TerrAscend Corp.

Good afternoon, my name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to Terrassen's second quarter 2024 Financial Results Conference call. Joining us for today's call is Jason Wild, Executive Chairman, and 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, including the company's expected financial results for the third quarter of 2024, and estimates and assumptions relating thereto, and the company's expectations regarding its new market opportunities, such as Ohio, the likelihood and benefits of the company's tax refund claims for past years, the expectations regarding regulatory reform, and the potential benefits thereof. Each forward-looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual result and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Additional information regarding these factors appears under the heading, Risk Factors, in the company's Form 10K filed with the Securities and Exchange Commission, or the SEC and other filings that the company makes with the SEC from time to time, which are available at .sec.gov, on CDAR+, and on the company's website at .terasen.com. Before looking statements in this call, speak only as of today's date, and we undertake no obligation to update or revise any of these statements. Also during the call, the company 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 and on our quarterly report on Form 10Q for the quarter ended June 30, 2024, which you can find on the company's investor relations website or on the SEC and CDAR Plus websites. I would like to introduce Mr. Jason Wilde. Please go ahead.

Good evening, everyone, and thank you for joining us. The team and I are pleased with our accomplishments thus far in 2024. Financially, we reported yet another quarter of -over-year net revenue and adjusted EBITDA growth, as well as positive operating and free cash flow. For the quarter, net revenue totaled 77.5 million, an increase of .5% -over-year, and adjusted EBITDA from continuing operations totaled 15.6 million, an increase of .9% -over-year. Our second quarter of 2024 marks our eighth consecutive quarter of positive cash flow from continuing operations, totaling 13.1 million compared to 1.8 million for the same period last year. We also generated positive free cash flow for the quarter, totaling $11.7 million. In addition to driving revenue and profitability, refinancing of our debt has also been a priority. We worked diligently through a competitive process and are pleased to have recently closed on a $140 million senior secured loan that matures in August of 2028 and contains no prepayment penalties. This provides optionality for Terrassen to capitalize on future progress in federal reform or on any substantial interest rate improvement based upon macroeconomic factors. The proceeds of this loan are being used to pay down our existing debt, which matures later this year and carried a slightly higher blended rate. The balance of the proceeds are available for M&A transactions focused on our geographic expansion plans. I'd like to thank Focus Growth, the lead lender on this new loan, as well as the other lenders who participated in the syndicate for their trust in and support of Terrassen. We have enjoyed working with the Focus Growth team on this transaction and are already working closely together to evaluate additional opportunities. I also elected to participate in the loan in line with my ongoing support for the company on both the equity and debt sides of the capital structure. Completing this deal was an important milestone for the company as this refinancing provides us with the financial flexibility and optionality to execute on our growth strategy. I'm thrilled that we will now have no other material debt maturing until late 2027. For several quarters, we have highlighted the greenfield expansion opportunities and possible transformational deals that we are actively pursuing. We believe that Terrassen's focused approach has put us in a differentiated position compared to our peers to invest in the best geographies and assets at attractive valuations. On this subject, the Midwest is a priority for us. We have openly discussed our interest in Ohio as the state begins to implement adult use. We are focused on the larger Tier 1 licenses, which would allow us to operate up to 100,000 square feet of canopy and up to eight dispensaries. Today, we are in active discussions with multiple operators in Ohio and expect to close in on at least one of these opportunities in the near term. When we enter any market, our goal is to be a market leader. Our expectations for Ohio are no different. With Michigan and soon Ohio, we expect to be able to leverage our existing SG&A infrastructure in the Midwest, enabling us to make Michigan and any new states more profitable for us combined rather than on a standalone basis. From a federal perspective, we continue to see progress with cannabis reform. July 22nd was the deadline for the 60-day public comment period regarding the DEA's proposed rescheduling rule. According to data from Headset, over 92% of those comments were in favor of rescheduling or descheduling. While this is still subject to final ruling by the DEA, we believe that rescheduling cannabis to schedule three would be a landmark event for Terrassen, the entire cannabis industry, as well as cannabis consumers and patients. Rescheduling would result in the elimination of punitive, unfair tax treatment. It would also provide cannabis companies with greater access to capital at reduced costs and unlock restrictions on medical research. While encouraged by the rescheduling process and monitoring the actions being taken in Congress, we are proud to have taken a leadership role as a foundational supporter of the case against the U.S. Attorney General being led by David Boyce. The case is progressing as expected, and we were especially pleased that the District Court acknowledged that there are persuasive reasons for a re-examination of the way the Controlled Substances Act regulates marijuana and stated that the plaintiffs can pursue their claims and seek attention of the Supreme Court. David Boyce believes the case could be heard by the Supreme Court next year. The bottom line is that cannabis companies just want to be treated like every other business in the U.S. and we think the Supreme Court justices will agree. Given the uncertainty surrounding federal reform, from a business perspective, we will continue to focus on controlling what we can control. Thus far in 2024, I'm proud of what we have accomplished. We have the right team, high-performing assets, strong cash flow, and the financial flexibility along with possible greenfield expansion and transformational deal opportunities. The cannabis industry is still in the very early stages of its development. This quarter marks our fifth anniversary of operating in the U.S. If you said to me then that we would be reporting a quarter with almost $78 million of revenue, 48% gross margins, and positive cash flow, I would have been pleased. If you then told me that the stock today would be down 75% from when it was pre-revenue in the U.S., I'm not sure that I would have believed you. I would have been very disappointed, and I am very disappointed. The question I often get is, so if the company is better positioned today than it was five years ago, why is the stock price so much lower than it was? As same investor Benjamin Graham famously stated, in the short run, the market is a voting machine, but in the long run, it's a weighing machine. Clearly, there was a lot of voting going on during the cannabis boom times of 2020 into 2021, and much less weighing. For the last three years, it's been the opposite. Jeff Bezos wrote in his letter to shareholders while reflecting on Amazon's 90% decrease in stock price in the year 2000, quote, we are a company that wants to be weighed, and over the long term, we will be. Over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company. This has been our guiding principle at Terrace End and a concept that we remind ourselves of often. Now I'll turn the call over to Zia to provide an update across our key markets. Zia.

Thank you, Jason, and hello, everyone. As Jason mentioned, we have accomplished a tremendous amount thus far in 2024. Let me share how we performed state by state for the quarter in our key markets. Starting with New Jersey, we are thrilled that according to BDSA, Terrace End held the number of top-three positions in the state throughout the first half of 2024. This top spot was accomplished with bread across all categories, with our brands holding top three positions in flour, vapes, edibles, and concentrates. As the market has expanded and more retailers have come online over the past year, our revenue mix has shifted towards wholesale versus retail. This has been the trend over the last several quarters, and for the second quarter, while wholesale revenue was down sequentially and below our internal expectations, it still increased 100% here over a year, and we maintained the number one market share position in Q2. At retail, we returned to sequential growth for the first time in four quarters. As background, our retail sales declined for three consecutive quarters in New Jersey, driven by the opening of over 100 3-stores within 20 miles of our 3-stores. These declines have now dissipated. This speaks to the quality of our products, the relationship that our customers have with our brands, and the Apothecary's -in-class retail experience. We have maintained strong gross profit margins, EBITDA margins, and cash flow in New Jersey, largely due to the performance of our brands, high cultivation yields, product quality, and our low-cost structure. We continue to explore opportunities to expand our retail footprint under state legislation that enables existing operators to take stakes in up to seven additional social equity qualifying dispensaries. This would further increase margins and profitability. Turning to Maryland, retail and wholesale revenue remained stable sequentially. During the quarter, we completed the expansion of additional rooms at our Hagerstown facility and have started to benefit from this increased flower capacity in recent weeks. As a result of this expansion, we expect continued wholesale growth in Maryland, as well as increased verticality in our four dispensaries, thereby enabling further gross margin improvements going forward. In early June, we relocated one of our stores to a new location in Nottingham, a larger and more conveniently located store that offers drive-through and expanded floor space. As of today, with our four retail dispensary locations, while BDSA does not track retail market share in Maryland, we believe we have one of the highest performing retail footprints in the state. In Pennsylvania, it was business as usual during the second quarter of 2024. While retail revenue was stable, we have doubled wholesale revenue year over year, driven by strong performance of our value-oriented Legend brand and expansion into the Edibles category with our Valhalla and Juana brands. We remain optimistic that Pennsylvania will approve adult use in 2025. Earlier this year, Pennsylvania Governor Josh Shapiro formally endorsed his support for an expedited adult use cannabis program by January 1, 2025. As we have mentioned many times, we believe Pennsylvania would be a significant growth lever for the company. With a population of 12 million, the state is expected to grow from a $1.2 billion medical-only state to a $1.5 to a $2 billion plus adult use market by 2028, according to BDSA. As we approach 2025 and get more clarity on timing, we are preparing to hit the ground running when adult use does launch in the state. This includes planning to turn on additional capacity at our cultivation facility to give us the approximate five-month lead time needed to harvest. Once we bring the additional rooms online, we expect to have one of the largest cultivation outputs in the state. And lastly, in Michigan, our main focus has been on improving operational efficiency and driving gross margin to establish a solid foundation from which to expand. As a result, gross margins surpassed 40% for the third consecutive quarter. We currently have 20 locations in this state, including the recent opening of our second Detroit location. We expect to scale our operational footprint in the Midwest by entering new neighboring states to Michigan, such as Ohio. Doing so will offer us the opportunity to more effectively leverage our operating expenses by running Michigan regionally. In the meantime, we are focusing on optimizing our state-level operating expenses. Going forward, we continue to evaluate opportunities to go deeper in the state. Michigan remains an important market for us as the nation's second-largest cannabis market with over $3 billion in annual sales. To summarize, I am as excited about our future as I have ever been. With our recent refinancing, we have improved our financial flexibility to execute on our growth plan, which includes acquisitions of best in-state operators at extremely attractive and accretive multiples. We have a lot to look forward to in our core markets. In Pennsylvania, we expect adult use in 2025. In New Jersey, we hold the number one position in one of the most attractive markets in the country. And in Maryland, we are bringing on new cultivation capacity and going deeper with penetration of our brands at our high-performing retail locations and through wholesale across the state. Finally, we have many greenfield opportunities to expand into new states like Ohio. We also continue to actively explore other transformative transactions. I would now like to turn the call over to Keith to provide a financial update.

Thanks, Leigh-Ad, good evening, everyone. The results that I'll be going over today have already been filed on both CDAR Plus and with the SEC, and all results that I will reference today are stated in U.S. dollars. Net revenue for the second quarter of 2024 totaled $77.5 million, an increase of .5% compared to $72.1 million for the second quarter of 2023. Wholesale revenue for the quarter was $24.4 million compared to $13.9 million in Q2 of 2023, representing a 75% increase year over year. This growth was mainly driven by three factors. First, increased demand for our brands across the new store openings in New Jersey. Second, a doubling of our wholesale business in Pennsylvania, driven by performance of our Legend Flower and Valhalla Edibles brands. And third, a more than doubling of our Maryland wholesale business enabled by additional supply from the expansion of our cultivation and manufacturing facility in Haverstown. Retail revenue for the quarter was $53.2 million compared to $58.2 million in Q2 of 2023, representing an .7% decline year over year, mainly driven by new door openings in New Jersey and reductions in unprofitable revenue in Michigan, offset by growth in Maryland. Note that sequentially our New Jersey retail revenue grew for the first time in four quarters. Gross profit margin for the second quarter of 2024 was .6% compared to .2% in the second quarter of 2023. The year over year decrease was driven by channel mix shift and price compression in New Jersey, partially offset by margin expansion in both Michigan and Maryland. Sequentially, gross margin improved 60 basis points driven by improvements in both Maryland and Michigan. General and administrative expenses for the quarter of 2024, excluding stock-based compensation, were $22.1 million compared to $28.5 million in the second quarter of last year. G&A as a percent of revenue, also excluding stock-based compensation, was .5% in the second quarter of 2024 compared to .5% in the second quarter of last year. The second quarter of this year includes a $4.2 million reversal of bad debt expense related to a settlement of an accounts receivable. Excluding this bad debt reversal, SG&A expenses were still down materially year over year, while net revenue grew 7.5%. We continue to focus on realizing expense leverage and managing SG&A at or near the 30% level, excluding stock-based compensation and depreciation and amortization. Net loss from continuing operations for the second quarter of 2024 was $6.2 million compared to a net loss of $12.9 million in the second quarter of last year. The improvement was driven by revenue and gross margin growth while reducing G&A expenses. Adjusted EBITDA from continuing operations for the second quarter of 2024 grew .9% year over year to 15.6 million, representing a .2% adjusted EBITDA margin compared to 12.8 million and .8% in the second quarter of 2023. The -over-year margin improvement of 240 basis points was driven by a G&A expense leverage partially offset by the decline in gross profit margin. Turning to the balance sheet and cash flow, cash and cash equivalents, including restricted cash, were $30.5 million as of the end of Q2 compared to $25.7 million as of the end of Q1 and $25.3 million as of the end of 2023. Net cash provided by continuing operations was $13.1 million for the second quarter of 2024 compared to $1.8 million in the second quarter of last year. This represented our eighth consecutive quarter of positive cash flow from continuing operations. The second quarter of 2024 included an $8.4 million federal tax refund related to an amended return we filed with the IRS. CAPEX spending was $1.4 million in the second quarter, mainly related to the completion of our Hagerstown, Maryland expansion project, which doubled the output capacity at that site. Free cash flow was $11.7 million for the second quarter of 2024 compared to negative $200,000 in the second quarter of last year. During the quarter, we made $5.8 million of principal payments on our debt and $1.2 million of distributions to our New Jersey minority partners. On August 1st, we closed on a non-deletive senior secured term loan for gross proceeds of $140 million, bearing a coupon rate of 12.75%, with a four-year duration maturing in August of 2028 with no prepayment penalties. The net proceeds of this term loan are being used to pay off existing higher interest debt maturing later this year. Focused Growth was the lead lender on this loan, and we are very happy with the partnership that we have established with them and the trust and support that they have given us. I would also like to thank the additional lenders in the syndicate, including Jason Wilde, for this same trust and support. As a result of the closing of this deal, we have the financial resources and flexibility to execute on our growth plans, and we have no material debt obligations maturing until late 2027. The closing of this transaction also resulted in the reclassification of our debt from a current to a long-term liability, which has resulted in our net working capital position turning from negative to positive. This stronger balance sheet position has enabled us to remove the going concern disclosure from our financial filings. Looking into Q3, we expect to be flat to slightly down across the P&L sequentially. In summary, we believe our second quarter represents another period of strong results, with revenue and adjusted EBITDA increasing year over year. In addition, we delivered our eighth consecutive quarter of positive cash flow from continuing operations. Following QN, we took further action with our refinancing, which provides us with the financial flexibility and optionality to continue to execute on our growth plans. We look forward to sharing our progress on the business during our next quarterly call. I would now like to turn the call back over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Federico Gomez, ATB Capital Markets. Federico, please go ahead.

Hi, thank you, Ebunie. Thank you for taking my questions. First question is on New Jersey. You mentioned that you reached the number one market share during the first half of 24. I'm curious, I think last time you reported, I think you mentioned you were second or third. So are you gaining share in that market, or maybe are other players losing? Any comments in terms of the competitive environment there at the wholesale level, just considering that it is an important market for many other MSOs as well. Thanks.

Hi Fred, this is Keith. I'll take the first part, then I think Zia will jump in to elaborate more on the market conditions. BDSA in their recent release, they improved the methodology of their market reads, for the whole market, of course, not for us. And so as a result, in fact, we've been number one for quite some time. And we actually spoke directly with the CEO of BDSA to confirm their methodology, which is more accurate according to them, 90% accuracy. And so that's been the result, and that's great. And so recasting their data back through the beginning of the year, we've been number one all along.

Yeah, from the dynamic of the market, Fred, this is Zia, from the dynamic of the market, we knew that when we went up from 17 stores to 150 plus stores, that retail will be pressured. Within 20 miles of our stores, as we explained in our prepared remarks, we've had around 103 stores that were around our stores. So heavily, we were bombarded in our trade areas with stores. And we knew that if you offer the right service, if you have the right quality, if you have the right brand, and if you continue to innovate and launch new products, in excess of 25 new products that we launched in New Jersey, we will be able to weather the storm and go back to growth. So for the first quarter, as I have mentioned, our retail business has gone back to being positive. And looking into Q3, we're seeing the same trend. As a matter of fact, New Jersey for us, Q3, we expected to continue to improve and gain share. So we're very happy, we're very pleased with New Jersey performance. And we continue to watch wholesale, we're seeing shift. Now that we stabilized retail, we're seeing the business gaining momentum, the size of wholesale increasing. And it really is the same consumer who is buying from our retail stores, buying through the wholesale channel in those independent retails. And that's why we're very excited, and we will continue to see that improvement. Now, as a matter of fact, we have made the decision after we saw the turnaround and after we saw the stabilization of retail, we have made the decision to expand our Bunton facility. So we're starting that project and it will come online at the beginning of 2025.

And if I could just add in there, just in terms of the quality of the market position, the depth of it for us, we were top three positions, I think as you had described in his prepared remarks, across all the formats, across vapes, across flour, concentrates, edibles. So we're really happy about that result.

Yeah, and what I'm proud about the most with what the team has done, we exited the quarter in June, our June numbers in New Jersey, we grew, the market grew by 1% in June, where our business grew by 4%. So the momentum continues, and that's why we're confident about what we're seeing here in Q3.

Perfect. Thanks for that caller. And then second question here, just on the tax refund. I guess if you could just remind us how much more are you expecting there? You know, have you had any amount denied so far, or are we still waiting for the reminder of the refund?

Thanks. Sure. So we have a total of 30 million of refunds that we feel that were owed. We received eight of that 30. So there's still 22 that remains. Nothing's been denied. No further news other than our receipt of the $8 million.

Great. Thanks for that.

Thanks, Fred. Thank you. Your next question comes from Noel Atkinson, Clara Securities. Noel, please go ahead.

Good evening, guys. Nice to see you at number one market share in New Jersey, and congrats on the loan refinancing. It's great. A couple quick ones for me. Just you mentioned that you're expanding, you've decided to expand the Boonton facility. What played into that? Because I think on the last call we were talking about, you thought that the existing yields were enough to be able to support the market, and what the capex associated with that's going to be?

Yes. Noel, hi Noel. We've

talked about the expansion, I would say, three or four quarters ago, but if you remember, we've had a massive improvement in yield in New Jersey. We improved our yield back then by 50 percent, and we called it phase one of expansion. Then we knew as we budgeted for 2024 that we are good on supply, and our thesis was retail will be pressured, wholesale will make up for it, and we didn't know how long and where's the geography where the new stores will open. Now as we watched since January, we watched store by store, we watched the traffic, we watched the basket size, we watched items for each basket, we watched the price per basket. We have six month data that give us high confidence that our stores have plateaued and have gone back to growth. The combination of that retail stabilization and going back to growth, and the wholesale business continuing to improve for us is what is encouraging us and helped us make the decision that we need to increase that capacity in order to service the extra 20, 50, 80 additional accounts that will come online over the next one to two years.

Okay, and then just secondly, the 140 million facility, what after you know fees and tax and expenses and all that, how much do you think you have available for acquisitions from that facility?

Yeah, hi Noel, this is Keith. We're not given the exact amount, but there of course are closing fees and so forth as part of the 140. The loans that we paid off in total are about 120, so there's several million dollars left over that's on the balance sheet that can go towards M&A. And on the M&A front, and maybe if you want to jump in Jason, but on the M&A front, we're definitely, in all the discussions we're having, it's a variety of different structures in terms of some cash, mostly minimal cash, but also a lot of discussion around seller's notes at low interest, earn outs as well, so but yeah, we have some extra cash on the balance sheet from the proceeds of the loan.

Okay, and then maybe this is for Jason, I don't know, in terms of your efforts to get into Ohio, so you folks had hoped to be there ahead of the start date for adult use sales, now that that's sort of come and went this week, as that date has approached, have you seen the deal pricing in Ohio changing at all, or is it still as attractive as you were talking about before?

Yeah, no, I would say the pricing is, and the discussions are exactly the same that they were before. I think we said last quarter, like Ohio moved quicker than we expected them to do, and we were getting ourselves in gear and speeding up to the speed of the market, and we hope to be in the Ohio market in the early days, meaning the first couple of months of the program, and I would say that we feel even more confident at this point, and we are further along, where we think that we will be in the Ohio market in the first, say, one to two to three months of the market being adult use.

Okay, great. Thank you very much.

Thanks, Noah. Thank you. Your next question comes from Eric Deloria, Craig Hallam, Capital Group. Eric, please go ahead.

Great, thank you for taking my questions. First one for me, just kind of a quick one, so you guys have obviously done several acquisitions, various sizes, as you are now looking at presumably some smaller bolt-on acquisitions in places like Ohio, and then a few comments on some larger transformational deals. I'm just wondering, what are some of the learnings you've taken away from those previous M&A transactions you've done, whether that's on sort of type of business, overall, the structuring of the consideration, just kind of any sort of broad comments on sort of what you've learned and how that's influencing what you're looking at now in M&A. Thank you.

Yeah, absolutely. I'll start this off, and then maybe the kids can feel free to jump in. I would say, yeah, it's funny. I mean, we were just having the conversation earlier today like these Ohio deals that we're looking at, they in and of themselves are transformational in terms of the size of the potential revenues and profitability that some of these businesses would drive. So, I would even those I would consider, I would sort of consider transformational, but I would talk about those as sort of single-state assets versus what I'm assuming you consider more transformational would be sort of a deal that brought in multiple states. We're looking at both. Some of the ones that would bring in multiple states could bring in Ohio or one of these other single states that are high on our priority list, but we're running all of this in parallel, and we, as I mentioned on the previous question, we think we're pretty close in Ohio.

Yeah, Eric, what I want to add as far as the learning, look, in our portfolio, we have California, we have Michigan, we have New Jersey, we have Maryland, we have Pennsylvania, we have some of those states are only medical. Some of those states we flip the recreationals. Some of those states are more advanced than others. So, what we've learned throughout the years is as we build the business case for the state that we are acquiring, whether it's a small business, whether it's an SSO, or whether it's bigger, we play the most conservative scenario and the most aggressive scenario, and we protect ourselves against any surprises through earn-outs, and earn-outs that are long-term, earn-outs that are 36 months and months and beyond, and that is one of the biggest learnings. That's one of the biggest learnings, and we applied it in Maryland, and it paid its dividends.

And I'll just add, because I think your question had a couple parts to it, that's from the deal perspective. The other learnings are more on the integration and the operational perspective, which we've learned a lot, and we really have, I would say, a robust integration playbook and team that's ready to go with these new deals and plugged into what we're working on. And I'd say it was pretty seamless last year when we integrated the deals that we did in Maryland, and so we're ready to go, because as anyone knows, it's painful if you're not ready to integrate what you're acquiring. Right.

And that's a big benefit, as we discussed last year with Maryland, bringing that in and running it regionally certainly was a boost to our margins. One of the things that we feel good about is we've got, what I would describe as admirable margins at this point relative to some of our much bigger competitors, but what happens when we get to the size and scale that they have? Yeah, we think that we could be materially higher from a margin and profitability perspective, so Keith, good point adding on the importance of the integration.

That's all very helpful. I appreciate that, Coler. I hope I didn't mishear this, but I think you had some comments on expanding or turning on additional rooms in Pennsylvania. I know there were some comments there on Maryland, so I guess first correct me if I'm wrong there. But then, could you just comment on Pennsylvania competitive dynamics, what gives you confidence in turning on those additional rooms, the market's ability to absorb additional supply? Any kind of comments around that would be helpful. Thank you.

Yeah, thanks, Eric. What gives us confidence is the data that we are seeing both in retail and wholesale. We have currently turned on seven flower room in Pennsylvania, and that has helped us to double our wholesale volume in the state while we continue to have solid performance in our state average per store. We are watching very carefully the news around from the regulators on when Pennsylvania, when in 2025, Pennsylvania can turn recreational, and we expect that in the next one, two, three months here, we will expect to turn on the remaining nine rooms because you have that five-month lead before you harvest. So the current performance of our retail store, the wholesale business, the wholesale growth, the launch of new products, but also as we turn our attention to Pennsylvania to look at potentially going deeper in retail stores and add to our fleet of six stores, the combination of all those factors and the position we have on our inventory is what encourages us and gives us the confidence to do so.

And I just want to build on that, and Zia had mentioned it right at the end there, I was going to jump in as the inventory position, and our inventory position in PA and in fact across the board is very healthy in all of our states, but especially in PA, which has enabled us to turn on those rooms. So the team did a great job in sort of over-correcting intentionally to work down the inventory levels that we have had to work through over the last couple of years, especially with distillate inventory levels that have a long life. We've worked through all of that through the sales like Zia said of our edibles and concentrates products, and so we're not really taking a bet here on turning on new rooms. We need to turn on additional rooms to continue to satisfy the demand that we're seeing.

Thank you. All right, that's very helpful. Thank you for taking my question.

Thank you. Your next question comes from Matt Bottomley, Canaccord. Matt, please go ahead.

Evening everyone. Hope everyone's well. I just wanted to get a little more color. You gave some good granularity on a -by-market basis, particularly with, you know, you're standing in New Jersey and some of the retail pressures there just with new store openings, but just given where you had kind of guided at Q1, you know, maybe closer to 80 million for the quarter, what sort of changed on a macro level? And I'm just curious if there's any other statewide commentary you can give with respect to any sort of headwinds that may have come and gone since then.

Yeah, this is Ziaz. So, you know,

the mess, so the shortfall that we have came in from New Jersey wholesale. First of all, to reiterate, we grew 100% year over year, but internally our expectations were higher. We mentioned that we are number one in the state. In general, wholesale by nature can be choppy quarter over quarter. Overall, the demand is there and we are confident that we will continue to fulfill that demand. You know, we've talked often and we trained the team that for wholesale to be successful, you need the brand, you need the quality, you need the relationship with that brand, but then you also need the ground game. We, once we sell, once we sell our orders and occupy the shelf in those distribution points, the velocity and the sell through of our product, it's what's given us the confidence and what's causing our wholesale to continue to grow. But going back to the mess here, I mentioned how we exit the quarter in June. We're looking at the third quarter and we will see quarter over quarter in our wholesale. Again, that's the nature of the choppiness. That's the reason why we decided for 2025 we need more capacity. Again, our expectations were higher than where we landed in New Jersey wholesale.

Got it. Appreciate it. Then just the second one, just on your forward-looking commentary for Q3, I think muted growth is a bit of a theme in the sector right now and a lot of MSOs are sort of focusing on the profitability more. I know you guys have done a good job at that over the past year. Is there any puts and takes within that guidance with respect to tailwinds you're expecting, less headwinds on a -by-market basis, just trying to get an idea of if everything's going to kind of be flat in a homogeneous way, if certain markets like you had mentioned wholesale in New Jersey might rebound, that might sort of be offsetting for us to track.

Yeah. Hi, Matt. Keith. I can take that. There are. There are puts and takes as usual. Definitely on the positive side, like the ad said, we expect continued growth in New Jersey wholesale. We did rebound the growth in New Jersey retail, like we said in Q2. We're being a little bit cautious there in our guidance, so maybe we can beat that and continue to grow in retail, but we're sort of like in the formula, assume assuming that wholesale growth offsets retail decline in New Jersey to remain flattish, again, just sort of as a forecast. PA is healthy as we talked, if anything, a little bit more further growth there in wholesale and retail stable in Maryland. We expect to grow Maryland wholesale. We've finished the capacity expansion there as we mentioned, and we're building distribution and portfolio breadth of our product line and expect some growth there, not in the millions, but definitely some growth. Maryland retail remains relatively stable, and those are more or less the puts and takes.

OK. Thanks, Keith.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one on your touchtone phone. Your next question comes from Andrew Sample, Ventum Financial. Andrew, please go ahead.

Good afternoon, and congrats to my Q2 results. First of all, I just want to ask about the potential to streamline some SG&A costs, perhaps by combining some regional management teams. Would you maybe just be able to quantify what kind of potential operating cost synergies you're looking to save there in the quarters ahead and kind of the timing of when we would expect to see that roll into the P&L?

Hi, Andrew. This is Keith. I can take that. I just want to make sure we understand your question first, because when we talk about that, we talk about it in the context of M&A, like in Ohio, and if we complete a deal in Ohio, that's where we see some potential cost synergy leveraging our state level existing Michigan infrastructure across a deal like that, as an example. So it's hard to say exactly how that would be until we actually close a deal, but that's the thought, and I don't know if I captured your question correctly or not.

That's fair. Maybe if I could re-ask it a different way. I think you're targeting 30% SG&A being about 30% of revenue. So is that dependent on closing deals, or do you think if you weren't able to close a deal, you could find other ways to get to those target levels?

Okay, I got it. So yeah, on that front, we continue. It's almost like an ongoing exercise for us. So in fact, we're right in the middle, organization-wide, of yet another exercise of just turning over every stone, making sure we're being responsible, making sure we continue to adjust and adapt our retail labor model in every state to existing conditions and flex up and down as needed. And so that's how we plan to get to or maintain, in this case, get back to the 30%, because we're slightly above the 30% level in the way that we measure it. So that's the color behind that. So

not acquisition dependent. If we got a nice bolt-on or what I would call transformative large deal in Ohio done, that should just be able to help us drive us below 30%.

Understood. That's helpful. And then maybe just in terms of M&A and kind of how those discussions are evolving, I understand you probably can't get into too much details with this, but at a high level, what are you seeing in terms of potential targets being willing to take equity when you're discussing M&A transactions? In years prior, it felt that more of the privately held targets were more interested in cash consideration, but is there a growing appetite for targets accepting fair-based consideration, especially with some of the catalysts we have around the corner here?

Yeah, absolutely. I'll take that. Yeah, I think there's definitely more of an interest in taking our stock as currency. The thing is we're a little less interested in using our stock as large of a component of a deal as we would have been talking about, say, a year ago. It's interesting. These targets, when we're talking to them, they're actually sort of fighting for stock versus cash or certainly like earn-out cash or seller's notes. We're trying to have a balance there. They see that as upside and whatever valuation the whole deal is happening, we're pointing out to them, hey, if a quarter of this is stock and our stock does what we think it can do over the next five years as we continue to build this business, you're going to end up doing really well in terms of the overall transaction. So bottom line, most of the targets want our stock more so than they did a year ago, but we're using it sparingly in our negotiations.

That's helpful. Appreciate you taking my questions. I'll get back into the queue.

Thank you. Your next question comes from Mike Regan, Excelsior Equities. Mike, please go ahead.

Hey, everyone. Keith, real quick in terms of the guidance. In the past, you talked about gross margins saying sort of 47 to 50 percent for the year. So within the context of the third quarter sort of flattish to slightly down, is that sort of percent still a reasonable expectation?

Yes. Hi, Mike. Yes, it is. We just tried to keep our language simple in our guidance by what I said in my prepared remarks, but to parse that for you, we expect gross margins to remain in that 48 to 50 percent range depending on the quarter, and that's how we're thinking about it for Q3.

Okay. And then a second question. I know it's a little early since it's only been a couple of days, but have you seen any thoughts or have you seen any trends on the Michigan stores on the border with Ohio in the first couple days of Ohio adult youth?

Yeah, nothing to share yet, Mike. It's still too early. We have been, our stores have not, they're not in close proximity to see much yet, but we're keeping an eye on Ohio, a very close eye on Ohio with a lot of conversations, a lot of friends and potential families that we're talking to, and it's exciting what's happening in Ohio, but not on the Michigan side.

All right, great. And then just one more question. Did I see that you guys closed one of the California stores, and if so, is there sort of any financial impact or cost savings or any revenue impacts from that?

Yeah, Mike, very, very, very negligible. It's a store that was a baby store, super small store, store within a partnership. We were waiting for the lease to expire. We negotiated our way out of it, but it's super negligible.

Got it.

Great. Okay, thanks.

Thank you.

Thank you. Ladies and gentlemen, as a final reminder, should you have a question, please press star one on your touchtone phone.

Your next

question comes from Sonny Rainhawa, Seaport. Sonny, please go ahead.

Hey, guys, just I guess a little bit of a housekeeping issue. There was a adjustment for bad debt. Where was that captured in the income statement? Was that in revenue?

Hi, Sonny. No, it was captured. The reversal came into operating expenses. It was a bad debt expense originally, and that's where it was reversed into operating expenses. And then in adjusted EBITDA, we added it back or subtracted it out, however you want to think about it.

Okay, so operating expenses were $4 million. Under,

yeah, yeah, understated by, not understated, but lower by $4 million.

Okay, okay, perfect. And then just with the net proceeds, we're just trying to, I guess, just update our balance sheet for Q3. What were the net proceeds of your financing?

Yeah, sorry, maybe you missed it before, but we didn't get the exact number of but it's several million dollars net proceeds after we pay off the loans that are maturing plus the closing costs, et cetera.

Okay, I guess I'll be in the next release. All right.

Yeah, Sonny, this is Yad. I want to go back to the OPEX question just to make sure we're clear. Our underlying OPEX between Q1 to Q2 were down $400,000 from $25.5 million to $25.1 million.

That's not affected by the debt

reversal. That's why the true gap reported EBITDA number was higher because it captured that and we adjusted it out. That's why the adjusted EBITDA number was lower than the gap EBITDA number.

Yeah. All right, appreciate it.

Thank you. I will now turn it back to Jason Wilde for closing remarks.

Well, thank you everybody for joining us for this quarter's call. We look forward to talking to you all in a few months.

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.