TerrAscend Corp. (TRSSF) Q1 2023 Earnings Call Transcript
Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I’d like to welcome everyone to TerrAscend’s First Quarter 2023 Earnings Call. Joining us for today’s 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 there too and the company’s expectations regarding its market opportunities is listing on our Toronto Stock Exchange, and other financial and operational matters.
Each forward-looking statements discussed in today’s call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance.
Additional information regarding these factors appears under the heading Risk Factors and Company’s Form 10-K filed earlier today with the Securities and Exchange Commission or the SEC and other periodic filings which are available at www.sec.gov and on our website at www.terrascend.com. The forward-looking statements in this call will speak only as of today’s date, and we undertake no obligation to update or revise any of these statements.
Also, during the call, we will 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. Today, we reported our six consecutive quarter of sequential revenue growth generating $69.4 million for the first quarter of 2023, an increase of 43% year-over-year. We achieved this growth despite the typical seasonality we see Q4 to Q1, as well as the ongoing macroeconomic and cannabis industry challenges. This achievement is a result of the dedicated focus on our strategy, strength of our business model, and the operational and balance sheet measures we took in 2022.
Most notably, gross margin significantly improved sequentially by 420 basis points during the first quarter to 48.8%. We also achieved our third consecutive quarter of positive cash flow from operations delivering 8.4 million for the quarter. What I’m most excited about is that we were a free cash flow positive for the quarter, having generated $5.9 million, which contributed to an increase in cash and cash equivalence from 26 million as of December 31st to 33 million as of March 31st.
Not many in our industry can point to consistent financial progress like this in such a challenging environment. We have delivered on what we said we would do for the last several quarters by controlling what we can control and navigating the rest. This steady financial progress lends itself well to our plans to list on the TSX and we are on track to complete all of the steps required to do so. Our annual shareholder meeting is scheduled for June 22, where shareholders will be able to vote on the reorganization required for our proposed listing.
Assuming this is approved by our shareholders and the TSX grants approval for the listing, we should be in a position to commence trading shortly thereafter. We believe the TSX listing will provide the company greater access to a broader group of institutional and retail investors looking for attractive opportunities in the U.S. cannabis space.
This broader appeal should provide increased trading volume and a considerable advantage during M&A discussions. And several ongoing discussions, we are seeing sellers more willing to accept tariffs on stock as consideration and assign a greater value to our shares once listed on a major exchange.
Just to be clear, we don’t look at the TSX listing as a magic bullet. The capital markets have clearly been unkind to the cannabis space over the last two years. We do believe, however, that a well-run cash flow positive company can unlock substantially more value and significantly lower its cost of capital if listed on a major exchange with more participants. This is in my view, not only a great opportunity for TerrAscend, but also for other players in the industry, as our successful listing could blaze the trails for others to follow.
When we think about the trajectory of the company over the coming years, we see robust organic growth driven by our attractive line-up of states converting to adult use, and we see abundant M&A opportunities given our deep not wide strategy. This strategy has served to drive revenue and profitability through a more focused number of markets with the ability to go deeper, while also leaving an open map to enter new markets at the right price.
As I mentioned during our year-end conference call in March, we continue to see an increasing number of attractive opportunities in our pipeline. These opportunities range and type across the entire spectrum with private and public companies, single state and multi state operators as well as single and multiple sets of dispensaries within specific states. We are definitely still in a buyer’s market with distressed operators looking for a lifeline. However, we will remain patient and disciplined in our approach. I often say that the best way to get good M&A deals done is to not need to do any M&A. Given our runway, we feel like we are well positioned in this regard.
Lastly, to comment quickly on the ebbs and flows of the regulatory environment. Recently, a standalone safe banking bill was introduced in both the House and the Senate. Initial indications point to support from both parties, while we will continue to operate as we have them assuming no regulatory reform, any progress on this front would be a major catalyst for the industry.
In conclusion, we continue to make substantial progress in Q1 across virtually all facets of our business. We grow revenue sequentially for the sixth consecutive quarter and 43% year-over-year, we significantly expanded our gross margins and generated positive free cash flow, which led to increase in cash on our balance sheet. These achievements are all after having materially lowered our debt and interest expense in the back half of 2022. Looking ahead, our organic growth runway is attractive and we have ample M&A opportunities in our pipeline.
Before I turn the call over to Ziad to review our operations in more detail, I wanted to congratulate him on his recent promotion to Chief Executive Officer. I want to personally thank him for all he has already achieved with TerrAscend and I know I speak for our entire team, when I say that I am excited to see all of his future contributions to our growth and success.
Now I’ll turn the call over to Ziad to provide an update on our key markets. Ziad?
Thank you, Jason. I really appreciate those kinds words. I share your excitement regarding everything we have achieved in the last few quarters and what is in store for us in 2023 and beyond. I will now walk through our operations state by state.
New Jersey continues to be a strong market for us at retail and wholesale, where we hold a top three market share position. Our already strong margins continue to improve in Q1 through various initiatives, including optimization of product mix and balancing retail versus wholesale revenue, combined with sequential revenue growth, and a further reduction in our cost of goods. The most recent BDSA data ranks as top three operator in this state where we are over indexing in key product categories, including flower, vapes and concentrates.
In pre roll, we gained four points of market share in the quarter and we expect to drive material market share gains in edibles with expected launch of one which takes place tomorrow. We remain on schedule and on budget for further expansion at our Boonton cultivation facility, which will enable us to extend our supply to this growing market in early 2024.
Turning to Maryland, first quarter sales nearly tripled sequentially, although off of a low bay, mainly due to revenue contribution from our retail dispensary and the first harvest at our new state-of-the-art Hagerstown facility during the quarter. I’d like to add that while it usually takes a while to dial in the quality at a new cultivation facility, we have been extremely pleased with the quality of these early harvest as we are seeing yield per square foot, but to trans ratio, the THC Potency at levels comparable to our facilities in other states have been operational for much longer.
Now that we have absorbed the full cycle of harvesting, margins in Maryland for Q1 improved [indiscernible] and we expect to continue to expand as we ramp up our volume and move to adult-use in July. You have been gearing up for this [Maryland launch] as we did in New Jersey, strategically building inventory to ensure we have the capacity and resources to meet the expected demand surge. As you may recall, in late January, we closed on our AMMD dispensary acquisition, which contributed to revenue in February and March. Acquisition was Phase 1 of our vertical integration efforts in Maryland.
AMMD is 10,000 square foot high performing medical dispensary that currently generate approximately $8 million in annualized sales, which is two times the state average per dispensary. We are very excited for its future prospects as an adult-use dispensary due to its unique geographical positioning at the border of West Virginia and Pennsylvania, both currently medical only states.
M&A in Maryland is a top priority for us. We remain focused on adding three additional dispensaries to get to the four-cap limit. Our strategy of entering with cultivation and manufacturing first, with a plant or is picking up retail as we get closer to adult-use is working out very well. The pipeline of dispensary operators, with a desire to sell increased substantially given the five-year transfer restriction contained in the new adult-use bill. We are actively in discussions with a number of excellent prospects and look forward to sharing developments on this front very soon.
We are also prepared for adult-use launch from a branding perspective with a broad portfolio of high-quality products and winning brands such as Kind Tree, Gage, Cookies, and [indiscernible]. When adult use is implemented in Maryland, we will be more than ready to capitalize on the opportunity. We have built a strong foundation to both support this launch and ensure our long-term success the state.
Now let’s move to Pennsylvania, which as I mentioned on our last call, it is sleeping giants the current medical market size of more than $1.2 billion. Right now, the regulatory test of adult-use continues to progress. Although, we expect we will have more clarity on finding in the next few months. In the meantime, we will continue to minimize expenses and optimize efficiency of our existing operation. For the first quarter, both retail and wholesale revenue were stable sequentially.
As we’ve stated previously, we are already fully built out at our large-scale cultivation and manufacturing facility with plans in place to bring on currently unused capacity as needed in response to adult-use implementation.
Turning now to Michigan, we continue to execute on our plan to drive further market share gains and profitability in the state. Revenue quarter-over-quarter was stable, even taken into account the expected Q4 to Q1 seasonality. Our rent strategy has proven to be very effective in this market, demonstrated by the significant premium to the average price in the state.
The recent opening of Lemonade Centerline, we now have an 18 store retail footprint in Michigan. We also completed a soft opening our 19th store in Oxford, with the grand opening scheduled for this [indiscernible]. Our revenue remains stable, gross margins extended materially versus Q4. Reflecting the actions we have taken to optimize our operations and reduce costs.
During the quarter, we increase the mix of the TerrAscend’s brands versus third-party brands at our dispensaries. But our now fully operational extraction lab poised to add additional form factors and a broader array of products in the coming months. We are confident in our path to positive EBITDA during the second half of 2023. While we see a healthy pipeline of M&A opportunities to add to our retail store count of 19 in Michigan. We remained very disciplined, while focusing on margin expansion and profitability of our existing operation. Last but not least, in Canada, we announced recently that we increased our ownership of our cookies retail store to 95%. This will enable us to focus more on our retail business in Canada and have better control of our own data.
In closing, Q1 was a very successful quarter for us. We are pleased with sixth consecutive quarter of sequential revenue growth and our third consecutive quarter of positive cash flow from operations that we have achieved. We’re even prouder that both the operational and balance sheet measures that we took it in 2020 continue to result in improvements gross margin, EBITDA, cash flow from operations and free cash flow.
With our exceptional team, high quality products and brands, and improved balance sheets and exciting lineup states and best-in-class institutional sponsorship. I am more confident than ever and our ability to grow profitably both organically and through M&A.
I would like now to turn the call over to Keith to provide a financial update.
Thanks, Ziad. Good afternoon, everyone. The results that I’ll be going over today have already been filed on both SEDAR and EDGAR. And all results that I will reference today are stated in U.S. dollars. Net sales for the first quarter totaled $69.4 million, compared to $69.0 million for the fourth quarter of 2022 and $48.6 million during the same period last year, representing positive growth sequentially, and 43% growth year-over-year.
Retail revenue for the quarter was $55.4 million versus $57.2 million in the previous quarter, representing a 3% sequential decline which we expected due to seasonality. Retail revenue was flat sequentially in Pennsylvania, down low-single-digits in New Jersey, Michigan and California, all due to expect to seasonality and up in Maryland driven by two months of sales related to the acquisition of AMMD.
Retail growth was 115% year-over-year, driven by the acquisitions of Gage and Pinnacle in Michigan, and AMMD in Maryland, as well as the launch of adult use sales in New Jersey in April of last year. Wholesale revenue was $14 million in Q1 versus $12 million in Q4, representing a 17% increase sequentially, driven by growth in New Jersey and the expansion of our branded wholesale business in Michigan.
Wholesale revenue declined 41% year-over-year, driven by the discontinuation of bulk wholesale in Michigan after Q1 of last year, and decline in our wholesale business in Pennsylvania as a result of further virtualization in the state. Gross margin for the first quarter of 2023 was 48.8%, compared to 44.6% in the fourth quarter of ’22 representing a 420 basis point improvement quarter-over-quarter.
This impressive sequential improvement was driven by increased yields, optimization of mix and better utilization of capacity in New Jersey, Michigan and Maryland. General and administrative expenses for the first quarter of ’23, excluding stock based compensation, and depreciation and amortization were 26.0 million, compared to 33.6 million in the fourth quarter.
G&A expenses excluding 1.9 million of onetime items, primarily related to stocks implementation and legal settlements in the first quarter, and excluding 9.9 million of onetime items primarily related to bad debt expense as previously disclosed in the fourth quarter were 24.1 million, or 34.7% of revenue, and 23.7 million or 34.3% of revenue, respectively. This modest increase in G&A expenses excluding these onetime items, was primarily driven by the acquisition of AMMD in Maryland.
Stock based compensation expense for the quarter was 1.7 million, compared to 1.6 million in the fourth quarter. GAAP net loss from continuing operations in the first quarter was 19.2 million, compared to a net loss of 2 million in the fourth quarter of ’22. The increase in net loss of 17 million quarter-over-quarter primarily relates to 21 million in reversal of goodwill and intangible impairments in the fourth quarter of ’22, related to the finalization of the purchase accounting for the Gage acquisition.
Adjusted EBITDA from continuing operations for the first quarter of ’23, a non-GAAP measure was 12.2 million, representing a 17.6% margin, compared to 12.2 million and 17.7% margin in the fourth quarter of ’22.
Turning to the balance sheet. Cash and cash equivalents were 32.9 million as of March 31st of ’23, compared to 26.2 million as of December 31st. Cash provided by operations was 8.4 million for the first quarter, compared to 7.3 million in the previous quarter. This quarter-over-quarter increase in cash flow from operations was driven by lower interest payments, partially offset by an increase in inventory in Maryland, related to the scale up of our Hagerstown facility, and preparations for adult use in the state beginning on July 1st.
It is important to note that while we did not make a tax payment during the quarter, if we had made a payment equivalent to what was accrued related to the current quarter, we would have still generated positive cash flow from operations. CapEx spending was 2.5 million in the first quarter, primarily relating to store openings in Michigan as Ziad outlined earlier.
Free cash flow for the quarter was 5.9 million. This was the first quarter that we generated positive free cash flow since the first quarter of 2021. Indicating the progress that we’ve made and the momentum that we have gained in our business. During the quarter, we received 12.8 million related to a factoring with recourse agreement for employee retention credits, for which we applied in the fourth quarter of ’22. We also closed on the acquisition of AMMD in late January for all cash consideration of 9.6 million.
Looking ahead to Q2, we expect to deliver our seventh consecutive quarter of sequential revenue growth with revenue and adjusted EBITA growing in the low-single digits. We anticipate this sequential growth will be driven by favorable Q2 seasonality, along with additional growth in the northeast, including ramped up output at our Maryland facility and the benefit from a full quarter of retail sales at our newly acquired AMMD dispensary. We also expect growth in Michigan from our two recent store openings and continued progress with branded wholesale. In Q3, we are excited about a further pickup in growth rate driven bought largely by Maryland adult-use beginning on July 1st.
To summarize, we continue to make solid progress on executing on our strategic growth plans by challenging operating environment. This includes achieving sequential sales growth, improving our gross margin, and realizing SG&A leverage. At the same time, we remain focused on driving efficiencies and managing cost to drive positive cash flow from operations. Also, our existing footprint is fully built out thereby enabling cash flow from operations to mostly convert to free cash flow. Complementing this, we continue to proactively strengthen our balance sheet to reduce debt and interest expense, improving our capital structure.
With our ample access to capital, and our wealth [indiscernible], we are in a solid position to support our continued growth. You’re also well placed to capitalize on the growing number of active opportunities in our M&A — from distressed buyers with attractive assets in geographies, where we either have existing operations or are complementary to our current facilities. Our position here can only be strengthened by a listing on the TSX within a short number of weeks, subject to shareholder vote, and TSX approval. We look forward to providing updates on this expected listing, as well as additional updates on our progress in all areas of our business during the rest of [indiscernible].
This concludes our prepared remarks. I’d now like to turn it over to the operator.
[Operator Instructions] Your first question comes from Andrew Partheniou with Stifel.
Maybe we can start with Maryland. You discussed adding maybe three more stores there and an increased seller interest. Should we expect some movement here on acquisitions before the July 1st launch? And if not, maybe you can talk about just the timing for those acquisitions and as well, maybe the timing of the announcements versus closing. So to manage expectations given the regulator may have their hands full with launching Rec?
Sure. Hi, Andrew. So the answer to your first question is yes, I believe it was — do we expect to have any deals signed in close by the starter rec on July 1st and we do we expect to hopefully have multiple deals signed and close by July 1st. We are currently have multiple term sheets or LOIs that are signed. And we hope to be able to start announcing signing of the definitive docs in the in the coming weeks.
And maybe switching gears to New Jersey. If you talk a little bit about how the market is trending overall, are you seeing any kind of slowing in growth either from Q4 to Q1 or Q1 to Q2. Just wondering how that market performing given that there’s — it seems that stores are a little bit slow to open. Maybe you could talk a little bit about your expectations for new stores to add wholesale opportunities and accelerate market growth there?
This is Ziad. Currently, there’s a total of 38 stores operating in New Jersey, 26 are adult-use stores. We’re also watching very closely all the conditional licenses that are being granted. We are prepared for more stores to come in. As more stores come online, we see that opportunity for our wholesale. Our wholesale team in New Jersey has done an outstanding job staying in touch and assisting newcomers that are coming into the market. And they are being backed by our quality and our SKU that are performing very well in the state. So we do see that opportunity in wholesale.
You are right, those new stores are coming in slower than anywhere else. And we all understand the reason and that is the way the capital market is behaving. But we’ve seen a growth in our wholesale due to some of those openings. And we will be ready at the beginning of 2024 with the expansion of our Boonton facility to welcome more retail stores that come online.
As far as how the market is behaving. The market growth still outpacing the growth of retail stores, and definitely any cultivation we are not seeing any major cultivation coming online. So 12 months into the program in New Jersey, we look at the combination of revenue and gross margin. And they are stronger than what they started especially on the gross margin. So we will continue to observe that New Jersey continues to be a very strong market for us. And we continue to be as excited as we’ve always been.
Your next question comes from Eric Des Lauriers with Craig-Hallum Capital.
Eric Des Lauriers
First, I’m just wondering if you could comment on which markets you see room to expand margins via costs cuts. And obviously there’s some increasing demand coming in markets like Maryland, but I guess specifically on the cost side, I’m wondering sort of where you see room to continue improving margins?
We see plenty of room really across all states to continue. I mean, it may be it’s important to clarify cost cuts, but also we’re really focused on yield improvements, as well and making a lot of headway there. So the two kind of go hand in hand and as we’ve kind of built out the team and our capabilities and have a team that really looks end to end and across our facilities, we’re really starting to realize the benefits of that, that new approach. And again, I wouldn’t really signal out one in particular, because we’re really seeing it across the board and see further room for improvement. We track that very closely, as you might imagine, and we continue to see whether it’s in New Jersey, whether it’s in Michigan, I’ll leave PA out, because PA is a little bit of a different story where we’ve kind of scaled back and that one is very specific. And Maryland’s a startup. So it’s really kind of New Jersey and Michigan in particular where we have the kind of ongoing operations and yeah, I’ll stop there, Ziad anything to add to that.
Yes, hi, Eric. I’ll say this with a lot of humility, but with a lot of excitement. When we look at our company, and we look at the lineup of the states that we have, and I’m going to break them down one by one quickly. We don’t have concerns for 2023 in a humbling industry that can send curveballs anytime, but when we look at our state’s we look, we like New Jersey a lot. And we don’t see any threat in there. And it’s performing extremely well, in 2023 for us, kind of turning the page from a strategy perspective, and was thinking up in about 2024. When I think of Maryland, the story is pretty clear. We’re prepared for Maryland, we’re excited about Maryland. And we see that huge opportunity for us for four cores to come in more.
We look at Michigan and Pennsylvania and we could say that we kind of reached the bottom, the price has stabilized. Costs continue to improve for us and we see an opportunity on the margin line. So really, we like the lineup of the state. And we feel pretty good about the margin in each one.
Eric Des Lauriers
And next question for me, could you just comment on some of the liabilities come and do in Q2, how to think about tax payments throughout the year? And then maybe also comment on, potentially how you’re thinking about cash components of any M&A that you guys might do?
Sure, Eric, I’ll take that one as well to start and then Ziad could chime in, maybe piece by piece. So we do have a couple of items we’re really focused on in particular. One is the 35 million of debt reduction that we’re committed to, and remain committed to, we have a number of activities that are underway. Related to that, and there’ll be more news to come as the time is appropriate on that piece. But that’s a significant event for us to continue on the path that we’re on to reducing our debt, optimizing or reducing our interest expense, and so that we’re super focused on that part.
And then, on the tax part, I mean, that’s going to be timing related, we’re going to continue to follow an approach there where we, and Jason can jump in here as well. We were really, really say disciplined about not taking money too soon just to be comfortable on the balance sheet and incur the extremely exorbitant costs that that entails. And so we kind of think attacks the same way where we understand that there’s interest in penalties that could that could be incurred over time and we’re willing to just think through that strategically in time our payments when they’re most appropriate. And the third piece of it is for M&A. And this is where maybe Jason, you could jump in, but like some of the deals that we have in the pipeline that that, like Jason alluded to, we’re very far along on come with very minimal cash components, like literally 10% or less of the consideration being cash. So it’s that kind of market out there. And whether it’s, that just it’s kind of a favorable mix of deal consideration. So Jason, you want to add anything to that?
Yes, I think you hit the points there, Keith. There is, like we’ve discussed in Maryland, it is definitely a buyer’s market. There’s does not seem to be a whole lot of competitive tension from multiple buyers at the assets that we’re looking at. And the sellers are willing to do structured deals that are very advantageous. I mean, I think they’re a win, win for both sides, because these sellers generally don’t want to be stuck holding on to these dispensaries are the new five-year hold period.
So that’s set up a situation for us that we feel like we’re going to be able to go out and acquire up to four dispensary cap at extremely attractive valuations, extremely attractive structures. And then the second half of the year, we’re looking at some substantial run rate, revenue from those hopefully close deals.
Your next question comes from Matt Bottomley with Canaccord Genuity.
Just on the TSX uplisting plan. I’m just curious if have any indication, when it comes to some of the custodial issues that have been plaguing the sector, when it comes to the MSO trades. Obviously, it would be a nice uptick in volumes, I’m sure when it comes to trading on a major exchange. But I’m curious if you’ve had any indication from maybe retail platforms that get a lot of direct investment from retailers.
Even if they’re, your stock is trading on the TSX. Do you have any indication if some of those platforms would still allow your security to be traded by retail investors? Or have those discussions? Is it too preliminary for those discussions to have occurred?
I would say it’s probably a little too preliminary to get granular in terms of that we think that sort of this segment of investors. We sort of split it up into Canadian institutional investors, Canadian retail investors, European institutional and retail investors, and then U.S. institutional and retail investors. We think that being on the TSX should definitely open us up to the Canadian and European, institutional and individual retail investors. As it relates to the U.S. investors. We’re not quite sure, I mean, we’ve got, we believe that there is a good chance that many of these custodians will allow customers to hold a TSX listed operator like us.
Even if they were not willing to custody, our current stock as it’s on the CSE or on the bulletin board or to the U.S. We can’t quantify exactly the impact obviously, that we think that allowed, but I think it’s safe to say that the stock should trade significantly more volume than it does. And like we said earlier, if we continue to execute, we think that being on a larger exchange will help make our stock available, or if it’s available to more investors, that should be a positive kind of stock.
Okay, got it. Appreciate it. And just one more maybe on the fundamentals of the business. So a lot of good remarks in the prepared commentary and some of the Q&A when it comes to the margin profile and cash flow. But given that your adjusted margin is already sitting at 49%, that’s close to the industry high right now, I understand that there’s more moving parts when it comes to the EBITDA margin. But on the gross margin, are you able to maybe just parse out a little bit the differences between, increases on the back of higher utilization some facilities relative to you know, the fact that wholesale is creeping up a little bit more, it’s all obviously retails, a lion’s share of your top line, but just some of the moving parts where I would expect that over the next two, three quarters, maybe adjusted gross margin comes down a bit, but if there’s anything you can give, with respect to mitigating factors against that would love to know?
Sure, Matt, I’ll take that great question. We’re super happy about our progress with margin, needless to say, especially over this quarter-to-quarter period, 420 basis points. We’ve had some comments on that 420. That wasn’t on purpose. I didn’t even notice until somebody said something. But it’s really a state by state, I take your comment on the wholesale creeping up, but really, at this point, our businesses is whatever, 80% retail 20% wholesale or something like that. So the wholesale creeping up isn’t a major factor. It’s really if I go around the horn, it’s continued super strength in New Jersey, which is just a fantastic business for us right now. And it’s holding up very well. And again, just when we think we’ve hit a ceiling there, we continue to find optimization opportunities and cost reduction opportunities, like I answered to Eric’s question. And so that’s New Jersey, and there’s plenty of levers to pull there between mix of products and wholesale versus retail and cost reduction in yield. There’s a lot of activity going on there.
In Michigan, we’ve really, we made some good strides there quarter-over-quarter, and increase our gross margins, actually by hundreds of basis points. So it’s material, but we’ve only scratched the surface of Michigan, and we see so much more opportunity to continue to make improvements there. Again, on the cost side of things on getting more vertical, as he had described in the prepared remarks. Sourcing how we procure there’s, there’s a lot of opportunity there, Michigan.
Pennsylvania, we’ve done about as much as we can do, it’s scaled back at this point, and kind of ready to go and ramp back up for adult use when that comes. And then last but not least, Maryland will really get a lift as that takes off in really it started already when we cycled out of the scale up of Hagerstown and under absorption because we didn’t have any output and then in Q2, we started to get some output and started to get some absorption. And then we’ll see that continuing Q2. And then really, we expect Maryland to give us a big lift in tailwind there. So and all that back to the maybe the main premise of your question. Those are all tailwinds. Those are all positive levers that we have to pull and that can offset any inevitable headwinds that come our way whether it’s Sunday pricing tightening in New Jersey or anything like that. So hopefully that was a bit long, but hopefully that that gave you a good color on the question.
[Operator Instructions] Your next question comes from Noel Atkinson with Clarus Securities.
Just back to Maryland for a minute. When does the transfer window close for buying dispensaries? Is it July 1st or is it before that?
No. You can continue to run as medical only dispensaries post the date. But anything that close will transfer to recreational prior to July 1st.
So as long as you signed by July 1st year or you can be up and running?
And can you just give us a little more detail about where you are with the Hagerstown facility in terms of are you using? Are all the grow rooms and use now? Like will you be fully utilized have full capacity up and running at the outset of adult-use?
So, we’ll be observing how the business ramped up in Maryland, and our stores as we acquire those attractive businesses and as we start supplying them with our own brands and going deeper vertically. But then also, as we understand and learn the wholesale market, we will be launching one at this quarter. One in Maryland existed in every dispensary, so it will be a door opener for us.
So while we start today, with what we have, from a cultivation perspective, we have the ability to expand up to almost three falls what we have today, and we will be doing it very thoughtfully as we manage the inventory, and as we manage the demand in the market and also to the supply.
And then just lastly, so I think there’s been about a half a dozen new adult-use stores that have come online in New Jersey over the last couple of months. Where are you guys in terms of selling into other adult-use specifically dispensaries? Are you in all of them and where do you stand right now?
All of them. And so our brands and our SKUs have performed extremely well. And in New Jersey, and we continue to have top three market share in the state. And we are almost every door in New Jersey.
I would just add we are absolutely selling out every gram of flower that we can sell, that we can make of rough.
Next question comes from Andrew Semple with Echelon Capital Markets.
Quick question would just be on Michigan wholesale. Last earnings call you’re mentioning, you’re starting to see some pricing improvements in certain product categories. Just wondering what you’re seeing in terms of latest on pricing in that state, whether that trend has continued or those earlier gains have held. And then secondly, maybe just poking around for a bit more detail on how the revamp of your brand-new products, wholesale, and that status is going over the last few months.
Yeah, thank you. You know, I talked in our prepared remarks about our brand strategy, right and premium versus value in Michigan. There’s no doubt there is some pressure on the consumer pocket, right. And we will be introducing in Michigan, this quarter our value brand in order to continue to attract and maintain and retain, maintain our service and retain those customers that are more price sensitive.
Currently, in Michigan, this brand strategy is still giving us almost a 60% premium in pricing, versus the average bound that is sold in the state. We are seeing stabilization of the price we’re seeing a low increase in some in some areas. But what I’m excited about the most. From an improvement perspective from Q4 to Q1 is the performance of our finished goods wholesale business. We will continue to ramp up our verticality producing new form factors and our brands. Our wholesale business has doubled between Q4 and Q1 on our finished good. And as we watch Q2 and we look in the back half of the year, we will we expect to see another doubling in our wholesale. So we will we will reach our goal.
What has really impacted the pricing the most in Michigan is something that is extremely positive that happened in Michigan, and has disrupted a little bit the industry but in a positive way. And we hope we wish and pray that every state will do the same thing that Michigan the MRA has done or the CRA has done and is really cracking down and stopping illegal and illicit activities in the state. That dynamic has really helped the state in a meaningful way. And we hope to see that continue both in the state and others.
Just a quick follow up on the plans to sell your Canadian facility. Do you have any updates on that?
Yeah. Keith, do you want to take this?
Sure. Thanks, Ziad. Hi, Andrew. So we are far along in the process there. We have a sale agreement. And it’s, I’ll say days away from closing. So and it’s at a bracketed market price. And we’re happy about where we’re landing.
Your next question comes from Glenn Mattson with Ladenburg.
I was curious. Jason, you spent the day cord your Twitter feed down in DC. And so I just thought maybe it’s curious if you had any key takeaways or thoughts beyond you know, obviously not prognosticating on when change is going to occur or anything but just your general sense of the temperature down there. And whatever feedback you feel like sharing from your experience?
Glenn, before Jason answered the question, Keith and I have been given Jason some hard time because he’s been in his suit with his tie. Is he kept — he showed up in here and we were joking whether he’ll have his suit or not. He showed up still with his suit, but as soon as he saw it, he took his style.
I was guessing maybe like a 44 regular or something, yes, looks good.
Whatever size I was, on my [indiscernible] about 40 years ago or so. In terms of, it was very informative, and a new experience for me to go. I’ve never been in a Senate hearing before. I was told to expect to, I think Ziad told me that I was going to be annoyed as hell by some of the witnesses. At the hearing, which I definitely was, there was a lot of misinformation that I feel was put out there but some of the guests at the hearing.
But overall, this is just, what I would describe as watching the sausage get made, I don’t think there was anything from the people that I spoke to afterwards, there wasn’t anything that was disappointing, about the hearing.
But this is enough for many people who have followed the market for many years. This was sort of your typical, buy the rumor, sell the news, type of situation, I think that practically whatever happened at the hearing, the sector probably would have sold off, because that’s what often happens when people are excited and looking forward to something that’s going to happen on a specific date.
In terms of my thoughts are my prognostication on when I think it safe could be passed, I would say that a lot of the people that I was with thought that it could be in the coming months, or possibly by late June, early July. But we, as a general, our general view on all of his regulatory progress remains the same. We are planning for the worst, and hoping for the best. And that’s how we’ve got the business structure now. We don’t need any regulatory reform; it would obviously be nice and to help us accelerate our growth and lower our cost of capital.
As I hope the results have showed over the last couple of quarters, we don’t need that regulatory progress. Doesn’t mean that I’m not going to spend a lot of time trying to help move it along, especially since Ziad has stepped up so well over the last several months. And it’s taken over the CEO spot, it’s freed up some more time for me to go harass congressman and various politicians and things like that.
So I’m going to, at the end of the year, I dedicated myself to making more of an effort towards helping with the regulatory progress and some other approaches that we’re going to take to try to change some of the situation here, but we had a possibly from a judicial pathway. But we are not as it relates to running the business. We’re not assuming that any of that happens and that’s generally been a good bet to make obviously for the last couple of years.
[Operator Instructions] There are no further questions at this time. Jason Wild, please proceed.
Well, thank you all so much for joining our call today. We will see you again in about another three months. But we appreciate you taking the time to hear our updates.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.