Q2 2022 Terrascend Corp Earnings Call
I thought the original date of this presentation and management undertakes no obligation to update or revise any of these statements.
I would now like to introduce Mr. Jason Wilde. Please go ahead Mr. <unk>.
Good afternoon, everybody. Thank you for joining us this afternoon.
Today, we are among the leaders in each of our four key markets, New Jersey, Maryland, Pennsylvania, Michigan with the first three states having either recently been approved for adult use are expected to be over the next 18 to 24 months.
Scale is very important to meet the growing demand in each market, particularly as each approaches adult use we build scale in the early days when New Jersey was medical only.
All awaiting the launch of adult use to be invested and built a leadership position in both presence and capability, which had us well prepared for the April launch.
In addition to New Jersey, we have expansion programs nearing completion or are already completed in both Maryland, and Pennsylvania, where we expect to have leading capabilities and capacity preparing us for adult use in each of these key markets.
Maryland adult use on the November ballot in Pennsylvania widely considered to be not that far behind.
We cannot be more excited about the future growth runway ahead of us.
The macro environment has created challenges this year, which has impacted the consumer.
While growth rates across the cannabis sector have slowed we anticipate a return to significant growth over time, mainly driven by the unfolding state by state growth story, particularly concentrated on the east coast. We are in the ideal markets that are a key part of that growth story.
The recent slowdown in growth is not all bad the current market environment is presenting some extremely attractive opportunities there.
The benefit of our deep and not wide strategy provides opportunities that are not available to other multistate operators, who are capped and many of the most attractive states.
With fewer bidders for a best in class assets, we are optimistic about our ability to acquire great businesses and excellent states at historically low multiples.
Thinking of attractive states, let's talk about New Jersey.
Following the launch of adult use in late April our two stores in Maplewood, and <unk> are performing as well or better than we expected. Additionally, our third location in Lodi just opened a few weeks ago.
We believe for many reasons that load will be our best performing dispensaries.
I finally opening combined with the performance to date in Maplewood in Phillipsburg bolsters, our confidence that each of these stores can achieve at least a $40 million run rate in their first full year of <unk> sales.
In Pennsylvania, our sales grew sequentially amid a challenging and competitive environment.
We have completed the transition from old genetics to new which is resonating well with patients.
We were ahead of the curve last summer when we took the necessary actions to better position the company to navigate these more competitive market dynamics.
Today, we have a higher quality product that appeals to an increasingly sophisticated patient base, Pennsylvania is a key market for us long term with our capex spend and complete.
Our library of new strains now hitting the market and several upcoming new product and brand launches, we are well prepared to succeed in the current environment and to flourish upon the launch of adult use.
And Merrill Lynch adult use is harmed in November ballot with early polls are indicating that it will pass.
As we did in New Jersey, we are preparing now for this reality and are on schedule with the Hagerstown expansion and the closing of the Alleghany Dispensary acquisition.
These preparations along with our continued pursuit of additional dispensaries up to the Ford Defense REIT limit will position us as a leading vertically integrated operator and another key northeast market.
In Michigan the integration of the gauge acquisition is nearly complete.
Within a market that has become very challenging we have adjusted our cost structure. Accordingly. Additionally.
Additionally to complement our retail presence during the quarter, we launched our branded wholesale initiatives and opens our manufacturing and extraction labs.
On the retail front, we expect to have 20 dispensaries opening in Michigan by the end of the year.
In a quarter with many moving parts, we have demonstrated agility by adapting to an increasingly competitive environment and volatile economic backdrop, while also maintaining discipline and focus on executing our long term growth strategy.
I'd like to now turn the call over to <unk> to provide an update on our key markets.
Thank you Jason for laying out the macro overview and high level aspects of our business.
Next I would like to take us through more details on our operations state by state.
This is my second full quarter with Denison.
In my first week on the job I promised the team and committed to spend serious time with them in the field and every business unit.
To learn their day to day operation and there are challenges I can more effectively support them.
[noise].
To date, they have spent more than 75% of my time in the field, but rolling up my sleeves, and working side by side with our team members.
This passion commitment and work ethic from team members across all functions that I have not seen in my 20, plus year career in pharma.
I witnessed customers celebrating and welcoming our colleagues and the communities and appreciating what they do every day.
I witnessed patients sharing emotional stories on how candidates changed their life and got them off multiple opioids.
As a pharmacist that makes me more determined to work harder every day for that card.
During the travel I spend 90 nights.
Mild residence. Thank you J W going deep into the night with Jason discussing our exciting and fast moving industry and planning our expansion in our next moves.
Today I am pleased with the progress that we have made over this period of time and even more excited about the opportunities ahead.
In Q2, we delivered solid financial results with revenue for the second quarter growing 30% sequentially and led by New Jersey.
Let's start with New Jersey.
Adult use sales began on April 21st to our second quarter financial results reflect a partial quarter of adult use sales at two of our three locations.
Our phillipsburg and Maple its stores are performing well with revenue.
Traffic basket size and other key metrics exceeding our expectations.
Although later than we expected we are pleased to have recently opened our latest store in Lodi.
We had our soft opening over the past two weeks with the Grand opening planned for this weekend.
We believe that it will be our best performing dispensary.
Dislocation features the states.
Drive thru and offer through 17, and I 81 of the busiest traffic locations in the country.
Deputy carrier Lodi.
And one of the most populous regions of northern New Jersey.
14 miles outside of Manhattan, and adjacent to the iconic second all better being clubbed featured on discipline.
We are also among the operators with the longest store hours and Northern Jersey seven days a week.
Today, we are one of the only two operators with all three dispensaries open for recreational sales.
As we have mentioned before we are confident that we can achieve at least $40 million annual run rate in each of the three stores within their first year of operation on the adult use.
And our Boonton cultivation facility, we are doing an excellent job of maintaining an efficient and top quality process.
From grow to processing to packaging and shipment.
At retail we are really proud of our customer experience with minimal wait time.
Hi throughput.
Next our product and brand selection in New Jersey is unparalleled and we recently expanded with the introduction of gauge and cookies branded product.
Following the launch we had our highest grossing day ever as sales increased 40% for the first full weekend versus the prior weekend.
These launches we have seen continued momentum and growth.
Although.
Subsequent to the quarter, we opened our first cookies corner in our Maplewood store and.
And early signs indicate that is performing very well.
Our hydrocarbon extraction facility is up and running enabling us to produce multiple form factors of concentrate.
Based on what we have seen in other markets. We expect this segment to account for 20% to 30% of sales over time.
As the only operator in the state with the capability to sell concentrate.
Carrying these products exclusively in our store has helped us to develop their reputation as the destination that caters to the most sophisticated cannabis customers in the state.
This in turn is attracting consumers from a wider geographic radius.
Moving next to wholesale we are in the enviable position to have the ability to supply both the medical and recreational needs in our stores.
I'll also supplying the wholesale market with our brands.
We have one of the largest cultivation and manufacturing footprint in the state.
Furthermore, as mentioned on our prior call.
We signed a lease on a large facility and have begun the expansion process, which will eventually take us up to the 150000 square foot cannot be limit overtime.
With this ability to scale up we expect to continue to be both.
Retail and wholesale leader in New Jersey, a market that is estimated to grow to $2 $5 billion by 2026.
We believe the new Jersey adult use lunch sets the stage for other states in the northeast just similarly absolute approve adult use sales over the next 12 to 24 months.
Most notably, Pennsylvania, and Maryland, where we have established leadership positions as well.
Moving next to Pennsylvania revenue grew sequentially in the quarter. The improvements we made to our cultivation facility in our genetic library have significantly upgraded our product quality and selection.
We have fully transitioned from our old genetics.
Our popular new strain.
A result wholesale customers and retail patients are responding positively.
Retail and the state has become more competitive with a flattening of patient count combined with an increasing dispensary count.
Today, we have six dispensaries open and are seeing attractive acquisition opportunities to position us with a larger retail footprint adult use approaches.
Wholesale and the state has become more challenging as many retail operators have begun carrying a greater mix of their own products.
Within that environment, we are encouraged by the sequential increase of our realized sales price per pound a flower.
This is a strong indicator that our year highest quality products and train are resonating with patients in this increasingly competitive environment.
Over the past year, we have completed our investment in our P. A facility, which has resulted in a higher quality product as well as additional capacity.
We are now prepared to meet increased demand and an expected adult use market without significant further investment.
Staying in the northeast, we entered Maryland last year with cultivation and processing.
Is the intention to become vertically integrated in the future.
With adult use on the ballot for November we.
We are taking the steps now to prepare ourselves to be vertically integrated with ample capacity and strategically located dispensaries for the anticipated increased demand.
The buildout of our new facility in Hagerstown will be complete and operational this quarter.
This is a large facility at 150000 square feet.
A fully functioning processing area and he kitchen.
Our initial cultivation space double our existing capacity with room for further expansion.
Under manufactured product side, our new capabilities enable us to expand our product offering.
We are excited to replace an older facility that presented operational challenges with a new state of the art facility.
To date <unk>.
And as the wholesale market for us.
We expect to close on our previously announced acquisition of Alleghany medical in the coming weeks subject to regulatory approval.
Alleghany is an 8000 square foot dispensary, situated within six months of West, Virginia and Pennsylvania.
We plan to rebrand the dispensary is the uplift to carry them and introduce our leading brand and form factors upon closing.
Alleghany are the first step for US we continue to actively look for other retail locations to reach the four dispensary limit.
And to better position us for the anticipated strong adult use demand.
Similar to my comments on Pennsylvania.
Current competitive environment in Maryland is offering very attractive acquisition opportunities.
In Michigan.
The second quarter was our first full quarter of contribution from the Cage acquisition.
Although not up to our expectations in our first full quarter. We have continued our integration to best position us for efficiency profitability and positive cash flow.
At the end of the second quarter, we launched our branded wholesale business.
Leveraging our popular cookies engaged brands.
With over 500 dispensaries in Michigan.
More than half of which are not vertically integrated and.
And all these sell third party products, we continue to see branded wholesale as an important growth driver going forward.
Today, our retail footprint in Michigan is comprised of 12 dispensaries, all brand that either gauge or cookies with our newest cookies dispensary having.
Having opened during the quarter in Ann Arbor.
We also introduced Khalifa Kush into our engage dispensaries during the quarter a premium cannabis brand founded by Grammy Award nominated recording artists with Khalifa.
With the pending closing of our previously announced Pinnacle acquisition.
We will add another five dispensaries and we also have plans to open three additional locations in the coming months.
Mounting to an expected 20 locations in total and Michigan.
At our monitor facility, we recently opened our extraction lab and are making progress on our cultivation expansion.
Between our state's lineup.
And the open map that will allow us to be selective on where we go next.
<unk> is set up for strong growth for years to come.
Additionally, by focusing on the team members.
By listening to our customers and by delivering quality products and achieving operational excellence, we will achieve that growth, while improving margins and driving profitability.
I would like now to turn the call over to Keith to provide a financial update.
Yeah.
Thanks <unk>.
Afternoon, everyone.
The results that I'll be going over today have already been filed on SEDAR and Edgar.
I'd also like to remind everyone that effective with our previous 2021 10-K filing in March 2022 we became a U S filer with the SEC and report our results in accordance with U S. GAAP.
All of the results that I will reference today are stated in U S dollars.
Net sales for the second quarter totaled $64 8 million, an increase of 35% sequentially and 10, 4% year over year.
The sequential growth was driven by the start of adult use sales in new Jersey and by a full quarter's worth of sales in Michigan.
Regarding sales by channel wholesale revenue for the quarter was $16 8 million a decline of 30% sequentially.
This decline was driven by our decision to discontinue lower margin non branded wholesale business in Michigan.
While focusing on our higher margin branded wholesale business in the state.
Wholesale sales were up 11% in Pennsylvania, driven by the continued recovery of the business. Following our proactive intervention in the second half of 2021, the introduction of new higher quality strains as well as the introduction of new vape and concentrate products.
Wholesale sales in Maryland were down quarter over quarter, driven driven by operational challenges at our legacy Frederick facility, along with the planned transition to our new Hagerstown facility in Q3.
Retail revenue for the quarter was $48 million an.
An increase of 87% sequentially.
Driven by a full quarter of retail sales in Michigan combined with the beginning of adult use sales in New Jersey.
Retail sales in Pennsylvania, and California were both stable quarter over quarter.
Gross margin for the quarter was 35, 5%.
Adjusted gross margin for the quarter was 47, 1% as compared to 38, 4% in the previous quarter and improvement of 870 basis points sequentially.
Adjusted gross margin excludes the one time impacts, including reserves and write downs for aged inventory and Pennsylvania dating back to a revamp of that facility in the second half of 2021.
The sequential adjusted gross margin expansion was driven by strong improvements across all of our core businesses.
In Pennsylvania, we experienced nearly 1000 basis point expansion driven by volume improvement in both flower and base.
In New Jersey margin improved by over 800 basis points as the business scaled with the beginning of adult use sales in late April .
Even more encouragingly, we saw margins improve sequentially each month of the quarter.
And Michigan margins recovered back to nearly 40% as we focused on profitable revenue by discontinuing non branded wholesale sales.
Also we opened our extraction facility at the end of Q2, and we expect margin to benefit from this capability in Q3.
Sequential the sequential improvement in adjusted gross margin was partially offset by operational challenges and transition planning at our legacy facility in Maryland. This was a slight drag on our margins, which we expect to normalize as we transition to and ramp up at our new state of the art facility in <unk>.
Stan.
G&A expenses, excluding stock based compensation were up $10 million versus the previous quarter.
Driven by the full quarter addition of the gauge acquisition.
Excluding Michigan G&A expenses were up $1 1 million quarter over quarter due to additional staffing and other preopening expenses in preparation for the start of adult use sales in New Jersey.
As a percentage of revenue G&A increased to 45, 5% in Q2 from 38, 7% in the previous quarter the.
The increase as a percentage of revenue was impacted by the addition of gauge for a full quarter as well as staffing for all three stores in New Jersey. Despite the delayed opening of our lowered eyes store, which has since opened subsequent to the end of the quarter.
Adjusted EBITDA for the quarter was $5 8 million versus $3 3 million in the previous quarter.
Adjusted EBITDA margin improved to eight 9% in Q2 from six 6% in Q1.
The improvement was driven by higher sales and improved gross margin offset by higher G&A expenses with the addition of gauge for a full quarter and costs associated with the launch of adult use in New Jersey.
GAAP net income for the quarter was a positive $14 2 million compared to a net loss of $16 million in the previous quarter.
Looking ahead, we expect sequential revenue growth in both quarters of the second half driven by the continued ramp up of adult use sales in new Jersey, the closing of the pinnacle in a M D acquisitions in Michigan in Maryland, respectively.
Growth of our branded wholesale business and Michigan as well as additional store openings in Michigan.
We also expect continued sequential growth in adjusted EBITDA as well as adjusted EBITDA margin expansion in Q3, and Q4, mainly driven by operating expense leverage.
Turning to the balance sheet, we ended the quarter with a cash and cash equivalents balance of 49 million versus $88 million at the end of March.
During the quarter, we used $16 million in cash from operations, mainly driven by tax payments of approximately $9 2 million and interest payments of $6 4 million.
Also of note our taxes payable balance at the end of the quarter was $13 million.
Capital expenditures, including deposits were $12 3 million in the quarter.
Primarily relating to the ongoing expansion work at our Hagerstown, Maryland, and monitor township, Michigan facilities.
We also made final note payments of $5 million related to our 2021 acquisitions of HMS cultivation and processing in Maryland, and Casey our dispensaries in Pennsylvania.
Our capex spending plans for the rest of the year, mainly relate to final payments for our near completed Hagerstown project as well as our expansion plans for cultivation and in New Jersey at our recently leased harmony facilities.
We have ample liquidity and access to capital as a result of our strong credit creditworthiness based on the attractiveness of our business.
Have capacity for additional borrowing due to our unencumbered owned assets and minimal usage of sale leasebacks.
This concludes our prepared remarks, I'd now like to turn it over to the operator for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. So do you have a question. Please press the star followed by the one on your Touchtone phone you will hear I think Tom prompt acknowledging other quest if people aren't using a speaker phone. Please lift the handset before pressing any keys.
First question comes from Andrew Bond at Jefferies. Please go ahead.
Hi, Good evening, everyone. This is Andrew on the line for Owen Bennett. Thank you for taking our questions. So.
So first one for me on margins, maybe for you Keith obviously, a very substantial improvement in the quarter, but this was largely expected and we know there was kind of a lot of factors going into this like optimization of production in Michigan, just can take discontinuation of non branded wholesale New Jersey coming online.
Plus I would imagine a greater mix of branded sales via retail also helped so could you quantify or help differentiate the magnitude of those various benefits and any impact other than that to call out.
And related to that how should we think about margin trends for the rest of the for the rest of the year. Thank you.
Sure Hi, Andrew.
Yes. So I think you you highlighted a lot of the key drivers and.
And pretty much in the way I talked about it in my prepared remarks that that was the order of magnitude in terms of priority order of.
The drivers on the impact on our sequential margin gain.
I think as we look forward.
There's going to be.
Our balance of.
Of headwinds and <unk>, so I'll start with tailwind because we have a lot of actions underway. We have continued ramp up of our new of our business in New Jersey, That's first and foremost really going to continue to drive our margins upwards because as I said we've.
We've seen month on month on month.
Improvements in our gross margin in New Jersey.
As I mentioned the extraction lab in Michigan, that's going to really start to kick in and we believe that's going to get us from from.
The third the 40 or so percent Mark that I've mentioned are well up into the Forty's as we we can start to.
Manufacture and sell our own <unk> branded <unk> in Michigan. So that's another key driver.
And then.
And then we also have one thing I Didnt mentioned in my prepared remarks, but it's got to provide color on as we have a number of other.
Cogs Ah.
Initiatives that we have underway to continue to drive down the cost per pound across all of our facilities and we have some some plans with <unk>.
Boosting from internal talent resources boosting our.
Activities there.
And so that's a lot of the runway on the positive side and then we also just need to keep to be mindful that we need to continue to provide the fuel.
To combat any continued pricing pressures that we that we do.
C across our markets.
Great Super helpful and then second one.
On the hydrocarbon extraction facility in New Jersey, and just generally that that market.
Maybe for you Ziad I wanted to get a sense of your production levels.
Relative to the demand you are seeing in your own stores.
Production of these products still ramping are you putting any purchasing limits on any of these products like limiting our rec customer to one live vape cartridge per transaction, just trying to get a sense on your outlook for this production versus anticipated demand for these products.
Yes. Thank you Andrew at this point, we do not have any limitation on the production and we don't have any limitation on the customers on the pace and the patients on what they get we have a robust plan of innovation that is coming.
Down to five here, both in Q3 and Q4.
Under different brands that cater to different segments of our customers are but to answer. Your question. There is no limitation.
Fantastic.
Thanks, I'll pass it on.
Thank you next question comes from Ken Mackay at ATB Capital markets. Please go ahead.
Thank you and good afternoon, I appreciated the color on Maryland, obviously, a market that is increasingly a focus for the majority of players in the space could you provide a little bit more color around the issue you run into and what it is about Hagerstown, Nick will be that much better that much different I guess the scale.
Our piece of the equation.
Just better understand the evolution of the model and then second to that and Marilyn <unk>.
Hold out the fact that there is obviously increasing opportunity or acquisition opportunity.
That's four dispensary cap, but if you could perhaps help us handicap timelines around that or the agency that you're bringing to getting to that four dispensary cap. Thank you.
Yes. Thank you very much from a modeling perspective, the simple reason, it's an old facility that had old equipment.
That start going down during the summer season, and the manufacturer of those <unk> is no longer in business.
Fixing and replacing those equipments have caused a tremendous pressure on the production volume and the production quality.
That is why we're very excited to transition into the new facility, where that would be part of the past.
So that is from their own perspective as far as the opportunities.
A buyout perspective, or M&A Kendrick, we're seeing opportunities that are coming in.
That are extremely attractive and at multiples that are that are that are.
Magnifying.
The macro environment that is putting the pressure on small.
Small businesses from the interest rate to the capital.
Market inflation has really pushed some of the smaller businesses to look at their candidates.
Business different than how it was three or five years ago and that is what we are looking at not only in Maryland across the board.
Keith Jason and I are being presented almost on a weekly basis by.
By opportunities of different sizes.
Potential partners, who are talking to us for dose.
M&A.
Thank you Rob that's ready to sell and then just a quick one on Pennsylvania, if I could as well obviously encouraged to hear that.
<unk>.
So just how strong the performance was in the context that market.
But all of a sudden mindful that you called out sort of a flattening of that patient count grows and how much more challenging wholesale is becoming can you can you sort of frame up for us how you intent navigating that you obviously have managed.
And that is to increase your flower prices on the new strains.
But just how challenging is that wholesale environment. Today do you think it's going to get more challenging in the back half or do you think that you have the tools necessary to help mitigate some of those challenges how do we how do we think about the evolution of Pennsylvania through the second half after what appears to have been a a good second quarter again in the context.
The market.
Yes, Kevin I think it's a great question, Hey from a wholesale perspective, there are some decisions that are made today by our operators to increase their vertical shelf. It's a it's a short term move and its a reaction to pressure that is caused by the environment, but the recession by the.
<unk> by the pricing and the state.
In my opinion could it work or not the only group that will decide this is the patients are there.
Patients in Pennsylvania.
We know very well and Keith and I have done the modeling for every 10%.
<unk> on your shelf space of your own virtual vertical product you can.
Uh huh.
Increased gross margin by around 3%, but the real question is at what cost of revenue, we believe from a both retail and wholesale perspective, the right mix of having the right quality on yourself in retail and presenting the right quality to wholesale while keeping the.
The drug the medication for that patient are something that they had relationship with will be the winning combination at the end of the day. So how will the next or the second half of the year award from wholesale.
We're happy with the 11% increase sequential increase we saw in wholesale.
We're happy with the price that we are seeing on our new quality and then we're expecting the patients to keep their send their tie as far as the product.
Portfolio that they expect to see on their menus.
Very interesting mass and appreciate that so as yet a quick final one for me on probably a long shot but please you called out expected margin sequential sequential revenue growth sequential margin expansion in some of the drivers.
Alongside a part of the question here is are you willing or able to give us some sort of targets a target margin or at least a target range exiting the year I mean, what is the quantum of the improvement we can potentially look for here, even just directionally be useful.
Yeah Yeah.
Ken or it gets.
So.
Again, we're really trying to highlight that our.
What's really difficult to predict are the headwinds on pricing what.
What we can control is everything else, we're doing about it internally to provide the fuel.
And so that's where it's hard to give too much of a guardrail there but.
We're confident in everything we're doing and everything I outlined to Andrew earlier.
And that's really going to give us a F.
If if pricing pressures subside at some point, which actually we believe they should at some point and yet the market by market thing but.
There are different cycles, but we're we're doing everything we can internally with all the initiatives that we have underway to continue to drive our costs down at our facilities.
And all the other things that I that I outlined earlier.
Great. Thanks, Chris I'll leave it there and get back in queue.
Thank you next question comes from and she put Danielle at Stifel. GMP. Please go ahead.
Hi, good evening, thanks for taking my questions.
Maybe starting off with your balance sheet.
You know correct me if my math is wrong, but I think you have $240 million in that $60 million due in November from the gauge acquisition.
<unk> position is 48 million.
Could you talk a little bit about your cash management plans over the next few quarters.
The potential for refinancing of that maturing debt.
And.
What kind of debt to EBITDA.
We're targeting given this quarter it may not be fully representative of your normalized leverage ratio.
Yeah, Hi, Andrew.
So yes, you're you've read it right in terms of the facts of our debt levels.
As I mentioned, we have 49 million of cash on our balance sheet, we have.
For example, if you look out over the runway, we have new Jersey generating really strong cash flow cash flows for us on a weekly basis.
So projecting forward, we have that coming in we do have the gauge loan that matures in November and we.
We are looking to refinance that loan and we've been actively out in the market talking with with various lenders and.
Are very encouraged by the interest and responses that we're getting and the kind of rates and terms that we're hearing in the midst of a difficult.
The environment for borrowing that we're in but.
That's our intention there and.
As I mentioned in my part earlier, we are we feel like we have additional capacity to borrow against our other.
Other assets that we own in other states that are unencumbered.
And so that's that's kind of our game plan for our balance sheet.
Yes, Andrew the only thing I want to add Keith says.
The reaction we're seeing.
During our conversation is really.
Anchored around the available asset that we have.
The crew.
Credit worthiness that we earned in the market, but also the partnership versus the lender ship that those groups are.
Expressing to us because.
The J wind investment in this business and the stake hold that they have the.
The interest that they haven't done so theyre coming into a partnership more than a lender ship.
Thanks for that and maybe.
And maybe continuing a little bit on on that theme considering that you are looking at acquisitions.
Just coming back to that leverage ratio, if you're thinking about raising debt to two.
To pay for or fund those acquisitions.
And as well I think in the press release, there was a little bit of talk about raising equity.
What kind of share price improvement would you like to see to justify raising equity.
Hi, it's Jason Jason here, I would say that the.
The comments on raising equity.
For some point in.
In the future, where our stock is appreciably.
Better than it is than it is today, we're not we're not considering that.
These levels in terms of acquisition opportunities there is.
Our broad range of opportunities that we're looking at some of them are very cash light or many of them are already cash light some of them are structured some of them.
Have the ability to use a part cash part stock.
And then Uh huh.
Further payments or earn outs.
At some point down the road so we.
We think that there's lots of arrangements that would be very balance sheet friendly that would and would bring in.
Excellent assets to the company in terms of what we're seeing out there I would say that first of all we have we have no fomo, we think that the current assets. We have are excellent and are going to provide a really nice glide path of growth over the next two.
Two or three years.
So.
What I would tell you that it has changed versus just a quarter ago.
Is that while we are seeing a similar if not.
Larger amount of incoming traffic potential deals.
Assets are getting better.
And the multiples the expected multiples are going down.
That is that's something that we're that we've been getting more and more excited about.
And we think that.
We are still not quite to the point, where we're seeing I've used this term internally, where we think.
The whites of their eyes, or where we're getting to the point where deal is just so.
Tractive that we that we.
I would sort of be crazy, if we turned it away we're.
We're getting a whole lot closer to that and I think that we will be seeing in the coming months.
That will that will end up taking advantage of.
At least one or two of those opportunities.
Thanks for the color I'll get back in the queue.
Thank you next question comes from Vivien <unk> Cowen. Please go ahead.
Hi, Thanks, good afternoon.
Appreciate all the questions are around M&A critically with what keeps pointing out the sequential margin improvement will be driven by operating leverage that that's clearly a component of that that Keith I wanted to just follow up on that.
With the full integration of gauge a clear step up in terms of SG&A dollars sequentially like what opportunities are there for increased cost synergies as you continue to look at you know somewhat extended business recognizing that you guys have a more narrow geographic footprint than some of your peers. Thanks.
Yes, Hi, Vivien.
Yes.
Yeah.
We just just like the Cogs initiatives, we have.
A pretty long list of operating expense initiatives as well.
I don't know if your question was targeted specifically at Michigan, but.
We've taken some some pretty notable actions already.
In Michigan and there's more.
More opportunity to come but but more broadly there.
There's opportunities to continue to drive savings and productivity.
Across the board that we're pursuing pretty aggressively and we believe that that combined with continued.
Growth in our revenue is going to give us better operating leverage and we see this this quarter being a peak because really absorbing that full quarter impact of the operating expenses in Michigan was.
Was quite an impact in Q2 in fact, some of the actions that we that we took in Michigan. We took at the end of <unk>.
At the end of the second quarter that didn't have much of an impact in the second quarter, but we're already starting to have an impact in the third quarter and beyond.
So hopefully that provides a bit more context there.
Yeah that's helpful.
And if I could just follow up with you Keith.
I'm sure, you're certainly aware of what external expectation and one for the quarter and what they are for the year, we've tried to be conservative.
Came in below our expectations.
Do you care to comment on external expectations for revenues in the back half. Thanks.
So.
Look we've we've been focused internally on our business, we stopped giving giving guidance I know that makes it tricky for everybody.
Everybody's estimates are to come in line with how the business is trending.
We do have a lot of moving parts with bringing engage onboard with the.
The the revamp in Pennsylvania, and a shift in their entire operating environment in Pennsylvania. So there's there's a lot of moving parts. So I understand it's difficult to model all of that.
The New Jersey ramp up so so I don't really have a comment on the back half of the year consensus numbers.
I assume everyone will re look at those numbers and in light of.
What we reported this quarter and some of his comments it commentary on on what we expect.
Broadly speaking in the back half of the year.
Thank you next question comes from Eric Taylor.
Craig Hallum Capital group.
Please go ahead.
Thank you for taking my question.
Would you quantify the capex that you're expecting for Maryland, and New Jersey expansion, and then perhaps touch on timing expectations.
Hi, Eric Keith So.
The Capex project for Maryland is pretty much complete at this point they're still.
Payments that that'll be made according to the terms but.
But the projects complete.
And then new Jersey without getting into specific detail on exactly New Jersey is now underway if I if I could frame. It for you the way I'd frame. It is that our capex plans in the back half of the year, which are essentially new Jersey will.
We will be.
Slightly below the capex spending in the first half of the year. So that's about maybe that gives you an idea of what to expect there.
And does that comment sorry, just to clarify does that include the pending payments for Maryland.
That now and then and then that layering that on top of the new Capex spending in the back half plus plus pending payments from Maryland, <unk> will be the back half spending.
Okay.
And do.
Do you expect I mean, just.
I appreciate the color on some of these margin.
Cost improvements that you guys are focused on do you expect to generate positive cash flow from ops in the second half.
We're not we're not giving a specific time frame on that.
But we're focused on the initiatives that I described continued sequential progression.
Across the line items.
And with an eye towards positive operating cash flow.
If not by the end of the second but in the second half by the first quarter of 2023.
Thank you I appreciate the color Keith.
Thank you next question comes from Matt Mcginley.
Amit at Needham. Please go ahead.
Thank you Dave a more specific follow up question on Michigan revenue slipped a $17 $5 million, but even at a 40% gross margin rate. It sounded like based on your comments of G&A was probably around 12 million bucks in the quarter, which would imply youre really moving in the wrong direction in terms of profitability and our state. So my question is you mentioned some of the cost cutting.
But what turns for you in Michigan to get that to profitable is there that much corporate overhead in the state.
You need M&A to get to get back to profitability or is there just a four wall profitability problem with the stores that might be harder to fix.
Yes, Matt this is <unk>. Thank you for the question.
It's not so we have some synergy that we already started.
Exploring here between Michigan and the remaining of the businesses, starting with our marketing and our user experience team. Some of the initiatives that we took out of Michigan and then.
That created a share service with a market like new Jersey, instead of bringing in.
Additional talent and head count.
We created that shared service to be spread across the enterprise in Michigan itself.
While it does not show in this quarter, what Youll see in the next quarter.
We've had specific initiatives.
One of them is around the Cogs.
Specifically from an automation perspective, and from a labor perspective as it comes to the cost of production.
Have reduced the cost per pound by around 10% to 12% with a plan by next quarter for the cumulative reduction to be around 30% on that.
Cost.
Production per pound.
The second area that the team has done an outstanding job in Michigan immediately spring sprinting into action as both.
Okay.
Mid level management, but also on the labor model piece and retail.
When you look at our retail labor model in general in the industry. It sits somewhere around two to three transactions per man hour, we believe that across the board not only in Michigan.
Labour model needs to look more like four to six transactions per man hour and also the stores needs to be paired with the floor labor model and additional model that goes in with transaction.
So those initiatives have already took taken places in Michigan and we are already seeing the benefit of this so to recap on the Cogs that is on the.
Opex side from a labor model perspective, and it is on the overhead by leveraging the team that was built.
For the future to fit for the present across the entire enterprise.
Yeah.
Okay. Thanks for that and then my follow up is on the New Jersey. When do you believe that youll be sufficiently sufficiently supplied to begin selling more wholesale product to other dispensaries in the state.
The $40 million run rate for the dispensaries I'm just wondering how we should think about the wholesale opportunity in the first year not just not just the retail opportunity.
Yes, so in New Jersey, we already have started our wholesale.
The efforts we've had.
An exciting wholesale market.
We waited we carefully plan to make sure that Florida.
Set up well Maplewood third stores are set up well and the wholesale team has done an outstanding job we consider ourselves.
Last quarter to be tough to wholesale supplier to the.
The market in addition.
Two the current sale was seen as more.
Applications are granted and more licenses.
Licenses are coming online the team is already engaging six to nine months prior to the opening of retail.
To make sure they established that relationship also detours.
Hmm.
Let the potential wholesale customers learn about the product see the quality in order to become a customer but down the down the line and our loyal customers.
Thank you.
Thank you. Your next question comes from Glenn Mattson Ladenburg. Please go ahead.
Hi, Yeah, just on the M&A strategy I'm curious about the just the thought process in terms of.
Historically, you've done well by trying to get into states before legalization happens getting there early wait it out until adult Rec comes along.
Is that you go to look for more states on that side of the equation or is it more just a financial transaction whereby if you get the deal that's just too hard to pass up.
No matter the market.
There's just a huge jump on a deal like that which which of those two is more accurate.
Yes, I would say it's more.
We're looking for acquisitions in markets in medical markets that are that are going to go wreck the whole sort of eat while you dream approach theres lots of <unk>.
Places our ways to go.
In Pennsylvania, and in Maryland, where we can buy more assets. They are benefited by the scale.
While we dream and then.
And when it goes rack then it's off to the races.
In terms of new markets.
There are certainly multiples are certainly less in states that have already gone wreck.
But we are still more focused on.
The also attractive valuations of assets in medical states.
Or that or.
Sure.
Looking like Theyre going to go rack in the coming up in the coming years.
Thanks. So one quick one also on Marilyn do you have a sense of like if the vote would pass.
Like how ready is that state that.
To turn on.
Have they learned from some of the mistakes made in other markets.
Just a sense of have you talked to the.
The powers that be there and have a feel for the appetite once the vote happens.
Yes, so here's the facts today, we know we have a.
This is on the ballot for November .
The other fact that the governor said.
They will not.
Interfere into signature and they will let it go so those are all great signs.
All of the survey.
Survey showed that it will talked about so those are the facts that we know today than as we all know.
It could be in Arizona, it could be a.
Illinois or it could be a new Jersey approach, we hope or timeline, we hope it's in Arizona.
And a few few.
Opinions.
Lead us to believe in flu a few government affair lobbyists lobbyists lead us to believe that it is a 2023.
Launch.
And maybe just to add that it's a more developed medical program than New Jersey was so new Jersey had a lot more to work through.
Not given any excuses to the state there, but that maybe is why it took longer yeah.
And one thing I would add to that if I believe and this might it might not be.
Still true, but I believe that the question as it was written to be on the on the ballot said something to the effect do you think that adult use should be approved for <unk>.
People that are over the age of 21 on I think it was like July 30, <unk> 2023, or something to that effect, which would.
If we're reading the tea leaves right and it doesn't mean that they'll execute it in.
And get it open.
On time or as they plan, but that also leads us to believe that it will hopefully be implemented sometime in the summer of next year if it if it passes the vote.
Okay, great. Thanks for color.
Sure.
Thank you. Your next question comes from Noel Atkinson Clarus Securities. Please go ahead.
Good evening.
Guys. This is George dialing in on behalf of note most of our questions have been addressed so just a quick one here.
Are you guys still targeting to have 40 or more retail stores in your portfolio by the end of the year.
Yes, so George where we're being very agile and we are where we're not being stubborn and we're being stingy in where we're allowing we're letting the environment.
Guide us on where to go Michigan for example.
As as the state adjusted quickly and it's a challenging environment and arguably.
It's one after.
Fastest switch, we've seen anywhere, including Colorado and California.
<unk> reviewed our plan and we felt that.
Three stores plus the five stores that we are acquiring.
With critical would be the best fit for that next quarter, and we will continue to evaluate and we will continue.
To see what the next moves are no.
Pricing is one factor that will help us decide on that retail versus wholesale the other factor.
Ed.
Uh huh.
We are seeing in every state.
Publicly the names are published of cultivation assets.
Shutting down or reducing their production by 80 or 90% that is going to bring in some balance between the supply and the demand. That's what Keith was referring earlier do we expect the price to balance at some point. So that dynamic continues then.
The.
Getting getting back to more aggressive on the on the on the retail or increasing our retail fleet.
We will be.
Will be.
At the center of our attention now also what we have decided.
Yeah.
We're being very thoughtful and we take we put big efforts to think.
On the <unk>.
Every dollar we spend from a capex perspective.
We believe in today's environment.
Buying an operational store that is established.
We are doing with in Maryland, and Pinnacle is a smarter and better decision than building its tour from the ground up.
And all the all those balances is what will determine where we will be from our counts.
Yeah.
Got it that's helpful. That's it for me. Thank you guys.
Thank you Kurt.
Thank you next question comes from Andrew sample at Echelon capital markets. Please go ahead.
Hi, there good evening, thanks for taking my question.
Just wanted to return to the pressures faced in Michigan and I. Appreciate the color provided so far on the wholesale dynamics in that state I guess cause Matt already pointed out theres. Some disclosures made in the financial statements I would suggest that.
Sales in that state were down about 27% quarter over quarter.
Just given the retail and wholesale mix.
It's been typical in that market that magnitude of decline would appear to suggest there was also some fairly significant pressure on retail.
In Michigan within that quarter.
If that is the case could you maybe spend some time on the retail dynamics in Michigan for the second quarter and what your expectations are for.
Sales per store and.
For the second half of this year.
Yeah.
Yeah, Hi, Andrew This is Keith I'll start and then Seattle pick it up but I think it's just worth clarifying that <unk>.
7 million came out quarter on quarter.
<unk> to our decision to no longer do bulk wholesale which was a very low margin business. So that's going to make us healthier going forward and that distorts, maybe what youre seeing or picking up and.
And what's been disclosed there.
Ziad I will take the retail question.
Yes from a retail perspective.
We mentioned that retail is flat no matter, how you slice it retail flat in Pennsylvania, and Michigan, Obviously in New Jersey is a is a happy story of the honeymoon series Great story for Us and we're Super excited because we see in our future in Pennsylvania, and New Jersey, but.
The sales.
What we look at through a really an excellent.
That's for dashboards and.
Data driven.
That forms on the loyalty and the acquisition and the retention of patients and customers any state for example in Michigan.
From Q1 to Q2, we have seen a 20% increase in customer count and our retail stores.
New customers were accounted.
Accounted for 50% in Michigan, So we still acquiring customers in Michigan.
And a very attractive way the retention piece is we're just consistent sensitivity for pricing comes and the story in Pennsylvania is even brighter.
We look out.
We look at our loyalty in 60 years.
The three tiers are the loyal customers.
There are super loyal customers and the Super Super loyal customers the Super Super loyal customers visit us more than 10 times every 90 days.
The one below visit a five to 10 times every 90 days and the loyal visit us more than four to five times every 90 days in Pennsylvania, 80% of our.
Our customers are.
And those.
Bucket, the three I described and 70% and are Super.
Super loyal and Super Super loyal in addition on the other hand, we look at the customers.
That are new to us that have not used that in the previous six months and we see that acquisition is getting much better in retail for us and I think the combination of that retention.
Acquisition is what allowed us to be flat.
In an environment that is.
Challenging or in an environment, where the state itself.
Yeah.
Has flattened or has gone down you look at our.
Pennsylvania for example.
Since since March the market sales has gone down from 104 to 95 million similar story in Michigan from a market sales so in that environment with sales plateauing and the state cultivation increasing.
Retail doors, increasing for us to be flat when we dissect the data we feel that it's working it's working as well as we can make it towards today.
Okay I appreciate the additional color there and one more quick one if I may.
I know you don't typically comment on state by state data, but maybe just directionally here how does the gross margin profile of the New Jersey is shaping up to some of your other limited license markets.
Our vertically integrated I guess, namely, Pennsylvania.
Yeah.
Yeah.
It's fantastic so the picture in New Jersey.
Is.
Is probably as good as you can get in a market given the dynamics there. So we're seeing.
Very our healthiest by far gross margin profile in and like I said getting better month over month over month. So we're still not at a point, where we're far enough along in the adult use program to to say that we've topped out.
With getting scale and a.
Cost leverage for gross margins. So we're really encouraged with where we are April through may through June .
And continually encouraged to see where we can go from here and that's also without even adding in the.
The additional Cogs initiatives that we keep talking about because we don't want to just rest on our laurels even in the state like New Jersey, we want to continue to drive optimization across all the lines.
Great. Thank you.
Thank you. Your next question comes from Pablo <unk> at Cantor Fitzgerald. Please go ahead.
This is Matthew Baker on for Pablo. Thank you for taking our questions can you comment on the New Jersey market cadence after the first month sales of $24 million.
Was that pent up demand in the market has dropped or our sales much more now.
Just any color there would help and then can you comment on whether your two rack stores, excluding Lodi, which just opened or above the market average per store of $2 million. Thank you.
Hi, Matthew it's Keith again.
I'm sure I'll chime in.
It's.
I guess the first thing is it's difficult to say because that first month.
Information that came out.
Everybody in the state kind of felt like.
So about the accuracy of that information so I'll set that aside for a minute and then maybe just comment on.
How we're doing and we're really positive I think we shared it in our opening remarks, and and reinforced our belief that that we can reach $40 million at each of our stores and.
It's hard to say because the data is not published across the market, but one would think from.
That piece of information that that would be a.
Over indexing versus the market and it makes sense to us because we believed all along way before the adult use program even started that our.
Advantaged store locations in Northern New Jersey.
And our operational capabilities would would get us above average so.
Yes, I think Thats ziad.
Yes, the only thing I want to add.
From a data perspective, I know, it's a short period, but we take that first month data of $24 million and then we know factually that 17% of the door sure that beyond the state delivered 20% share of the revenue of that number.
That was prior to launching cookies.
Prior to launch engage there was prior to launching.
Concentrates.
That's prior to opening the cookies.
The corner.
All those are events that have created record foot traffic and revenue for us and that is what has given us the confidence around the $40 million that we talked about in each store and.
I can tell you how excited we are Matthew about Lodi Grand opening on the <unk>.
Saturday, So oh I'd be there remembering my pharmacy days and working the drive through and the first drive through drive through and the state.
But those are the facts anecdotally.
But confidently we feel that we are doing better than average and better than many.
Okay. Thank you for the color on that and then just one more question question also on New Jersey can you comment on your retail versus wholesale split and then how much of your New Jersey retail sales come from your own branded products. Thank you.
Yeah in New Jersey is acting almost like fully vertical.
90, plus.
Totally vertical but that's by design.
And because it's early and because we're selective and because of our product. We don't think we will stay there similar to my color on Pennsylvania, the customer in the patients as the state.
And the customers gain more experience with Canada their expectation and the excitement goes up in foot traffic improve improve and basket size increases when you're.
<unk> portfolio and your menu is faster and bigger so.
It will not it will take some time, but we will thoughtfully through the right partnership.
Other wholesale providers that we believe in the quality that fit our vision and our strategy, we will increase that dynamic between owned brand and third party as far as the question around wholesale.
Versus retail.
We're still in early days, we were extremely conservative first to make sure that.
Nathan Burk throughput are supported with everything we produce and that's actually happening.
Florida was our biggest one.
And even though we're excited about this saturday or about two weeks ago. During the soft opening took longer than what we expected.
Knowing that as Don busier than the other store, we managed inventory in a conservative way.
But once one slowdown fix and we will we will be able to unlock and has a better understanding of that mix between wholesale and retail.
Thank you and I can assure you as new.
New Jersey would be to us a demand market not a supply markets anything thats, new produce we will be able to sale and we'll decide that mixture between the two.
That is most beneficial to us.
Yeah.
Thank you there are no further questions you may proceed.
Thank you for joining us today, and we look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.