Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to TerrAscend's Second Quarter 2023 Earnings Call. Joining us for today's call is Jason Wild, Executive Chairman, Ziad Ghanem, President and Chief Executive Officer, and Keith Stauffer, Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the Company's outlook, the Company's guidance for fiscal year 2023, and estimates and assumptions relating thereto, and the Company's expectations regarding its market opportunities, the benefits of its listing on the Toronto Stock Exchange, and other financial and operational matters. Each forward-looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statement.
Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements. 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, filed with the Securities and Exchange Commission, or the SEC, and other filings that the company makes with the SEC from time to time, which are available at www.sec.gov, and on the company's website at www.terrascend.com. The forward-looking statements in this call speak only as of today's date. 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. Jason Wild. Please go ahead, Mr. Wild.
Good afternoon, everyone, and thank you for joining us. A year ago, we embarked on a major initiative to position our company for success, regardless of legislative reform. Today's results and our momentum over the last several quarters are a testament to the hard work of the team. Over the last several quarters, we have significantly improved our margins, transformed our balance sheet, paid down our debt substantially, and materially lowered our interest expense. We have achieved positive operating cash flow for multiple consecutive quarters, acquired four dispensaries in Maryland, divested non-core assets, and successfully listed on the Toronto Stock Exchange. All of these accomplishments occurred while we also drove industry-leading revenue growth in the first half of 26% year-over-year. Our results in the second quarter exceeded our internal forecasts.
Today, we reported our seventh consecutive quarter of sequential revenue growth, generating $72.1 million for the second quarter, an increase of 12.7% year-over-year and 3.9% sequentially. Gross margins have improved sequentially over the last three quarters, from 44.6% in Q4 of 2022 to 48.8% in Q1, and now up to 50.2% in Q2. We also achieved our fourth consecutive quarter of positive cash flow from operations, delivering $1.8 million for the quarter. We recently issued guidance for full year 2023 of at least $305 million in revenue and at least $58 million in adjusted EBITDA, respectively, representing year-over-year growth of 23% in net revenue and 49% in adjusted EBITDA from continuing operations.
As evidenced by our guidance, we have a high degree of confidence in the second half of the year. We expect significant growth in revenue and profitability as we realize the benefit of our now vertically integrated operations in Maryland, as well as continued execution in our other geographies. We really got a lot done this quarter. Let me tell you about some of the specifics. Starting with Maryland, we successfully reached the four dispensary cap just in time for adult use on July first, a key step in our strategy to become a market leader in this state, which is already run rating at $1 billion. Our team was able to quickly identify already profitable stores in great locations and transact at incredibly attractive terms.
From a balance sheet perspective, we executed on the sale of our Canadian facility for CAD 19.7 million, closed a significantly lower interest rate loan for $25 million with an FDIC-insured bank, completed private placements for over $21 million in an extremely difficult capital raising environment, and paid down $43 million of higher interest rate debt. We've been laser-focused on reducing debt, lowering interest expense, and driving positive cash flow for the last 12 months. On the 4 July, we listed on the TSX.
Our original thesis was that over time, our TSX listing would help decrease our cost of capital and provide us with greater access to a broader group of institutional and retail investors. In fact, we have had multiple institutional inbounds in recent weeks, both U.S. and foreign, and those calls continue at a high rate in recent days. Prior to listing, when investors asked us about U.S. custody, we opined that we didn't know if a TSX listing would solve that issue. I'm happy to report that already Morgan Stanley, Bank of New York, and their Pershing stock clearing unit, Cowen, and others have removed TerrAscend from their blocked security list, pursuant to their formal MRB or marijuana-related business policy.
While institutional investors may still refrain from investing in our shares based upon their internal compliance policies, custodial impediments will no longer be in the way of the firms that ultimately choose to invest. While the removal from these blocked lists has gone without much notice, we do think that this is a big deal. In an industry where change has been excruciatingly slow, the speed of these removals is noteworthy. One other benefit of the TSX listing is the substantial amount of capital indexed to TSX-listed securities, and we expect to be included in several of the indices in the coming months. Moving on to regulatory reform. While indications point to support from both parties on SAFE Banking, we continue to operate under the assumption of further delays in regulatory reform.
With all the fundamental progress we have made, we are in a position to control our own destiny, despite the ongoing and unsustainable federal tax regime. The lack of reform will not keep us from executing on our plan to be a consistent growth and cash-generating business. In fact, currently, we have one of the highest growth rates in this industry and expect that growth trend to continue, given our lineup of states and our wide-open map. Any reform progress would only be additive to the strong business that we have built. In conclusion, we have made substantial progress over the last month, number of months, across virtually all facets of our business. This team has a lot to be proud of and excited about. Now I'll turn the call over to Ziad to provide an update across our key markets. Ziad?
Thank you, Jason, and hello, everyone. Jason, I share your pride in what we accomplished in Q2. I will now drill down deeper into our state-by-state operation. Let's begin with New Jersey, which is currently our largest and most profitable market. Our already strong margins improved during the second quarter, driven by various optimization initiatives, including product and channel mix, yield improvements, and a reduction in cost of goods. We maintain a top three market share position in the state. This is supported by recent BDSA data, where we hold top positions in key product categories, including flower and vapes, and a dominant position in concentrates. In May, we launched Wana edibles into this market, and we have received very positive reaction from consumers. They say they love the taste, the vegan options, and the stability of the product.
We are very pleased with what we've seen so far and expect our relationship with Wana will help to drive further market share gains in edibles. Regarding New Jersey's social equity bill, it is currently pending the governor's signature. This bill allows existing operators to own up to 35% of an additional seven dispensaries. We are in active conversations to determine the right partners. On to Maryland, which converted to adult use on July 1. Official state data on the first month of sales points to a current run rate of $1 billion annually, roughly doubling the medical market. We entered 2023 with our state-of-the-art cultivation and manufacturing facility in Hagerstown, having just been completed in preparation for adult use.
Since the beginning of the year, we have completed the acquisition of four accretive dispensaries just in time for adult use implementation on July 1, having gone from zero retail market share at the beginning of this year to what we believe will be amongst the top market share positions in the state at retail. These four dispensaries in Maryland were on a revenue run rate under medical of roughly $30 million. Now, with the launch of adult use, we anticipate that these dispensaries will drive substantial revenue growth and cash flow for TerrAscend in the state. Complementing our growing retail presence in Maryland, we also are experiencing solid wholesale growth by offering a complete selection of our high-quality brands, Kind Tree, Gage, Cookies, and Wana.
We are currently supplying our brands to the vast majority of the nearly 100 doors across the state and have strong plans in place to improve our depth and breadth of distribution. Since turning operational in early 2023, harvests at our Hagerstown facility have been high quality. Yield per square foot, bud to trim ratios, and THC potency are at levels comparable to our facilities in other states that have been operational for much longer. With increased volumes and continually improving absorption at the facility, we expect margins in Maryland to further improve during the second half of the year, continuing the trend we've experienced in the first half. Between our wholesale and retail operations in Maryland, we believe we are now one of the leading operators in this billion market. Moving to Pennsylvania, sales remained stable sequentially for both retail and wholesale.
Currently, the state has a medical market size of over $1.2 billion. We are seeing progress on the regulatory path towards adult use in this state. We are monitoring the environment and expect to have more clarity during the second half of the year. Pennsylvania represents an extremely large opportunity for us as we have the footprint to drive substantial growth under adult use. Rest assured, we will be ready for that, just as we were in New Jersey and Maryland. In the meantime, we will continue to run a lean operation in the state. Turning to Michigan, I am pleased with the 6% sequential revenue growth for the quarter, mainly driven by same-store retail growth. During the quarter, we opened our 19th Michigan store in Oxford. We are executing on our plan to drive further market share gains in the state.
We have maintained a significant premium to the average sales price in the state due to our brand strategy, which has proven to be effective. For the second half of the year, we have a clear plan to go further vertically, introduce a new and broader mix of products, and further reduce cost of production, all driving expanded gross margin and leading to positive EBITDA. With the time constraints imposed by our Maryland M&A, with those efforts out of the way, we have refocused in recent weeks on multiple Michigan opportunities and look forward to sharing the details if and when we get any of these deals to the finish line. In doing so, we will further grow our market share, leverage our state-level infrastructure, and expand profitability. In my 17 years at Walgreens, I was part of many productive and successful quarters.
This second quarter at TerrAscend ranks right at the top. For that, I would like to thank the team for the hard work, the resilience, the dedication, and the stubborn confidence of getting it right, on time, and ahead of plan. Our story for the second half of the year is straightforward. We pre-announced our revenue and adjusted EBITDA growth expectations last week. We have multiple revenue growth drivers across our states, and we expect to continue solid gross margin performance like we delivered in Q2. Regarding operating expenses, we expect continuous improvement in the second half of the year, with Q4 operating expenses targeted at around 30% of revenue. I would like 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, and all results that I will reference today are stated in U.S. dollars. Net sales for the second quarter totaled $72.1 million, compared to $69.4 million for the first quarter and $64.8 million during the same period last year, representing 3.9% growth sequentially and 12.7% growth year-over-year. Retail revenue for the quarter was $58.3 million versus $55.4 million in the previous quarter and $48 million during the same period last year, representing a 5% sequential growth and 22% year-over-year growth. The sequential growth was driven by New Jersey, same-store sales growth in Michigan, and a full quarter of our AMMD acquisition in Maryland.
The year-over-year growth was driven by adult use sales in New Jersey, the acquisition of AMMD in Maryland, and organic growth in Michigan, offset by declines in PA and California. Wholesale revenue was $14 million in Q2, $14 million in Q1, and $16 million during the same period last year, representing flat growth sequentially and a 13% decline year-over-year. The decline year-over-year was driven by market dynamics in PA, offset by growth in New Jersey. Gross margin for the second quarter of 2023 increased to 50.2%, compared to 48.8% in the first quarter, representing a 140 basis point improvement quarter-over-quarter. This improvement follows a 420 basis point improvement from Q4 to Q1.
We have been taking actions over the past number of quarters, and we are now seeing the outcome of these actions in our results. In the second half of 2022, we optimized our operations in Pennsylvania in response to the changing market dynamics in that state. In Canada, we closed the money-losing non-retail part of our business. In Michigan, we've been executing on a playbook to expand our gross margins, and it is working. New Jersey has been our workhorse, where we continue to identify further optimizations on top of the already very healthy gross margin profile of that business. Finally, in Maryland, with the expansion of the business and the ramp-up of our Hagerstown facility, we delivered healthy gross margins in that state even prior to the launch of adult use on July 1.
General and administrative expenses for the second quarter were $30.5 million, compared to $27.7 million in the first quarter. These numbers include stock-based compensation. G&A expenses for the quarter were impacted by $2.5 million of one-time items, which included M&A costs related to our acquisitions in Maryland, capital raising transaction costs, legal fees, and TSX listing-related costs. Excluding these one-time costs and other one-time costs in Q1, underlying G&A expenses were up modestly quarter-over-quarter, driven by a full quarter of the AMMD dispensary acquisition in Maryland and other modest investments in our growth initiatives. During the second half of the year, we plan to continue to hold the line on our operating expenses organically.
We will integrate the three expense structures from our three Maryland dispensary acquisitions, and we expect to exit the year at around 30% of revenue, excluding G&A and stock-based comp. GAAP net loss from continuing operations in Q2 2023 was $12.9 million, compared to a net loss of $19.2 million in the first quarter. Adjusted EBITDA from continuing operations for Q2 2023, a non-GAAP measure, was $12.8 million, representing a 17.8% margin compared to $12.2 million and a 17.6% margin in the first quarter. The quarter-over-quarter growth was driven by higher sales and improved gross margin, partially offset by an increase in underlying G&A expenses, excluding the one-time adjustments that I outlined.
Turning to the balance sheet, cash and cash equivalents, including restricted cash, were $34.5 million as of June 30, 2023, compared to $33.5 million as of March 31, 2023. Cash provided by continuing operations was a positive $1.8 million for the second quarter. This represents our fourth consecutive quarter of generating positive cash flow from operations. No cash income tax payments were major in the quarter. CapEx spending was $2.2 million in the second quarter, primarily relating to new store openings in Michigan. Free cash flow for the quarter was nearly break even.
During the quarter, we completed the sale of our facility in Canada for $15 million, completed private placements for gross proceeds of $21 million, closed on a $25 million loan with an FDIC-insured bank at a rate of prime + 2.25%, paid down $43 million of higher interest debt, and made cash consideration payments totaling $4.9 million for the two Maryland acquisitions that closed in the quarter. In our August 1, press release, we announced our expectations for full year 2023. We expect at least $305 million of net revenue and at least $58 million of adjusted EBITDA from continuing operations for the full year, representing year-over-year growth of 23% in net revenue and 49% in adjusted EBITDA from continuing operations. We have multiple growth levers across our states.
We also expect to continue with solid gross margin performance like we delivered in Q2. Regarding operating expenses, we expect to exit the year at around 30% of revenue. To summarize, we are making solid progress on executing our strategic growth plans and have demonstrated strong momentum over the past few quarters, with more to come in the second half. This momentum includes seven consecutive quarters of sequential revenue growth and top-tier revenue growth in the industry, gross margins eclipsing the 50% mark, and four consecutive quarters of positive operating cash flow, all while transforming our balance sheet through a material reduction of our debt. With our demonstrated ability to access capital at favorable terms for this industry and our well-positioned lineup of states, we are in a solid position to support our growth.
We are also well-placed to capitalize on the growing number of opportunities in our M&A pipeline, with attractive assets in geographies where we either have existing operations or are complementary to our current facilities. We look forward to providing updates on this expected on the rest of the year as we progress through the rest of the year. This concludes our prepared remarks. I'd now like to turn it over to the operator for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star two. If you are using a speakerphone, please lift your handset before pressing any keys. 1 moment, please, for your first question. Your first question will come from Andrew Partheniou at Stifel. Please go ahead.
Hi, good evening. Thanks for taking my questions, and congrats on the good quarter here. Just wanted to start off looking at cash, and maybe this one is more of a housekeeping question, but I'm not sure if I read it correctly. Did you receive a tax refund in the quarter? Which seems a little bit unusual in this industry. Also on working capital, saw that you've built up a little bit of inventory there. Assuming it's from Hagerstown, which I think you had that 1st harvest in Q1 and ahead of the rec catalyst in July 1st. Could you talk a little bit about how you expect cash flow from operations to trend over the next two quarters?
Is it a little bit lumpy in Q3, on a, on a positive basis and then, and then, a little bit more stabilizing in Q4, or is it more even between the two? Just a little bit, a little bit of color there to, to kind of manage the expectations. Thanks.
Sure, Andrew Partheniou. Hi, it's Keith. Yeah, so on the first part, we did receive a refund. That's a refund from overpaying in 2021. It took a while to get the refund back since we did the final filing in October of last year. So that is correct. You read that correctly. Regarding the second part of the question on working capital, there are a couple of drivers to that. One is what you mentioned in Maryland, just a build, kind of pre-adult use build there. And then the second one, maybe to provide more color, and Ziad can, can jump in as well.
It's actually a positive thing where we continue to surprise ourselves on the records that we break on our yields in New Jersey. That has actually given us a buildup that is all fresh product and will come back through in the third quarter. That kind of answers the second part of your second question. The working capital impact that we saw here, primarily inventory related in Q2, will flip back both through Maryland and through New Jersey in Q3. Q4 should be more normalized, I would say, with not a major fluctuation one way or another.
Yeah, Andrew, this is Ziad. Keith, I agree with everything. The only thing I wanted to add more color on is to give some light or to, to highlight, the New Jersey inventory. The team informed me yesterday that this last harvest had a 50% improvement on yield with a 93+% of A bud. In addition to this, we have few friendly stores that were coming online in Q2, that got delayed to Q3. All of this, the extra inventory that got built in New Jersey are fresh inventory, A bud inventory, and has a home to go to in Q3.
Thanks for that. Then, you know, maybe continuing on New Jersey, you've got this fresh product. You mentioned, some new stores that, that have opened, which could be new wholesale customers. It sounds like, you know, you're, you're, you're positive on the outlook in, in New Jersey. You know, when you look at, you know, what's happening in, in the state for, for other operators, it seems like it's a bit more of a mixed outlook. There's been layoffs and, and, it seems like one private operator lost a license from not paying regulatory fees.
It just seems a little bit unusual for a state that, that, that's in its first year of rec conversion. Could you talk a little bit more about, you know, what you guys are seeing? You know, what's driving your, your optimistic outlook, and, and what do you think about, more stores opening for the second half of the year?
Andrew, I'll focus on talking about us. I'll start with the compliance. you know, I'm so proud of the compliance culture that we have built at TerrAscend. Events and data in the state shows that few events took place where some of the competitors were fine, some of the competitors were not compliant. We still hold a perfect track record, and we have an excellent relationship with the regulator. That's on the compliance side. From the business side, you know, we set our target for the second half of the year to be around that 50% gross margin. We talked about the OpEx. New Jersey is an integral part of those goals. Our gross margin in New Jersey continues to improve.
Our cost of production continues to decrease due to the yield that I described, that 50% increase in yield from previous quarter. The price of our premium flower and quality flower that we are still commanding in the market, and the avoidance of any discount play that we did not have to do. All this, our brand equity and strategy, our cost of production, price stability, and the demand on our products is what's driving our optimism.
Yeah, I would say the only backlog, the, the only sort of place where we're not sort of fully hitting our potential there is sort of in that inventory, we're getting such higher yields, and we've had more recently a slight bottleneck in processing that high-quality flower into eighths and the other products that we turn it into. That's sort of a good issue. We still have demand in excess of what we can supply from a flower perspective, and we sort of got with these yield increases, assuming they sustain themselves, we got that extra capacity that we've been talking about with our expansion and construction that we're that we plan on undertaking towards the end of the year.
We, we ended up getting the extra yields without having to spend all that CapEx, but we still believe that extra money will be well spent when we add the additional canopy starting towards the end of the year.
Especially as we continue to negotiate and decide who is the right partners for us to bring in that, those additional seven.
Oh, I forgot about that.
Yes.
Yes, absolutely. The other, the other thing we're excited about is the social equity bill that is about to be signed that will allow us to own up to 35% of an additional seven diverse stores. We could, they could even be under the Apothecarium banner, there could be some really... There's, there's really some exciting opportunities in terms of some potential partners we've been speaking to over the, over the last few weeks.
Appreciate that color. I'll get back in the queue.
Thanks, Andrew.
Your next question will come from Eric Des Lauriers at Craig-Hallum Capital. Please go ahead.
Great, thank you for taking my questions, and, yeah, congrats on the, on the strong quarter here.
Thank you.
My question's on Michigan. Just wondering if you could expand on some of the dynamics here. I've been very impressed by the turnaround you guys have made in that market, given it is among the most price compressed, among the most competitive. You know, from my standpoint, it seems like a strong validation of your premium product strategy, and, you know, I think could, could provide comfort or, or confidence to investors who are, you know, looking at the space now and looking for investors who can, you know, navigate the industry's price compression.
I'm wondering if you could expand on, on some of the changes that you've implemented to drive that increase in profitability in Michigan. Then if you could help us understand, you know, what in that playbook may be repeatable in other states and what may be unique to Michigan. Thank you.
Yeah, thanks, Eric. You're right. I, I agree fully around that, that, premium strategy. As a matter of fact, our average price per pound today in Michigan commands a 42% premium over the average in the state. Just give me 2 minutes, and I'll walk you through not only what's replicable, replicable in other states, but what we are doing in all our states, starting from, you know, going from seed to sale. Starting with our cultivation, we have managed to get to a level that is extremely exciting when it comes to cost per pound. Michigan is leading the pack with yield of gram per sq ft, so that is definitely helping with the margin. We have started utilizing our manufacturing facilities, facility, and we are launching new product.
We have launched our Legend brand that has exceeded our internal expectation in Michigan for the first 3 months and has contributed in acquiring new customers that we are more sensitive, while it did not cannibalize our premium customers. The loyalty that we are seeing with the combination of those, of that brand strategy continued to be strong. In Michigan today, we have close to 72% of loyal customers who have visited us more than 5x in 90 days, and it's divided into 20, 15, and 17 between loyal, super loyal, and super, super loyal. Those are some of the initiatives that we are doing across all our states and are driving that improvement in Michigan and is making us feel super confident about Q4 and getting to the goal that we declared in the past about being EBITDA positive.
That's very encouraging. Just to clarify here, that metric on 70% loyal customers, is that just, you know, of, of the customers coming into your stores in Michigan, about 70% of them are visiting 5+ times in 90 days? I just wanted to clarify on that.
That is correct. That is correct. we measure them into three buckets, Eric, and I've shared that in the past. The loyal are 5x every 90 days, the super loyal are 6x-10x, and the super, super loyal are more than 10x in any 90 days period. That is our retention and the acquisition is what percentage of customers we are seeing new in Michigan that have not used us in the previous 6-month period. we focus on those buckets and, yeah, I'm pretty happy with that.
Yeah, no, that's great. Then my, my last question here, I'm just wondering if you could comment broadly, not, not necessarily quantify, but just comment broadly on the pricing premium that you, you know, may be experiencing in, in other markets. You know, I mean, most of your other markets are certainly not as price compressed as Michigan. You know, I would assume, you know, kind of the, the, the average pricing is sort of closer to, you know, what may be considered premium pricing in, in other markets. I'm just kind of wondering, you know, where your current premium, you know, kind of sits in some of these other markets and just sort of how you expect that to trend, you know, over the next, whatever, you know, 2 or 3 years.
Is this something where you expect kind of, you know, the average pricing to, to fall down and then, you know, yours to remain a bit more stable? If you could just kind of give us, you know, any sense of like, you know, current, current premium and, and, and how you expect that to evolve just, you know, over the, you know, handful of years here, that'd be great. Thank you.
Sure, I'd love to. And, and I can do it state by state. You know, we covered and we discussed Michigan. Pennsylvania has a similar story to Michigan. We consider Pennsylvania to have hit the bottom, and there's a stabilization to pricing. We have actually seen a reduction in brand count in Pennsylvania from 132 to 115 this quarter, leading me to believe that there is some stabilization. I can't call it recovery yet, but time will tell. In that state, similar to Michigan, we have the same premium that is equal to Michigan on our A-bud. New Jersey. You know, New Jersey, I can't compare it to the market. I can compare it to our own, and our pricing has not changed since the launch in April.
It continues to be strong, it continues to be stable, and it continues to have high demand. When I compare the discounting that's taken place in the state, it's happening outside of the premium brand while we're protecting that. Maryland's still too young, but I'm pretty excited about the price of the premium flower in the state. While New Jersey started at $4,000 a pound at wholesale, the A-bud in Maryland, we're seeing it around $3,200-$3,300 per pound, which to me is pretty exciting, and it's pretty promising. Still too early, so we'll keep an eye on this, Eric.
All right. Thank you so much for the color.
Yep. Thank you.
Your next question will come from Frederico Gomes at ATB Capital Markets. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. Congrats on the quarter. First question is just on Maryland. I know that you mentioned the medical run rate there, the stores you acquired, about $30 million before, before adult use. I'm just curious about the magnitude of sales growth you're seeing there with adult use sales and whether you continue to see that sort of increase in the state, or has, you know, sales sort of stabilized at this point? Thank you.
Yeah, thanks, Frederico. Ziad here. I'll start, and Keith, maybe you can supplement with more info. We feel that our four dispensaries in aggregate are among the top, if not at the top, from a retail market share perspective. Our overall strategy on Maryland from the very beginning, it was around timing, starting with our cultivation and then selecting the right acquisition to go fully vertical. The four dispensaries are performing very well so far in adult use. Our guidance that we put out last week assumes that our total Maryland business doubles in size, when you compare the pre-launch to post-adult-use launch. All the indications that we have seen so far make us feel pretty good about that assumption.
I want to mention, keep in mind, we closed on those dispensaries, the week of, and with one or two, the day of adult use launch. We still have a big opportunity of going further vertical, bringing in the strategy that I shared with Eric earlier around our premium flower, around our partners brand, and we will accomplish that, and we will realize that opportunity. Keith, anything else you want to add?
No, I think that covered it.
Frederico, does that answer your question?
Yes. Yes, that's perfect. Thank you. Just a follow-up here on the TSX listing. You mentioned conversations that you had with, you know, investors and, and some of the custody issues being potentially solved. I'm wondering whether the, the, the listing is also helping, you know, the potential negotiations around M&A that you have that could involve shares. You know, is that a factor at play here that you think could, could help those transactions? Thank you.
Thank you, Frederico, for reminding me, because I left that out, in terms of the positive aspects of the TSX listing. It is definitely more helpful to have a TSX-listed company when we're talking to acquisition targets. Even in terms of the Maryland acquisitions, we were able to use a substantial amount of stock in our largest transaction, the Peninsula transaction, and we believe that it was because of our TSX listing. Yes, it's already helped us, and, you know, essentially lowered the cost of capital as, as related to, to picking up, you know, a top three dispensary or so in the, in the state. It continues to help as we're discussing deals with other parties.
Thank you. congrats again on the quarter. I'll back to the queu. Thanks.
Thanks, Federico.
Your next question will come from Matt Bottomley at Canaccord Genuity. Please go ahead.
Hi, good evening. Thanks for all the color tonight. Just wanted to stick on the M&A theme. I'm just wondering if there's any geographies, you know, other than going deeper in some of the ones you mentioned on the call, that might be of interest to you. Then, if not specific geographies, what are you seeing in sort of the private markets right now relative to the valuation ask, considering that, you know, we're unfortunately, once again, pretty much at the all-time lows again, in the equity market, and I'm just curious how that's translating and, you know, if the demand is more for cash versus shares? I think you already partially answered that with your Maryland acquisitions, but any further color on the M&A landscape would be helpful.
Yeah, absolutely. As anybody who's listened to us for at least the last couple of quarters knows, the way we look at it in terms of acquisitions is sort of 2 separate buckets. One is going deeper in the states we operate in, where we can, because there's, you know, caps in several of them. We're continuing to do that. As it relates to Michigan, we are unlimited in how many dispensaries we can own there, and we're as Ziad mentioned earlier, we're engaged in several active discussions on that front.
Also, New Jersey, with the new social equity rule, that's coming, that's another way, obviously, to go deeper in Jersey and something that we've been prioritizing in terms of actually, you know, sort of, what do they say, beating the pavement or hitting the pavement and going and trying to meet as many different opportunities as possible. The other bucket is additional states. As we've said in the, in the past, we're going to be very opportunistic on that front.
We generally like stuff, that's, you know, or we're attracted to stuff that's contiguous to the states that we're already in, and we've described it as sort of, you know, Michigan, you know, east and then up and down, the East Coast, and that's, that's still, you know, sort of the, the higher probability targets on that front in terms of where we're going to add a new state. The other thing is, sort of the third bucket, would be, larger, more transformational, deals. You know, we haven't discussed that, much in the past, but that's, there's some things that we've been looking at on that, on that front as well. Obviously, nothing, nothing further to share on that until we have something to share about it.
Yeah, Matt, sorry, Matt, I thought you also asked in terms of, oh, and I think you said we sort of answered it, but in terms of components of, in terms of the transactions and private transactions, I would say that the private transactions are we're seeing them at the lowest multiple we've seen them, you know, that's been a similar case over the last, over the last few months. We definitely are seeing a high willingness to accept our stock as a significant portion of, you know, their remuneration.
Got it. Appreciate all that. Just one other quick one for me is, you had mentioned, potential conversations or maybe a wish list of some indices you might be able to get in now that you're on the TSX. Is there anything specific or any, anything you can expand on that?
Nothing to expand on right now. Obviously, the large TSX index that follow, that follows sort of the larger companies. I forgot, what, is it the 250 or I'm embarrassed for not knowing the exact title of it, but there's a large TSX index. That would be the main one, and then there are other indexes as well. Even, I mean, we've even had some people mention to us that they think that some of these ESG indexes might find us to, you know, to attractive and to qualify under their, under their requirements. That's, that's, that's sort of a, you know, the, the, the lower hanging fruit and the bigger driver, we think, of the most indexed money is going to be, you know, the main TSX indices.
Got it. Okay, thanks for all that.
Thank you.
Your next question will come from Noel Atkinson at Clarus Securities. Please go ahead.
Hi, guys. I'd like to everybody else's comments about doing so well in Q2. First off, just in New Jersey again. You know, they're up to, I think, 50 active dispensaries right now. Your Phillipsburg store is still, I believe, the only store in the county. What are you seeing for consumer traffic patterns, at the, you know, across your stores? Are you seeing that in increasing number of competitive stores are, are changing traffic patterns at all?
Yeah, Noel, we're not. As we, as we shared, New Jersey, for us, New Jersey, price is stable, retail performance is stable, foot traffic and basket size are stable. I, I say it slowly to check myself and, Keith, that's accurate.
Yeah, and, and I'll, I'll just add, since you mentioned Frederick's, sorry, since you mentioned, Phillipsburg, that, that is a highlight for us. That, that's the one that continues to surprise us, that, that actually, since April of last year, continues to inch up, in, in, in sales growth, and is our strongest store in, in the country and, and growing.
Okay, great. Secondly, in Maryland, how much of the available canopy in your production facility is now planted?
Yeah, 100% of what is available is planted. We have a phase 2 that we are carefully expanding as we watch the supply and the demand in the state in order to make sure we have a balanced inventory, a fresh inventory, and then keep up with the growth in the state. We expect that second phase to be completed in Q4 and to start bringing harvest online in Q1.
Just following along with that, I, I think, you know, I was a bit surprised, maybe, when, you know, earlier in the year when we were talking about Maryland, and, and the management team seemed a bit cautious in terms of wholesale opportunity and, and penetration in, in Maryland relative to New Jersey. You know, it sounds like based on your prepared comments that, you know, you're seeing strong demand for, for your wholesale products. You know, are you feeling better about Maryland wholesale? Do you see bigger opportunity for Maryland wholesale than maybe you were thinking about in the early days of, of the year?
Yeah, Noel, it's a, it's a fair description of being cautious in Maryland. It was, it was a state where we actually started the year with almost zero market share. We have exited a very old facility. We were building a new facility. We all along had a, had confidence in our strategy, brand, strains, performance, but it, it was not like in New Jersey, where we were in the state. We grew up in the state, we knew the state, we had cultivation in the state. so that was the, maybe the cautious that came in initially. Yes, when we forecasted the second half of the year, based on the penetration we had in Maryland, as I've mentioned, we, currently are, supplying or we're in 77 doors.
We strategically took the right step of leveraging a great partner like Wana, who had history in the state, to bridge our new presence in the state. That helped us to open doors, open doors, and we feel that we will continue to grow that wholesale business. Yes, it will continue to get healthier. It's continuing to grow. We have obviously view in Q3, being 6 weeks in, and I'm pretty optimistic.
Okay, great. That's all for me. Thanks very much.
Thanks, Noel.
Your next question will come from Glenn Mattson at Ladenburg. Please go ahead.
Hi, thanks for taking the questions. Nice quarter. Curious about, Jason talked about, you know, having a East Coast, more of an East Coast presence. Curious about the California assets and if there's any plan for them, and maybe, you know, if, if, if there is a plan for them or not, and if, just kind of generally speaking, is there any other asset sales now that you've done the major one you talked about in Canada, you know, still to come?
The first question around California, I'll start with this, and I'll just would like a little clarification on the second part. As far as California, California is a smaller market for us. We have five stores in the San Francisco, in the Bay Area. We have a small growth. We learned a lot from California. The gross margin in the retail stores is, is healthy, as it is in some of the younger state, and we learned a lot around supply chain, around the buying, around the vendors' relationship. Really, we call California not a, not a financial driver, but more of an R&D space, a established, mature state, that is more mature than Michigan, that we learn from and we stabilize. That's, that's a small business.
I would say that's how I describe California. We don't have any clear strategy on what's the future. We don't have anything to share around California. Glenn, the second part was around comparing what we did to Canada and any other places. Are you referring to shutting down or exiting any place?
No, I just meant if there was any other planned asset sales in terms of raising capital for other purposes or anything like that, but it doesn't sound like it.
Yeah, it's... Look, I, I, I think I'll start by answering it, and, and Jason drilled this in the culture, that, that, today there are a lot of lenders who would love to lend us money, and that's due to the creditworthiness and, the performance of the company and the assets which we have and the lineup of the state. But we continue to say we will borrow on our own terms and at the right time, similar to what we've done during Q2. I know, and I heard it directly, we heard it directly, analysts in private conversation that they're worried about us, and we assured everybody that we will do it at the right time, at the right rate, without having to sit on just safety money and pay interest.
We do not have to sell any assets for any capital need in the future.
Great. Thank you for that color. Ziad, as you talked about just monitoring the Pennsylvania progress, legislative progress, can you give us any more color and more detail on, on, you know, what you think the, you know, your best hedge case onto as to when we can see some progress on that front?
Yeah, Glenn, you're setting me up for failure with counting and betting on what the legislators would do.
Yeah, no, with the caveat that no one, no one can get this stuff right, obviously. Just your opinion.
Well, here, here... Yeah, no, you're absolutely right. Here are the facts. An Adult use bill was introduced early, the first week of July. There's a lot, there are a lot of conversations that are taking place on both sides of the aisle. Common sense would say with, with, Maryland and New Jersey being Adult use, there is an incentive for the state to move faster. If you ask me, my best guess, I would say between the next 12-24 months is when the state will launch its Adult use program. There are a few dots, that dots that leads me to believe so. The conversation during the governor budget, the date that was mentioned, so I would say 1-2 years, Glenn.
Thank you for the color.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one now. We have no further questions from the phone, I will turn the conference back to Jason Wild for any closing remarks.
Thank you, everybody, for joining our earnings call today. We hope you share in the excitement that we do for the progress we've made over the last several quarters. We look forward to speaking with you all again in November to share further progress. Thank you.
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask you to please disconnect your-