Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Verano Holdings Corp. Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you, I will now turn the conference over to Julianna Paterra, Vice President of Investor Relations. You may begin.
Thank you, and good morning, everyone. Welcome to Verano's second quarter and 2023 earnings conference call. I am joined today by George Archos, Chief Executive Officer and Founder; Brett Summerer, Chief Financial Officer; Darren Weiss, President; and Aaron Miles, Chief Investment Officer. During this call, we will discuss our business outlook and make forward-looking statements within the meaning of applicable U.S. and Canadian securities laws, which based on management's current assumptions and expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, and achievements of the business or developments in the company's industry to differ materially from those implied by such forward-looking statements. Actual events or results could differ considerably due to risks and uncertainties mentioned in our filings on EDGAR and SEDAR, including our financial statements for the quarter ended June thirtieth, 2023.
In addition, throughout today's discussion, we will refer to non-GAAP financial measures that do not have any standardized meaning prescribed by GAAP. Management believes non-GAAP results are useful to enhance the understanding of the company's ongoing performance, but these are supplemental to and should not be considered in isolation from or as a substitute for GAAP financial measures. These non-GAAP measures are defined in our earnings press release and available on our website at investors.verano.com, which also includes the reconciliation of these measures to the most comparable GAAP financial measures. Lastly, all currency is in US dollars unless otherwise noted. George, please take it away.
Good morning, and thank you for joining our second quarter 2023 earnings call. Today marks another quarter of progress for Verano, in which we achieved record revenue, generating 3% sequential top-line growth and 31% adjusted EBITDA margin. Our results continued to exceed our internal expectations, which speaks to the strength of our strategy of positioning ourselves to capitalize on new adult use markets, designing and deploying a comprehensive brand and product innovation blueprint, and building the business to continue to deliver near and long-term value in the current environment. In light of the strong performance, I am proud to announce that we are raising the lower end of our 2023 free cash flow guidance to $65 million-$75 million, up from $50 million-$75 million. Today, I'll speak to the quarter in more detail before passing it to Brett for a review of the financials.
I'll then close by covering the many positive catalysts we see ahead, driving Verano forward. The second quarter was marked by relative pricing stability in retail and wholesale versus the first quarter. While some markets, such as Pennsylvania and Ohio, continued to experience some pressure, we were very pleased to see that on average, across our portfolio, prices seem to have mostly stabilized. As usual, we plan to continue avoiding irrational pricing strategies and will work to maintain responsible levels, which reflect a balance between appropriately responding to market dynamics to remain competitive and maintaining profitability. This story played out in Illinois across both retail and wholesale. Though wholesale revenue was down 10% year-over-year, our data shows that double-digit pricing contraction in the market outpaced this decline.
Although we made market adjustments to mitigate pricing misalignment, we were successful in avoiding the significant discounting that seemed to ripple across the state. Retail revenue was only down 7% year-over-year, despite the country count growth in the state, which by our measure, is up about 20% in 2023 alone. On the CPG side of the business, I am excited to report that we have been growing wholesale market share the last few months, which we believe reflects the success of our brand strategy. Looking at Florida, sales for the quarter were roughly flat year-over-year, we are pleased with these results as we have been able to stay out of the aggressive discount occurring in the state.
We will continue to sell products at prices which reflect the quality of our brands in conjunction with leveraging our tiered value offerings to broaden our reach and expand wallet share. We have maintained our market share of over 10% in the second quarter, measured by ounces sold, similar to that in the first quarter. Given that we are priced above the state average and the state only reports market share and volume, we believe our true market share in terms of revenue in the state is in fact much higher than 10%. Turning to Connecticut, its adult use market remains steady, with our Meriden location continuing to perform at about 2.5 times sales versus the prior year period. From a macro perspective, we estimate that our house of brands holds over 40% market share in the state.
We recently opened our first social equity joint venture location to adult use consumers in Norwich and look forward to opening our remaining five locations over the remainder of the year and beyond. Unfortunately, many states have launched programs that, although often well-intentioned, have made it extremely difficult for social equity entrepreneurs to create and maintain viable businesses by isolating them without access to capital. Connecticut's program, however, promotes social equity business by allowing companies like Verano to share our industry expertise and contribute financially in a space that is starved for capital. We commend the State of Connecticut for structuring social equity in a way that sets entrepreneurs up for success. Our business in Maryland is also performing well after seamlessly transitioning to its adult-use program on 1st July.
Initial results have been in line with our expectations, which we attribute to the advanced modeling capabilities we developed from our extensive operating experience and history transitioning medical to adult-use markets. So far, our dispensaries are posting a similar adult-use bump in top line to what we've seen in Connecticut, with retail sales trending slightly upwards each week. Still, in its early days, we'll be watching this new adult-use market closely as it matures. Moving to New Jersey, the market remains a strong performer, with our net wholesale revenue up nearly 50% in the second quarter versus the prior year period. Relatedly, according to BDSA, our overall market share remains strong at over 21%, the largest in the state, with our namesake Verano brand commanding the number one position as well.
We launched Savvy in the tail end of the quarter, which we believe contributed to our market share growth and speaks to the brand power within our strategically developed house of brands. This success in New Jersey is a fantastic example of our data-driven brand strategy in action. We thoughtfully evaluate consumer data and demand in order to develop and deploy new brands, launching in individual markets only once supported by the data. Last year, we launched our value tier in most markets while purposely delaying its launch in New Jersey as the premium brands continued to dominate. This spring, we began to see a slight change in consumer patterns in New Jersey. Anticipating that these market dynamics would continue, we proactively launched our value tier in June. We continue to value innovation and brand development and will work to serve consumer needs as preferences evolve.
Holistically, we leverage our sophisticated operations and advanced automation to remain ahead of the curve and enable rapid speed to market. Our operations continued to improve upon their best-in-class baseline. On the wholesale side, units per headcount increased 60% in the first half of 2023 versus the prior year period, and gram harvested per plant has increased 15% year to date. On the retail side, we've increased transactions per headcount by 26% in the first half of 2023 versus the prior year period. While we believe we have the top operations in the space, we maintain our ethos of continuous improvement, constantly searching for additional efficiencies. Now I will turn it over to Brett for a detailed review of the financials.
Thanks, George. This was another record quarter for Verano. As previously mentioned, the quarter exceeded our internal projections, largely due to price stabilization and continued strength from certain markets. Second quarter of 2023 revenue was $234 million, up 5% compared to the second quarter last year, driven primarily by strength in New Jersey and Connecticut, slightly offset by retail declines in Pennsylvania and Arizona. The quarterly revenue was up 3%, driven by increased wholesaling in New Jersey, in part due to Savvy's recent launch in the state. On a gross revenue basis, excluding our segment elimination, 68% was derived from the retail side of the business and 32% from the wholesale business. Gross profit for the quarter was $115 million, or 49% of revenue.
On an adjusted basis, generally excluding depreciation, amortization, and stock-based compensation, this was 58%, just slightly above the prior quarter, with increased vertical mix and reduced cultivation costs, plus its packaging, offsetting increased discounting and eight days of inventory reduction. We continue to expect adjusted gross margin, exclusive of inventory movement, to remain around 50%. Our vertical mix, or Verano sell-through, remained high at 47% for the quarter, excluding Florida, Arkansas, and Michigan, as we do not wholesale in those markets. We anticipate our vertical mix remaining in the mid to high 40s. SG&A expenses were $85 million for the quarter, or 36% of revenue. On an adjusted basis, generally excluding depreciation, amortization, and stock-based compensation, this was 28% of revenue, about 2% higher versus the prior quarter due to bonus timing.
On an adjusted basis versus the prior year, this is an improvement of 2% due to the right sizing of our staffing levels. As communicated in previous quarters, we continue to expect adjusted SG&A to remain in the 26%-28% range for the foreseeable future. We had a net loss for the quarter of $13 million and adjusted EBITDA of $72 million, or 31% of revenue. Turning to the balance sheet and cash flows, we ended the quarter with $103 million in cash and cash equivalents. The acquisition consideration payable balance is nearly eliminated, with only $2 million outstanding after paying down over $12 million in the quarter. Cash flow from operations for the quarter was $24 million, even while decreasing our income tax payable balance to $227 million.
This marks our 10th quarter in a row of positive operating cash flow and third consecutive quarter of positive free cash flow. After spending $8 million in CapEx this quarter, we generated $16 million of free cash in the second quarter alone. Looking ahead for CapEx, we still anticipate spending between $35 million-$50 million for the year. In addition, given we continue to meet or exceed our internal expectations for free cash flow after generating $24 million in the first 6 months, and that we now have visibility into Maryland's adult-use impact, we are confident in our raised free cash flow guidance of $65 million-$75 million. This will be the largest free cash flow for the industry in 2023 and reiterates the strength of our balance sheet relative to our peers.
We look forward to providing future updates on our progress for free cash flow. For now, I'll pass it back to George.
Thank you, Brett. Turning our attention to legislative developments, while a potential SAFE passage seems to be at the forefront of the headlines, we have many tangible wins that give Verano and the industry reasons to celebrate. So far this year, Connecticut, New Jersey, and Illinois have decoupled the heavy 280E tax burden at the state level. This is a major victory, given New Jersey and Illinois are within our top three retail revenue contributors. Those two states, along with Connecticut, serve as our top three wholesale revenue contributors. Our groundwork at the state level has had tremendous success as we ensure we have a seat at the table in providing a firsthand perspective to legislators regarding the cannabis industry. Our team will continue their hard work, and we are hopeful for further legislative and regulatory progress in states that have not yet followed suit.
Shifting to the Southeast region, in June, we were notified that Verano was to be awarded one of the five coveted vertical licenses for Alabama's new medical program. This license would allow us to operate a cultivation and processing facility, along with five retail dispensaries. After the state's commission discovered some inconsistencies in the tabulation, an independent third party was hired to review the scoring. Given that we had the top score by a comfortable margin above the other winners, we still expect to be among the five operators granted a vertical license. We hope to share an update on the Alabama license later this month. Regarding M&A, while we continue to evaluate many opportunities, we remain extremely selective, particularly on valuation. As it stands today, we are biding our time as valuations continue to decline in the private market.
In the meantime, we are happy with our portfolio and remain in no rush to make changes, but we'll continue to explore synergistic fits. In D.C., we are pleased to see these conversations continuing. We are actively involved with the ATACH organization and hold a board seat on the U.S. Cannabis Council, both of which coordinate lobbying efforts at an industry level. With a rescheduling or descheduling decision still on the horizon, we will continue our involvement at the federal level to help push progress forward. We ultimately anticipate that some form of federal action will create large changes for the industry, including the possibility of an uplifting to U.S. exchanges. We have been emphasizing this for quarters, but bears repeating. We want to be prepared for any opportunities that benefit our shareholders. Our registration statements filed in the U.S. and Canada both recently became effective.
Though we are not currently conducting an operate, this provides us with greater efficiency in connecting with any compelling momentum or opportunities in the future. Despite uncertainties surrounding legislative outcomes, we remain focused on scaling the business and developing our people. We prioritize promoting from within, building a robust infrastructure to ensure stability and continuity. We announced a slew of executive promotions in June, which highlights the deep bench of talent we developed over the years and further positions us for the next stage of growth. Relatedly, we recently announced two additions to our board. We welcomed John Tipton, President of the Southern Region of Verano, and Charles Mueller, an independent director who brings deep tax experience from his over 36 years of experience at PepsiCo. We are thrilled to have their expertise on the board.
Lastly, with $24 million of free cash flow generated to date in 2023, we were progressing nicely towards our updated free cash flow guidance of $55 million-$75 million. While margins are still core to our business, our focus has evolved to emphasize free cash flow. We anticipate delivering the strongest free cash flow in the industry in 2023, given current industry guidance, and all while managing our balance sheet and obligations appropriately. We have so much possibility ahead of us, and I believe this is only the tip of the iceberg of what we will accomplish. We have laid the right groundwork and have set the stage to take advantage of further progress and new opportunities. We see a long, long way of growth and are excited about continuing to execute on our strategy. Operator, please open the lines for questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, press Star and then the number One on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We will take our first question from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning. Thank you for the questions, congrats on the strong quarter. First question for me, just want to talk a little bit more specifically about the driver of you raising the lower end of the free cash flow guidance. You talked about pricing being better than you had expected, with some stabilization, you also avoided some of the discounting. Was that really the primary reason why you have to raise the lower end? Just could you clarify whether or not any of the added state 280E's, did that have an impact on this year and have an impact of you also raising the lower end of the free cash flow guidance? Just an incremental color on what gave you the confidence to raise the lower end would be helpful. Thank you.
Sure. It's a combination of factors. I think the first and foremost is, you know, we, we put together projections for the beginning of the year, and so far, we delivered in our against our internal projections at or above where we what we had expected. That gives us confidence in our long-term outlook for free cash this year. That, that's kind of the biggest driver. If you think about the different components, it absolutely helps that, you know, New Jersey and Illinois had their 280E roll back. It's not a huge driver of of our, our guidance, but it is, it is one of the factors.
I think the other real reason that we have this free cash flow and the strength that we have is, you know, as we've been talking about for the last few quarters, we're working on our inventory. We've been very successful in delivering the inventory reductions we've been talking about. That's also given us confidence in our ability to deliver the free cash number this year.
Okay, great. Thank you. I appreciate that. Second question for me, just wanted to turn specifically to Florida. I, I know that's one, George, where you've always, you know, stayed away from some of the promotional activity that, that a lot of the players do participate in the marketplace. Just curious now, just what's your take in terms of whether or not that's gonna maintain or, or worsen through the remainder of the year and even potentially into 2024? Would there be, be anything that might make you change your stance, or, or are you comfortable maintaining kind of the position you've had in terms of staying away from the promotional activity and just kind of going more so on the quality and, and, and higher price points there? Thank you.
Hey, good morning, Aaron. Thanks for the question. I mean, for us, it's status quo. We're gonna continue to look at everything across our business, every single state, including Florida, we'll make decisions accordingly. For us, staying out of the discounting game has been very important to our success, and we'll probably continue to do so. That being said, holidays are coming up. We might take an opportunity to do something there for our patients and consumers in Florida, other than that, it's business as usual.
All right, great. Thanks very much for the questions, and I'll jump back in the queue.
Thank you.
We will take our next question from Scott Fortune with Roth MKM. Your line is open.
Yeah, good morning, and congrats on, on the cash flow there. Real quick, just want to follow up on the inventory levels, you know, you know, improving cost efficiencies and overall, that's helping the margins here. Where are you, where are you at the inventories levels? I, I know you wanted to get down to 90 days. Just kind of step us through on your, your inventory kind of management here to maintain the, the gross margins at, at these current levels, kind of looking forward here.
Sure. Initially, when we were looking at targeting inventory, we were coming in around that 90-day mark from an internal perspective. However, I think last quarter we talked about, you know, it's more of a range of in the 90-100. You know, this quarter, we got to 109 days, and I think that's-- I'm actually pretty comfortable with where that is. We're still gonna do some things, you know, incremental improvements, that sort of thing, but I think all the big moves are out of there. And I think, you know, being right around 100 is probably the right level for our company, at least for now, and we kind of see where everything falls out, especially when you think about, you know, we have the Maryland AU and, and whatnot.
We don't want to be too restrictive in, in what we're doing in terms of managing that inventory. But yeah, again, it's been very good for us. I think the, the big wins from a cash perspective have been put on our balance sheet at this point. There's some probably stuff in the noise, but I think we're pretty, pretty good where we are, and I think we can deliver our cash flow without any incremental significant reductions in inventory.
Appreciate that color there. Thanks. Then just kind of a follow-up update on New Jersey, kind of how you guys are viewing the store cadence there, to provide you with more wholesale, wholesale opportunities. Are you starting to see any pricing pressure in New Jersey? I, I know you just heard just the value side of things, but just kind of a little more color on New Jersey, holding the prices there and the margins in New Jersey, with potential new wholesaling opportunities coming on board. Just the cadence there, that'd be helpful. Thanks.
Good morning, Scott Fortune, this is George Archos. New Jersey has been fairly stable. We're excited about the new stores coming online. They've been in various areas throughout the state. We're continuing to wholesale there. Our wholesale business is very strong, and we feel it's going to be viable for many years to come. We don't see many actionable cultivation facilities coming online in the state. We've been one of the top wholesalers there, and I think that's going to continue.
Great. Thanks for the color.
We will take our next question from Chad Brandell with Needham & Company. Your line is open.
Thanks. Good morning. Just wanted to touch on the free cash flow guidance again. Is the range you provided contingent upon using deferred tax payments as a source of cash in the back half of the year? Or do you think that the updated range is achievable while further paying down that tax balance like we saw in, in the first half?
Yeah, absolutely. First of all, I'd like to point out our, our current tax balance due is $227 million relative to prior quarters. It's down about $20 million bucks. You know, we were in the $240 range kind of towards the end, or $250 range, towards the end of the year last year, and we've continued to pay that down a little bit more aggressively than we have in the past, although we're not, you know, going beyond our, you know, current guidance of about 18 months, plus, give or take.
All of the free cash flow that we've been talking about, to date includes the payment of, you know, the full 2021 tax burden that we have, and follows the guidance again, that we have in, in the, for the, for the 18 months. To answer your question, yes, we plan to deliver that without anything unnatural in, in taxes, and we still plan to pay plenty of taxes between the end of the year without destroying our free cash.
Great. Thank you. Just, just to follow up on the inventory, can you quantify the inventory reduction impact on gross margin in the quarter? Then, I, I know you, you said you're sort of switching that target to, to 100 days, up, up from the 90, but can you maybe talk about how you think that impact will look in the remainder of 2023?
Sure. In the quarter, we did about $9 million worth of inventory reduction. If we didn't have that in, our gross margin would be, you know, in that 34%-36%, 35%, I guess, 35% range. I'm sorry, EBITDA margin would be 35%, then our gross margin would be, what? 63%, I think. That, that's where it would be. I apologize, what was your second question?
Just how that impact looks in the remainder of the year on gross margin-
Got it.
... as you approach that 100-day target.
Yep. Again, I think, you know, we have been targeting. I, I think the key initiatives that we took to get to, you know, what we had laid out originally as a target have kind of been behind this. I do think there's some, again, movement around the median, but there's not any big, you know, any big major lifts or anything around the, around that, that we have ahead of us. With the adult use in Maryland and whatnot, we might even see some lifts in inventory. To answer your question, I don't expect inventory to be a huge driver of our profitability for the, the next six months. At least there's not a current plan for it.
You'll see $2 million here and there, but we're not expecting to see, you know, like the $9 million we saw this quarter, or the $8 million we saw last quarter.
Great. Thank you.
Yep.
We will take our next question from Russell Stanley with Beacon Securities. Your line is open.
Good morning, and thanks for taking my questions. Just on the decoupling from 280E, just wondering if you can provide any, any granularity or any color as to, or quantify the impact of those three markets on cash flow on an annualized basis? Just a rough idea as to how much of a benefit you're seeing there, and maybe secondarily, you know, what other markets that you see that could follow the same path.
Sure. I mean, you know, your guess is as good as mine in terms of the markets that follow the same path, although we're seeing the same news articles, et cetera, so we'll just have to see how those things play out. In terms of the amount of, you know, impact to our cash flow and to our balance sheet, you know, if you think about the reduction, as I mentioned before, we're down from about $250 to about $225. You know, the state portion is a, is a healthy portion, but not all of that, and you. That's essentially a direct result of the 280E rollbacks that we saw in Illinois and New Jersey. Yeah, it's, it's high single-digit, low double-digit sort of savings.
Great. Thanks on that, and just a follow-up on Illinois. Just wondering what your latest view is. We're now into August, just curious as to how many stores you think you might exit the year with in terms of, you know, supporting more doors for your wholesale business there?
Hey, good morning, Russ. We'll see. I mean, they continue to open up slowly but surely, maybe the end of the year, around 20, 20 stores or so.
That's great. Thanks for the color. I'll get back in the queue.
Thank you.
Thank you.
We will take our next question from Andrew Semple with Echelon Capital Markets. Your line is open.
Good morning, and congrats on the quarter. First question here would be on the early days of the Maryland adult-use market. Just, would like to get your sense of how supply conditions are in the state. First of all, at your own stores, whether you're keeping those well-stocked and, and have ample capacity for wholesale, and whether you're seeing good availability of third-party brands where, where you decide to bring those into your store?
Yeah. I would just say our, our initial reactions to the, the Maryland market are actually very, very, very much in line with what we had internally projected. You know, we've probably given some, well, we have given some color in the past on how, what we thought about that market versus other ones, such as New Jersey. We did think it would be a little bit less of an impact and played out the way we expected, but still very, very favorable. We're very happy that we're there. Sorry.
Yeah, supply to our stores has been very good. Vertical integration there is a key component to our business. We continue wholesaling to all parties within that state. It's been a legacy state for us, so it's been a very nice lift, and we're excited for Maryland. It's been a very strong market for us for many, many years, and seeing this switch over to AU has been great. We also recently just moved our Towson store, which has been a much better location, doing extremely well for us, so very good launch for the mid-year.
Great, glad to hear. My follow-up question would just be on the operating costs. You, you managed to keep that fairly flat for several quarters, but we did see that increase in Q2. Was there anything maybe a little bit more temporary in there, first of all, and second of all, are you seeing any sort of impact of the inflationary pressures and tight labor market on the operating expenses? Just, you know, wondering how we should be thinking about this moving forward.
Yeah. We did have a couple one-time items in this quarter. When you look at last, this quarter versus last quarter, the, the, bonuses that we had for the company, are on a larger base with higher merits, obviously, as a, as a result of our merit and also our bonus payout in the first quarter was below, you know, target, what we had, laid out last year. The combination of those two factors is why we have this kind of step up. I'd say it's the majority of the step up quarter-over-quarter.
In terms of the outlook, you know, I do think the guidance that we've provided in the past, somewhere between 26% and 28%, on an adjusted basis, is, is still where we plan to come in. There's no major reasons why we don't expect that to continue.
Great. That's all for me. Thank you for taking my questions.
Thank you.
As a reminder, it is star one if you would like to ask a question, and we will take our next question from Yewon Kang with Canaccord Genuity. Your line is open.
Hi, this is Yewon Kang for Matt Bottomley. Thanks for the question. I just wanted to touch on Maryland just a little bit. I know, it's been only about a month since they launched their adult-use program, and you guys obviously penetrated the market on day one of launch with four incumbent medical dispensaries that you guys had. I guess, could you comment on the initial demand levels seen at those stores on the retail level and any kind of ramp-up that's been present within the past few weeks?
Sure. From an initial day-over-day, week-over-week sort of launch, when we saw the adult use, you know, we had a really, really good outstanding result, and we saw a lot of people coming in and driving up our sales. We don't obviously talk about what we expect over time, you know, we did see it cool off a little bit after the first couple of days, which always happens. We're pretty consistent. We're happy with where it's kinda going in. Right now it's about a, about a 2.5 times lift that we're seeing out there in the market.
Great, thanks. Just to follow up on that, I just wanted to touch on Pennsylvania as well. I know the competition on the retail level has been fierce for some time now within that market, but, I guess, are you guys seeing any signs of price stabilization in the market there? What do you think needs to happen in Pennsylvania in order for growth to be resumed in that, in that state?
We're seeing, you know, prices, pricing pressure continuing to fall off and everywhere in the country, including Pennsylvania. Actually, our sales in Pennsylvania are continuing to flat to up. It's because of our products and our unique position in the market. We're happy with Pennsylvania. Obviously, it'd be better if the prices were higher, but it's not, it's not unique in that regard. It's just more visible, I think, than certain other ones, just because of the history that it has.
Great. Thank you.
We also have a number of items in there, so we're pretty excited about Pennsylvania. We have great store locations. We can continue to open in prime areas. Our wholesale business is strong there. We think that AU happens within the next two years, which will be extremely exciting, not only for our company, but for others. We have a very positive outlook for PA.
Great. Thank you.
Thank you.
We will take our next question from Frederico Gomes with ATB Capital Markets. Your line is open.
Hi, good morning. Thank you for, for taking my, my questions. First question is just on, on the amount of free cash flow you expect to generate this year, just considering debt. I'm just curious how you look at, you know, capital location and the different options you have, you know, be it investing for growth, you know, reducing debt, or even, even buybacks at, at this point in that context. Thank you.
Sure. You know, we, we always look at everything. Whenever we have excess cash, we look at the best return for that cash in any given base, any given day, and on any given basis. You know, the way we think about it, generally, we do look at M&A transactions. We have a number of things are always in the, you know, in the, on the burner there and looking at different things. Obviously, cash is king in that regard, so we want to make sure we have a little bit of a war chest. Obviously, we have a good opportunity ahead of us to pay down either our taxes or our debt with Chicago Atlantic.
Both of those carry a double-digit interest rate, and we're happy to reduce some of that, even though we're great friends with Chicago Atlantic. Then I think, you know, we, we do have optionality in terms of, you know, stock buybacks, that sort of thing, but it's just another one of those things we have to look at what's the return overall for all investors, and is, is that the right decision in the long term? Again, everything, all options are on the table.
Thank you. Then on, on, on your production efficiency, so you mentioned some data about, you know, cultivation costs being lowered, and you, you continue to get that in your footprint. I'm curious if you expect that sort of same pace of gains to continue through the year. You know, are there any low-hanging fruits here in specific markets you might be working on in terms of lowering your cultivation costs and how that might, you know, offset price compression in some of those markets? Thank you.
Sure. I, I think we're, it's, it's hard to see right now because of the inventory movements, but our, our gross margins are actually steadily improving quarter over quarter over quarter, so we're pretty happy with where we are, and I think the trajectory is fine. We have made some key, major decisions in terms of reducing, our footprint, you know, certain closures and/or reductions in, in capacity, just to make sure that we're matching our, output to the level of the market demand. You know, nothing major still on the radar. It's just more about, you know, continuing to, to tighten the screws as we go forward.
Thank you. I'll back to you.
Thank you.
Ladies and gentlemen, we have no further questions at this time, so I will now turn the call back to Mr. George Archos for closing remarks.
Thank you, everyone, for joining, and we'll see you next quarter. Have a great day.
Thank you.
Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.