Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to TerrAscend's Q1 2023 earnings call. Joining us for today's call is Jason Wild, Executive Chairman, Ziad Ghannam, 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, the company's guidance for fiscal year 2023, and estimates and assumptions relating thereto, and the company's expectations regarding its market opportunities, its listing on the Toronto Stock Exchange and other financial and operational matters. Each forward-looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
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 appears under the heading Risk Factors in the company's Form 10-K files with the Securities and Exchange Commission or the SEC and other periodic filings, which are available at www.sec.gov and on our website at www.terrascend.com.
The forward-looking statements in this call speak only as of today's date, and we undertake no obligation to update or revise any of these statements. Also, during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our investor relations site or on the SEC website. I would now like to introduce Mr. Please go ahead, Mr. Wild.
Good afternoon, everyone, and thank you for joining us. Today, we reported our sixth consecutive quarter of sequential revenue growth, generating $69.4 million for the Q1 of 2023, an increase of 43% year-over-year. We achieved this growth despite the typical seasonality we see Q4 to Q1, as well as the ongoing macroeconomic and cannabis industry challenges.
This achievement is a result of the dedicated focus on our strategy, strength of our business model, and the operational and balance sheet measures we took in 2022. Most notably, gross margin significantly improved sequentially by 420 basis points during the Q1 to 48.8%. We also achieved our third consecutive quarter of positive cash flow from operations, delivering $8.4 million for the quarter.
What I'm most excited about is that we were free cash flow positive for the quarter, having generated $5.9 million, which contributed to an increase in cash and cash equivalents from $26 million as of December 31st to $33 million as of March 31st. Not many in our industry can point to consistent financial progress like this in such a challenging environment.
We have delivered on what we said we would do for the last several quarters by controlling what we can control and navigating the rest. This steady financial progress lends itself well to our plans to list on the TSX, and we are on track to complete all of the steps required to do so. Our annual shareholder meeting is scheduled for June 22nd, where shareholders will be able to vote on the reorganization required for our proposed listing.
Assuming this is approved by our shareholders and the TSX grants approval for the listing, we should be in a position to commence trading shortly thereafter. We believe the TSX listing will provide the company greater access to a broader group of institutional and retail investors looking for attractive opportunities in the U.S. cannabis space.
This broader appeal should provide increased trading volume and a considerable advantage during M&A discussions. In several ongoing discussions, we are seeing sellers more willing to accept TerrAscend stock as consideration and assign a greater value to our shares once listed on a major exchange. Just to be clear, we don't look at the TSX listing as a magic bullet. The capital markets have clearly been unkind to the cannabis space over the last two years.
We do believe, however, that a well-run cash flow positive company can unlock substantially more value and significantly lower its cost of capital if listed on a major exchange with more participants. This is, in my view, not only a great opportunity for TerrAscend, but also for other players in the industry as our successful listing could blaze the trails for others to follow.
When we think about the trajectory of the company over the coming years, we see robust organic growth driven by our attractive lineup of states converting to adult use. We see abundant M&A opportunities given our deep, not wide strategy. This strategy has served to drive revenue and profitability through a more focused number of markets with the ability to go deeper, while also leaving an open map to enter new markets at the right price.
As I mentioned during our year-end conference call in March, we continue to see an increasing number of attractive opportunities in our pipeline. These opportunities range in type across the entire spectrum with private and public companies, single state and multi-state operators, as well as single and multiple sets of dispensaries within specific states.
We are definitely still in a buyer's market with distressed operators looking for a lifeline. Disciplined in our approach. I often say that the best way to get good M&A deals done is to not need to do any M&A. Given our runway, we feel like we are well-positioned in this regard. Lastly, to comment quickly on the ebbs and flows of the regulatory environment. Recently, a standalone SAFE Banking bill was introduced in both the House and the Senate. Initial indications point to support from both parties.
While we will continue to operate as we have been, assuming no regulatory reform, any progress on this front would be a major catalyst for the industry. In conclusion, we continued to make substantial progress in Q1 across virtually all facets of our business. We grew revenue sequentially for the sixth consecutive quarter and 43% year-over-year.
We significantly expanded our gross margins and generated positive free cash flow, which led to increasing cash on our balance sheet. These achievements are all after having materially lowered our debt and interest expense in the back half of 2022. Looking ahead, our organic growth runway is attractive, and we have ample M&A opportunities in our pipeline. Before I turn the call over to Ziad to review our operations in more detail, I wanted to congratulate him on his recent promotion to Chief Executive Officer.
I wanna personally thank him for all he has already achieved with TerrAscend, and I know I speak for our entire team when I say that I am excited to see all of his future contributions to our growth and success. Now, I'll turn the call over to Ziad to provide an update on our key markets. Ziad?
Thank you, Jason. I really appreciate those kind words. I share your excitement regarding everything we have achieved in the last few quarters and what is in store for us in 2023 and beyond. I will now walk through our operations state by state. New Jersey continues to be a strong market for us at retail and wholesale, where we hold a top three market share position.
Our already strong margins continued to improve in Q1 through various initiatives, including optimization of product mix and balancing retail versus wholesale revenue, combined with sequential revenue growth and a further reduction in our cost of goods. The most recent BDSA data ranks us as top three operator in the state, where we are over-indexing in key product categories, including flower, vapes, and concentrates.
In pre-roll, we gained 4 points of market share in the quarter. We expect to drive material market share gains in edible with the expected launch of Wana, which takes place tomorrow. We remain on schedule and on budget for further expansion at our Boonton cultivation facility, which will enable us to extend our supply to this growing market in early 2024.
Turning to Maryland, Q1 sales nearly tripled sequentially, although off of a low base, mainly due to revenue contribution from our retail dispensary and the first harvest at our new state-of-the-art Hagerstown facility during the quarter.
I'd like to add that while it usually takes a while to dial in the quality at a new cultivation facility, we have been extremely pleased with the quality of these early harvests as we are seeing yield per square foot, bud-to-trim ratio, the THC potency at levels comparable to our facilities in other states which have been operational for much longer.
Now that we have absorbed the full cycle of harvesting, margins in Maryland for Q1 improved materially, and we expect that they will continue to expand as we ramp up our volume and move to adult use in July. We have been gearing up for this Maryland launch, as we did in New Jersey, strategically building inventory to ensure we have the capacity and resources to meet the expected demand surge.
As you may recall, in late January, we closed on our AMND dispensary acquisition, which contributed to revenue in February and March. The acquisition was phase 1 of our vertical integration efforts in Maryland. AMND is a 10,000 sq ft, high-performing medical dispensary that currently generates approximately $8 million in annualized sales, which is 2 times the state average per dispensary.
We are very excited for its future prospects as an adult use dispensary due to its unique geographical positioning at the border of West Virginia and Pennsylvania, both currently medical-only states. M&A in Maryland is a top priority for us. We remain focused on adding 3 additional dispensaries to get to the 4-cap limit. Our strategy of entering with cultivation and manufacturing first, with a plan towards picking up retail as we get closer to adult use, is working out very well.
The pipeline of dispensary operators with a desire to sell increased substantially given the 5-year transfer restriction contained in the new adult use bill. We are actively in discussions with a number of excellent prospects and look forward to sharing developments on this front very soon. We are also prepared for adult use launch from a branding perspective with a broad portfolio of high-quality products and winning brands such as Kind Tree, Gage, Cookies, and Wana.
When adult use is implemented in Maryland, we will be more than ready to capitalize on the opportunity. We have built a strong foundation to both support this launch and ensure our long-term success in the state. Let's move to Pennsylvania, which as I mentioned on our last call, is a sleeping giant with current medical market size of more than $1.2 billion.
Right now, the regulatory path towards adult use continue to progress, although we expect we will have more clarity on timing in the next few months. In the meantime, we will continue to minimize expenses and optimize efficiency of our existing operation. For the Q1, both retail and wholesale revenue were stable sequentially.
As we've stated previously, we are already fully built out at our large-scale cultivation and manufacturing facility with plans in place to bring on currently unused capacity as needed in response to adult use implementation. Turning now to Michigan, we continue to execute on our plan to drive further market share gains and profitability in the state. Revenue quarter-over-quarter was stable, even taking into account the expected Q4 to Q1 seasonality.
Our brand strategy has proven to be very effective in this market, demonstrated by the significant premium to the average price in the state. With the recent opening of Lemonnade Center Line, we now have an 18-store retail footprint in Michigan. We also completed a soft opening of our 19th store in Oxford with a grand opening scheduled for this Saturday.
While revenue remains stable, gross margins expanded materially versus Q4, reflecting the actions we have taken to optimize our operations and reduce costs. During the quarter, we increased the mix of TerrAscend's brands versus third-party brands at our dispensaries. With our now fully operational extraction lab poised to add additional form factors and a broader array of products in the coming months, we are confident in our path to positive EBITDA during the H2 of 2023.
While we see a healthy pipeline of M&A opportunities to add to our retail store count of 19 in Michigan, we remain very disciplined while focusing on margin expansion and profitability of our existing operations. Last but not least, in Canada, we announced recently that we increased our ownership of our Cookies retail store to 95%. This will enable us to focus more on our retail business in Canada and have better control of our own destiny.
In closing, Q1 was a very successful quarter for us. We are pleased with the sixth consecutive quarter of sequential revenue growth and our third consecutive quarter of positive cash flow from operations that we have achieved. We're even prouder that both the operational and balance sheet measures that we took in 2022 continue to result in improvements to gross margin, EBITDA, cash flow from operations, and free cash flow.
With our exceptional team, high-quality products and brands, an improved balance sheet, an exciting lineup of states, and best-in-class institutional sponsorship, I am more confident than ever in our ability to grow profitably, both organically and through M&A. I would like now to turn the call over to Keith to provide a financial update.
Thanks, Ziad. Good afternoon, everyone. The results that I'll be going over today have already been filed on both SEDAR and EDGAR. All results that I will reference today are stated in U.S. dollars. Net sales for the Q1 totaled $69.4 million, compared to $69.0 million for the Q4 of 2022, and $48.6 million during the same period last year, representing positive growth sequentially and 43% growth year-over-year.
Retail revenue for the quarter was $55.4 million versus $57.2 million in the previous quarter, representing a 3% sequential decline, which we expected due to seasonality. Retail revenue was flat sequentially in Pennsylvania, down low single digits in New Jersey, Michigan, and California, all due to expected seasonality, and up in Maryland, driven by 2 months of sales related to the acquisition of AMMD.
Retail growth was 115% year-over-year, driven by the acquisitions of Gage and Pinnacle in Michigan and AMMD in Maryland, as well as the launch of adult use sales in New Jersey in April of last year. Wholesale revenue was $14 million in Q1 versus $12 million in Q4, representing a 17% increase sequentially, driven by growth in New Jersey and the expansion of our branded wholesale business in Michigan.
Wholesale revenue declined 41% year-over-year, driven by the discontinuation of bulk wholesale in Michigan after Q1 of last year and a decline in our wholesale business in Pennsylvania as a result of further verticalization in the state.
Gross margin for the Q1 of 2023 was 48.8% compared to 44.6% in the Q4 of 2022, representing a 420 basis point improvement quarter-over-quarter. This impressive sequential improvement was driven by increased yields, optimization of mix, and better utilization of capacity in New Jersey, Michigan, and Maryland. General and administrative expenses for the Q1 of 2023, excluding stock-based compensation and depreciation and amortization, were $26.0 million compared to $33.6 million in the Q4.
G&A expenses, excluding $1.9 million of one-time items primarily related to SOX implementation and legal settlements in the Q1 and excluding $9.9 million of one-time items primarily related to bad debt expense as previously disclosed in the Q4, were $24.1 million or 34.7% of revenue and $23.7 million or 34.3% of revenue respectively.
This modest increase in G&A expenses, excluding these one-time items, was primarily driven by the acquisition of AMMD in Maryland. Stock-based compensation expense for the quarter was $1.7 million compared to $1.6 million in the Q4. GAAP net loss from continuing operations in the Q1 was $19.2 million compared to a net loss of $2 million in the Q4 of 2022.
The increase in net loss of $17 million quarter-over-quarter primarily relates to $21 million in reversal of goodwill and intangible impairments in the Q4 of 2022 related to the finalization of the purchase accounting for the Gage acquisition. Adjusted EBITDA from continuing operations for the Q1 of 2023, a non-GAAP measure, was $12.2 million, representing a 17.6% margin compared to $12.2 million and a 17.7% margin in the Q4 of 2022.
Turning to the balance sheet, cash and cash equivalents were $32.9 million as of March 31, 2023 compared to $26.2 million as of December 31. Cash provided by operations was $8.4 million for the Q1 compared to $7.3 million in the previous quarter.
This quarter-over-quarter increase in cash flow from operations was driven by lower interest payments, partially offset by an increase in inventory in Maryland related to the scale up of our Hagerstown facility and preparations for adult use in the state beginning on July 1.
It is important to note that while we did not make a tax payment during the quarter, if we had made a payment equivalent to what was accrued related to the current quarter, we would have still generated positive cash flow from operations. CapEx spending was $2.5 million in the Q1, primarily relating to store openings in Michigan that Ziad outlined earlier. Free cash flow for the quarter was $5.9 million.
This was the Q1 that we generated positive free cash flow since the Q1 of 2021, indicating the progress that we have made and the momentum that we have gained in our business. During the quarter, we received $12.8 million related to a factoring with recourse agreement for Employee Retention Credit, for which we applied in the Q4 of 2022.
We also closed on the acquisition of AMMD in late January for all cash consideration of $9.6 million. Looking ahead to Q2, we expect to deliver our seventh consecutive quarter of sequential revenue growth, with revenue and Adjusted EBITDA growing in the low single digits.
We anticipate this sequential growth will be driven by favorable Q2 seasonality along with additional growth in the Northeast, including ramped up output at our Maryland facility and the benefit from a full quarter of retail sales at our newly acquired AMMD dispensary. We also expect growth in Michigan from our two recent store openings and continued progress with branded wholesale. In Q3, we are excited about a further pickup in growth rate largely by Maryland adult use beginning on July 1 .
To summarize, we continue to make solid progress on executing on our strategic growth plans despite a challenging operating environment. This includes achieving sequential sales growth, improving our gross margin, and realizing SG&A leverage. At the same time, we remain focused on driving efficiencies and managing costs to drive positive cash flow from operations.
Our existing footprint is fully built out, thereby enabling cash flow from operations to mostly convert to free cash flow. Complementing this, we continue to proactively strengthen our balance sheet, reduce debt and interest expense while improving our capital structure. With our ample access to capital and our well-positioned lineup of states, we are in a solid position to support our continued growth.
We are also well-placed to capitalize on the growing number of attractive opportunities in our M&A pipeline from distressed buyers with attractive assets in geographies where we either have existing operations or are complementary to our current facilities. Our position here can only be strengthened by a listing on the TSX within a short number of weeks, subject to shareholder vote and TSX approval.
We look forward to providing updates on this expected listing, as well as additional updates on our progress in all areas of our business during the rest of 2023. This concludes our prepared remarks. I'd now like to turn it over to the operator.
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Andrew Partheniou with Stifel. Please go ahead.
Hi. Good evening. Thanks for taking my questions. Maybe we can start with Maryland. You discussed adding maybe three more stores there and an increased seller interest. Should we expect some movement here on acquisitions before the July 1 launch? If not, maybe you can talk about just the timing for those acquisitions and as well, maybe the timing of the announcements versus closings, you know, to manage expectations given the regulator may have their hands full with launching rec.
Sure. Hi, Andrew. The answer to your first question is yes. I believe it was, do we expect to have any deals signed and closed by the start of rec on July 1 . We do. We expect to hopefully have multiple deals signed and closed by July 1 . We are currently, we currently have multiple term sheets or LOIs that are signed, and we hope to be able to start announcing the signing of the definitive docs in the coming weeks.
Thanks for that. Maybe switching gears to New Jersey, if you could talk a little bit about how the market is trending overall? Are you seeing any kind of slowing in growth, either from Q4 to Q1 or Q1 to Q2? Just wondering how that market is performing, given that it seems that stores are a little bit slow to open. You know, maybe you could talk a little bit about your expectations for new stores to add, wholesale opportunities and accelerate market growth there?
Yeah, Andrew, this is Zia. Thanks for the question. Currently, there's a total of 38 stores operating in New Jersey. 26 are adult use stores. We're also watching very closely all the conditional licenses that are being granted. We are prepared for more stores to come in. As more stores come online, we see that opportunity for our wholesale.
Our wholesale team in New Jersey have done an outstanding job staying in touch and assisting newcomers that are coming into the market, and they are being backed by our quality and our SKUs that are performing very well in the state. We do see that opportunity in wholesale. You are right, those new stores are coming in slower than anywhere else, and we all understand the reason, and that is the way the capital market is behaving.
We've seen a growth in our wholesale due to some of those openings, and we will be ready at the beginning of 2024 with the expansion of our Boonton facility to welcome more retail stores that come online. As far as how the market is behaving, the market growth is still outpacing the growth of retail doors and definitely any cultivation.
We are not seeing any major cultivation coming online. You know, 12 months into the program in New Jersey. We look at the combination of revenue and gross margin, and they are stronger than what they started, especially on the gross margin part. We will continue to observe, New Jersey continues to be a very strong market for us, and we continue to be as excited as we've always been.
Thanks for that. I'll get back in the queue.
Thanks, Andrew.
Your next question comes from Eric DesLauriers with Craig-Hallum Capital. Please go ahead.
Great. Thank you for taking my questions. First, I'm just wondering if you could comment on which markets you see room to expand margins via cost cuts. You know, obviously there's some, you know, increasing demand coming in markets like Maryland, but I guess specifically on the cost side, I'm wondering sort of where you see room to continue improving margins. Thanks.
Yeah. Hi, Eric. I'll take that and Ziad can chime in. We see plenty of room really across all states to continue. I mean, maybe it's important to clarify cost cuts, but also we're really focused on yield improvements as well and making a lot of headway there.
The two kind of go hand in hand. As we've kind of built out the team and our capabilities and have a team that really looks end to end across our facilities, we're really starting to realize the benefits of that new approach. Again, I wouldn't really signal out one in particular because we're really seeing it across the board and seeing further room for improvement.
We track that very closely, as you might imagine, and we continue to see whether it's in New Jersey, whether it's in Michigan. I'll leave PA out because PA is a little bit of a different story where we've kind of scaled back and that one is very specific, and Maryland's a start-up. It's really kind of New Jersey and Michigan in particular, where we have the kind of ongoing operations. Yeah, I'll stop there. Ziad, anything to add to that?
Yeah. Hi, Eric. You know, I'll say this with a lot of humility, but with a lot of excitement. When we look at our company and we look at the lineup of the states that we have, and I'm going to break them down one by one and quickly, we don't have concerns for 2023 in a humbling industry that can send curveballs anytime. When we look at our states, we like New Jersey a lot, and we don't see any threat in there, and it's performing extremely well. In 2023, for us, kind of turning the page from a strategy perspective, and we're thinking about 2024. When I think of Maryland, the story is pretty clear.
We're prepared for Maryland, we're excited about Maryland, and we see a huge opportunity for us for four quarters to come and more. We look at Michigan and Pennsylvania, and we could say that we kind of reached the bottom. The price has stabilized. Costs continue to improve for us, and we see an opportunity on the margin line. Really we like the lineup of the state and we feel pretty good about the margin in each one of them.
All right. That's very helpful. I appreciate that color. Next question from me. Could you just comment on some of the liabilities coming due in Q2, how to think about, you know, tax payments throughout the year, and then maybe also comment on, you know, potentially how you're thinking about cash components of any M&A that you guys might do. Thank you.
Sure. Eric, I'll take that one as well to start, and then Ziad can chime in maybe piece by piece. We do have a couple of items we're really focused on in particular. One is the $35 million of debt reduction that we're committed to and remain committed to. We have a number of activities that are underway related to that, and there'll be more news to come as the time is appropriate on that piece. That's a significant event for us to continue on the path that we're on to reducing our debt, optimizing or reducing our interest expense. That we're super focused on that part. On the tax part, I mean, that's going to be timing related.
We're gonna continue to follow an approach there where we, and Jason can jump in here as well. We're really, really, I'll say disciplined about not taking money too soon just to be comfortable on the balance sheet and incur the extremely exorbitant cost that entails. We kind of think of tax the same way, where we understand that there's interest and penalties that could be incurred over time, and we're willing to just think through that strategically and time our payments when they're most appropriate. The third piece of it is for M&A, and this is where maybe, Jason, you could jump in.
Like some of the deals that we have in the pipeline that, like Jason alluded to, we're very far along on, come with very minimal cash components, like literally like 10% or less of the consideration being cash. It's that kind of market out there. Whether it's kind of a favorable mix of deal consideration. Jason, you wanna add anything to that?
Yeah. No, I think you hit the points there, Keith. There is, like we've discussed in Maryland, it is definitely a buyer's market. There does not seem to be a whole lot of competitive tension, from the, you know, from multiple buyers at the assets that we're looking at. The sellers are willing to do structured deals that are, you know, very advantageous. I mean, I think they're win-wins for both sides because these sellers generally don't wanna be stuck holding on to these dispensaries for the new five-year hold period.
You know, that's set up a situation for us that we feel like we're gonna be able to go out and acquire, you know, up to the 4 dispensary cap, at extremely attractive valuations, extremely attractive structures. Then, you know, H2 of the year, you know, we're looking at some substantial run rate revenue from those hopefully closed deals.
Awesome. That was very helpful. Thank you.
Thanks, Eric.
Your next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Yeah. Good evening, everyone. Thanks for taking these questions. Just on the TSX up listing plan, I'm just curious if you have any indication when it comes to some of the custodial issues that have been plaguing the sector when it comes to, you know, the MSO trades. Obviously, it would be a nice little uptick in volumes, I'm sure, when it comes to trading on a major exchange.
I'm curious if you've had any indication from maybe retail platforms that get a lot of direct investment from retailers, even if they're, you know, your stock is trading on the TSX. Do you have any indication if some of those platforms would still allow your security to be traded by retail investors? Or have those discussions? Is it too preliminary for those discussions to have occurred?
Yeah, I would say it's probably a little too preliminary to get granular in terms of that we think that sort of this segment of investors. You know, we sort of split it up into Canadian institutional investors, Canadian retail investors, European institutional and retail investors, then U.S. institutional and retail investors. We think that being on the TSX should definitely open us up to the Canadian and European institutional and individual, you know, retail investors. As it relates to the U.S. investors, we're not quite sure.
I mean, we've got, you know, we believe that there is a good chance that many of these custodians will allow customers to hold a TSX-listed operator like us, even if they were not willing to custody, you know, our current stock as it's, you know, as it's on the CSE or on the bulletin board to the U.S. We don't know. You know, we can't quantify, exactly the impact, obviously, that we think it'll have, but I think it's safe to say that the stock should trade significantly more volume than it does.
Like we've, like we said, earlier, if we continue to execute, we think that being on a larger exchange will help make our, you know, stock available... or if it's available to more investors, that should be a positive for the stock.
Okay. Got it. Appreciate it. Just one more maybe on the fundamentals of the business. A lot of good remarks in the prepared commentary and some of the Q&A when it comes to the margin profile and cash flow. Given that your adjusted margin is already sitting at 49%, so that's close to the industry high right now.
I understand that there's more moving parts when it comes to the EBITDA margin. On the gross margin, are you able to maybe just parse out a little bit the differences between, you know, increases on the back of, you know, higher utilization, some facilities relative to, you know, the fact that wholesale is creeping up a little bit more? It's obviously retail is a lion's share of your top line.
Just some of the moving parts where I would expect that over the next two, three quarters, maybe adjusted gross margin comes down a bit. If there's anything you can give with respect to mitigating factors against that, would love to know.
Sure, Matt. I'll take that. Great question. We're super happy about our progress with margin, needless to say, especially over this quarter-over-quarter period, 420 basis points. We've had some comments on that, 420. That wasn't on purpose. We didn't even notice until somebody said something. It's really a state by state.
I take your comment on the wholesale creeping up, really, at this point, our business is whatever, 80% retail, 20% wholesale, or something like that. The wholesale creeping up isn't a major factor. It's really, if I go around the horn, it's continued super strength in New Jersey, which is just a fantastic business for us right now, and it's holding up very well.
Again, just when we think we've hit a ceiling there, we continue to find optimization opportunities and cost reduction opportunities like I answered to Eric's question. That's New Jersey, and there's plenty of levers to pull there between mix of products and wholesale versus retail and cost reduction and yield. There's a lot of activity going on there.
In Michigan, we've really made some good strides there quarter-over-quarter and increased our gross margins actually by hundreds of basis points. So it's material, but we've only scratched the surface in Michigan, and we see so much more opportunity to continue to make improvements there, again, on the cost side of things, on getting more vertical, as Ziad described in the prepared remarks, sourcing, how we procure.
There's a lot of opportunity there in Michigan. Pennsylvania, we've done about as much as we can do. It's scaled back at this point and kind of ready to go and ramp back up for adult use when that comes. Last but not least, Maryland will really get a lift as that takes off in really it, and it started already when we cycled out of the scale-up of Hagerstown and under absorption because we didn't have any output. In Q2, we started to get some output and started to get some absorption. We'll see that continue in Q2, and then really we expect Maryland to give us a big lift and tailwind there.
And all that back to the, maybe the main premise of your question, those are all tailwinds. Those are all positive levers that we have to pull, and that can offset any inevitable headwinds that come our way, whether it's someday pricing tightening in New Jersey or anything like that. Hopefully. That was a bit long, but hopefully that gave you a good color on the question.
No, appreciate the details. All right. Thanks, guys.
Thank you.
Thank you.
Ladies and gentlemen, as a reminder, should you have any questions, please press the star followed by 1. Your next question comes from Noel Atkinson with Clarus Securities. Please go ahead.
Hi. Good evening, guys. Thanks for taking our questions, and good job in Q1. Just back to Maryland for a minute. When does the transfer window close for buying dispensaries? Is it July 1 , or is it before then?
Yeah, no, you can continue to run as medical-only dispensary post the date, but anything that close will transfer to recreational prior to July 1.
As long as you sign by July 1 , you can be up and running.
That is correct.
Okay. Can you just give us a little more detail about where you are with the Hagerstown facility in terms of Are all the grow rooms in use now? Like, will you be fully utilized, have full capacity up and running at the outset of adult use?
Yeah. You know, we'll be observing how the business ramps up in Maryland, in our stores as we acquire those attractive businesses and as we start supplying them with our own brands and going deeper vertically. Also, as we understand and learn the wholesale market, you know, we will be launching Wana this quarter. Wana in Maryland existed in every dispensary, so it will be a door opener for us.
While we start today with what we have from a cultivation perspective, we have the ability to expand up to almost three folds what we have today, and we will be doing it very thoughtfully as we manage the inventory and as we manage the demand in the market and balance it with the supply.
Just lastly, I think there's been about a half a dozen new adult e-stores that have come online in New Jersey over the last couple of months. Where are you guys in terms of selling into other adult use facility dispensaries? Are you in all of them, most of them? Where do you stand right now?
Yeah. All of them know. We, you know, our brands and our SKUs have performed extremely well in New Jersey, and we continue to have top three market share in the state. We are almost in every door in New Jersey.
I would just add, we are absolutely selling out every gram of flower that we can sell.
Yeah.
That we can make or grow.
Yeah.
Okay, great. All right. Thanks very much, guys. Well done.
Thank you.
Your next question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.
Hi there. Good evening. Congrats on your-
Good evening. How are you?
Good.
Thank you.
First question would just be on Michigan wholesale. Last earnings call, you were mentioning, you're starting to see some pricing improvements in certain product categories. Just wondering what you're seeing in terms of the latest on pricing in that state, whether that trend has continued or those earlier gains have held? Secondly, maybe just poking around for a bit more detail on how the re-ramp of your branded products wholesale in that state is going over the last few months?
Yeah, thank you. You know, I talked in our prepared remark about our brand strategy, right? In premium versus value in Michigan. There's no doubt there is some pressure on the consumer pocket, right? We will be introducing in Michigan this quarter our value brand in order to continue to attract and maintain and retain our service and retain those customers that are more price sensitive.
Currently in Michigan, this brand strategy is still giving us almost a 60% premium, a 60% premium in pricing versus the average pound that is sold in the state. We are seeing stabilization of the price. We're seeing a low increase in some in some areas.
What I'm excited about the most, from an improvement perspective from Q4 to Q1 is the performance of our finished good wholesale business. We will continue to ramp up our vertical producing new form factors in our brands. Our wholesale business has doubled between Q4 and Q1 on our finished good. As we watch Q2 and we look in the back half of the year, we expect to see another doubling in our wholesale. We will reach our goal.
What has really impacted the pricing the most in Michigan is something that is extremely positive that happened in Michigan and has disrupted a lot of the industry, but in a positive way, and we hope, we wish, and pray that every state will do the same thing that Michigan, the MRA has done or the CRA has done. Is really cracking down and stopping illegal and illicit activities in the state. That dynamic has really helped the state in a meaningful way, and we hope to see that continue both in the state and in others. Did I answer your question?
Yes. Perfect. Perfect. Thank you.
Perfect. All right.
Just quick follow-up on the plans to sell your Canadian facility. Do you have any updates on that?
Yeah. Keith, do you wanna take this?
Sure. Thanks, Ziad. Hi, Andrew. We are far along in the process there. We have a sale agreement. It's, I'll say, days away, from closing, so. It's at an attractive market price, and we're happy about where we're landing.
Great. That's helpful. Thank you.
Sure.
Your next question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.
Yeah. Hi. Thanks for taking the question. I was curious, Jason, you spent the day, according to your Twitter feed, down in D.C. I just thought maybe curious if you had any key takeaways or thoughts beyond, you know, obviously not prognosticating on when change is gonna occur or anything, but just, you know, your general sense of the temperature down there and whatever feedback you feel like sharing from your experience.
Hey, Glenn, before Jason answers the question, Keith and I have been giving Jason some hard time because he's been in his suit with his tie in the Capitol. He showed up in here, and we were joking whether he'll have his suit or not. He showed up still with his suit, but as soon as he saw us, he took his tie off. We're gonna change his backstory.
I know. I saw the suit. I was guessing maybe like a 44 regular or something. Yeah, it looks good.
Whatever size I was on my bar mitzvah, you know, about 40 years ago or so. In terms of, it was very informative and a new experience for me to go. I've never been in a Senate hearing before. I was told to expect.
I think Ziad told me that I was gonna be annoyed as hell by some of the witnesses, you know, at the hearing, which I definitely was. There was a lot of misinformation that I feel was put out there by some of the guests at the hearing. Overall, this is just the, you know, what I would describe as watching the sausage get made.
I don't think there was anything from the people that I spoke to afterwards, there wasn't anything that was disappointing about the hearing. This is, you know, for many people who have followed the market for many years, this was sort of, your typical, buy the rumor, sell the news, type of situation. I think that practically whatever happened at the hearing, the sector, probably would've sold off because that is, you know, that's what often happens when people are excited and looking forward to something that's gonna happen on a specific date.
In terms of my thoughts or my prognostication on when I think it's safe to be passed, I would say that, you know, a lot of the people that I was with thought that, you know, it could be in the coming months or, you know, possibly by late June, early July. We as a general, our general view on all of this regulatory progress remains the same. We are planning for the worst and hoping for the best. That's how we've got the business structured now. We don't need any regulatory reform.
It would obviously be nice and, you know, you know, help us accelerate our growth and our and lower our cost of capital. We, as I hope the results have showed over the last couple of quarters, we don't need that regulatory progress. Doesn't mean that I'm not gonna spend a lot of time trying to help move it along, especially since Ziad has stepped up so well over the last several months, and, you know, is, and has taken over the CEO spot. It's freed up some more time for me to go harass congressmen and various politicians and things like that.
I'm gonna, at the end of the year, I dedicated myself to making more of an effort towards helping with the regulatory progress and some other approaches that we're gonna take to try to change some, you know, some of the situation here, but, you know, possibly from a judicial pathway. We are not, as it relates to running the business, we're not assuming that any of that happens, and that's generally been a good bet to make, obviously, for the last couple of years.
Right. Great. Thanks again for the color. That's it for me.
Sure.
Thanks, Glenn.
Ladies and gentlemen, as a reminder, should you have any questions, please press the star followed by the one. There are no further questions at this time. Jason Wild, please proceed.
Great. Well, thank you all so much for joining our call today. We will see you again in about another 3 months. We appreciate you taking the time to hear our update. Thank you.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. Ask that you please disconnect your lines.