to keep focus on scale.

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Operator [21]

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Next question will be from Andrew Partheniou at Stifel GMP.

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Andrew Partheniou, Stifel GMP Research - Analyst [22]

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Congrats on the strong guidance here. Maybe just to follow on that. One of the qualifiers I think you guys mentioned on the guidance is that it could be at least $192 million in sales and at least $45 million in EBITDA. Just wondering what necessarily would it take in order for you guys to beat your own guidance?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [23]

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Keith, do you want to take that?

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Keith Stauffer, TerrAscend Corp. - CFO [24]

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Yes, sure. So Andrew, it's really -- so we don't want to get ahead of ourselves. So we're being cautious in terms of run rates on retail stores, for example. And while they're ramping, and we see them ramping week-to-week and month-to-month, we don't project forward. So if retail stores continue to do better across the network, that could help us. So that's one key driver.

And also, we have a new store opening in Q4, as we talked about in New Jersey. So that's kind of a key variable that is difficult to predict exactly the opening there. We just talked about Berkeley. It's difficult to predict. So there are some unknowns out there that we're cautious about. And if things all turn in the right direction, we could have some upside, but we were just careful about how we wanted to guide with all of that.

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Operator [25]

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Next question will be from Noel Atkinson at Clarus Securities.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [26]

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I just have a few questions here. So just following on some of these other questions. On New Jersey, so your first dispensary opens Q4. Have you sourced supply? Do you have supply in place to be able to stop the shelves in Q4 from third parties? And also, will you have some product from your own facilities in your store at opening?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [27]

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Yes. Great question, Noel. As you know, supply is very tight in New Jersey. And so we -- part of kind of opening in the middle of the fourth quarter was really to make sure that we did have supply for that store. So it's not going to be the most robust opening. We do and have and believe we'll have some products from third parties available for us. And then we hope to quickly have, by the end of the quarter, our own products for the first time in marketplace. So yes, we do plan to have a combination of both.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [28]

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Great. And as you said on your Investor Day, the Pennsylvania market continues to grow robustly and you -- TerrAscend's done an incredible job, sort of keeping up with demand there and growing. So what do you see in terms of potential for further revenue expansion in Pennsylvania in '21? Now that you've done this 25% expansion, can you buy additional retail stores? What's the plan for '21 there?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [29]

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Yes. So as you do know, 15 licenses is the liable amount, and we currently have 3. We have nothing to announce, but we do have a desire to continue to look at how to get up to that 15 over time. So that is definitely on our radar. And obviously, we were very bullish on the continuation and particularly if rec becomes a reality in that state. So we are exploring and looking at ways to increase capacity even further. Nothing to announce and nothing I could say today. But given just how robust the market is, we will definitely continue to think through how we can create even more capacity. But at the moment, we have nothing to announce. So nothing we could say on that.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [30]

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Are you able to acquire another production licensee in Pennsylvania?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [31]

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No. We are -- right now, the limitation is one grow license per [license or] at the moment. But we do have a lot of land and so we'll see what we can accomplish.

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Noel John Atkinson, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [32]

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Okay. And then finally, sorry, I might have missed this part on the CapEx, Keith, what's the outlook for the CapEx spend for the second half of 2020?

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Keith Stauffer, TerrAscend Corp. - CFO [33]

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Noel, we're not giving specific numbers, but I would just to, I guess, reinforce my prepared remarks, like I mentioned, we spent $14 million approximately in Q2. It's more or less a similar number in Q3 as we complete mainly the build-out in New Jersey, and then it significantly subsides from there, clearly not down to 0 because there's always going to be CapEx spend. But in Q4, it will be a much less significant number. So that's kind of the shape of things. And we're still building out a couple of our stores. So we have some money behind Capitola, some money behind the finalization in Pennsylvania. And that's kind of the picture on CapEx.

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Operator [34]

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And your final question is from Chris Damas at BCMI Research.

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Chris Damas, BCMI Research - Principal & Analyst [35]

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We often see the adult-use legalization dilutes medical, limited license valuations. How do you expect the New Jersey adult-use licenses to be distributed, especially with social equity sort of thing going on? And do you expect much out-of-state business, especially New York?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [36]

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Yes. 2 good questions. So on the rec bill, it is our belief that as an existing vertically-integrated medical provider that the rec bill will provide for an immediate conversion to rec license unlike mass that has had some known challenges on that conversion. We haven't received any indication that would suggest that we wouldn't be able to easily move. And as you -- and given the retail landscape, we are also focused on any property that we move into has approval in advance for both med and rec. So that as we think about the right locations, we don't run into any challenges around that transition.

So we feel actually pretty confident on that move hand-in-hand moving right to rec across our business.

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Chris Damas, BCMI Research - Principal & Analyst [37]

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Yeah, great. How many dispensaries are there licensed in New Jersey at the moment, please?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [38]

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Well, there are 12 large vertical integrated license that have been issued for in each region, I believe. And each group has the right to open three. So there's 36, I believe, and I could be wrong. So you have to -- excuse me, if I'm quoting slightly off, of which 1/3 of it is open and they're coming online. So that gives you that count. There were a serious 2 dozen or so licenses that were planned on being issued as non verticals. Now as you probably recall, we're caught up in these recent losses that occurred regarding the application process, and there were some issues. And so we anticipate that by the end of this year, as we hope that those will be released, which could add another 20 or 30 into the market as non vertical. And I do believe that once rec is announced, there will be a series of license applications as well for dispensaries. I think I've heard loosely that the state has a desire for 75 to 100 locations as the amount that I've heard discussed without any official announcement. So that's kind of our expectation of where over the next 12 to 24 months, the number of licenses will be issued for the state for retail.

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Chris Damas, BCMI Research - Principal & Analyst [39]

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Do you expect a lot of New Yorkers to me across the tunnel and buy in Hoboken. I mean is there going to be (inaudible) traffic?

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [40]

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A lot of New Yorkers buy our food across the New Jersey at places, so that wouldn't be uncommon. I can't tell you which are the right locations. But yes, definitely. I mean, look, you've got med in New York. We all know that because they don't have flower in the New York Med program. Flower drives traffic and without the flower, nobody really engages as heavily, though there are some successes. So yes, I do anticipate for sure.

And even we've got a Phillipsburg location, which is on the border of Pennsylvania, so if that goes rec, we think that there's a lot of population in the Penn side that might come over as well. So definitely, for sure. And we're really focused on the towns that are commuting into New York as well in terms of in the north where our stores will be positioned.

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Chris Damas, BCMI Research - Principal & Analyst [41]

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Are those Penn stores on the border vulnerable at all to people just saying, I'm going to go over to New Jersey, if I can't get a script? You say it's rec.

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [42]

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And not now, but I do believe in New Jersey, I can only speak to the 1 location where we have in Phillipsburg, which is on the border. There's quite a large population in Pennsylvania on the other side. And so if New Jersey goes rec before Pennsylvania, I'm suggesting there just might be a further opportunity for that store to pull people from Pennsylvania prior to them going rec, but we'll see.

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Operator [43]

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Thank you. At this time, I would like to turn the call back over to Jason Ackerman for closing comments.

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Jason Ackerman, TerrAscend Corp. - Executive Chairman & CEO [44]

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Great. So I want to thank everyone for joining the call today. And most importantly, I want to thank the entire TerrAscend team. Really proud of you guys. It's been great working with everyone. Everyone is killing it, and these results are a reflection of all your hard work. So thank you, everybody. And we look forward to speaking to you again. Have a great day. Thank you.

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Operator [45]

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Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.