Cresco Labs - Q2 2020

Transcript

Operator (participant)

Good day, and welcome to Cresco Labs' Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press the pound symbol. Please note that this event is being recorded. I would now like to turn the conference over to Aaron Miles, Vice President of Investor Relations for Cresco Labs. Please go ahead.

Aaron Miles (VP of Investor Relations)

Good afternoon, and welcome to Cresco Labs' second quarter 2020 earnings conference call. We look forward to speaking with you today and discussing the great progress we have made as a company. I am joined on the call by our Chief Executive Officer and Co-founder, Charlie Bachtell, our Chief Financial Officer, Dennis Olis, and our Chief Commercial Officer, Greg Butler, who will be available for Q&A. Prior to this call, we issued our second quarter 2020 earnings press release. This document has been filed with SEDAR and is available on our investor relations website at investors.crescolabs.com. We plan to file our financial statements and MD&A for the three and six months ended June thirtieth, two thousand and twenty on SEDAR, subsequent to this call.

Before we begin our remarks, I'd like to remind everyone that certain statements made on today's call may contain forward-looking information with the meaning of applicable Canadian securities legislation, as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include estimates, projections, goals, forecasts, or assumptions, which are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans, or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations.

Additional information about the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found under Risk Factors in Cresco Labs' public filings available at www.sedar.com. Cresco Labs does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco Labs will refer to some non-IFRS financial measures, such as adjusted EBITDA and operational gross profit, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS.

These non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Please also note that all financial information on today's call is presented in US dollars, unless otherwise noted, and all interim financial information is unaudited. And with that, I will turn our call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

Charlie Bachtell (CEO and Director)

Good afternoon, everybody, and thank you for joining us today. We hope you and your families remain healthy, safe, and well. I'm gonna start off with some of the highlights from the second quarter, then I'll review the five ways that Cresco Labs is generating shareholder value in 2020. After that, I'll introduce our recently appointed CFO, Dennis Olis, to discuss our financial results and capital position in more detail. Our thesis remains that you win this industry by building the most strategic geographic footprint and by establishing meaningful material positions in each of those markets. And while vertical integration is key in the near term, the greatest opportunity for creating long-term shareholder value is achieved by prioritizing the middle two verticals of the value chain: branded products and the wholesale distribution of those branded products.

After a period of investing in infrastructure, deliberately executing our strategy, and committing ourselves to our mission, we are finally beginning to stretch our legs and realize the full potential of this organization. While Q2 for Cresco Labs continued to be about building, scaling, and refining our operations, we also started to see some of the fruits of our labor as we close the first half of the year and accelerate into the second half. Revenue in Q2 was $94.3 million, an absolute increase of nearly $28 million, or 42% over Q1, and an acceleration of growth by 16 points sequentially. In Q2, we grew revenue by more than 30% in every single one of our U.S. markets, with the exception of Massachusetts, where adult use was halted for part of the quarter.

We're now the largest wholesaler of branded cannabis products in the industry, with nearly $55 million in quarterly wholesale revenue. Our retail platform is outperforming, with $39 million generated from our 17 locations open during the quarter. On top of that, we substantially increased operating leverage and profitability, reducing SG&A on an absolute basis by $1.5 million from Q1 and generating $16.5 million of adjusted EBITDA. We're also proud to announce that in the month of June, we achieved that next major milestone of generating positive free cash flow. Our Q2 performance is a testament to the value of our strategy and our ability to execute it, and the results are showing in all of the areas that matter most, including in the numbers.

We said on our last call that the true test of a company's operational execution and their ability to manage through COVID would be seen in Q2 results, and our results speak for themselves. I could not be more proud of our performance and of every single member of the Cresco Labs team for how they've responded to the challenges this year. By being prepared, reacting quickly, and effectively managing change, we are continuing to drive top-line growth and increase profitability during a very challenging time. Consistent with our stated strategy, here are the five ways Cresco Labs is delivering shareholder value in twenty twenty. Number one, we're investing our resources in the most strategic markets. In the two states where we have the leading market share, Illinois and Pennsylvania, both have reached $1 billion in run rate sales.

Illinois is set to issue its next 75 retail licenses, a catalyst to more consumer demand and increased opportunities for our wholesale business. Pennsylvania now has nearly 390,000 people registered in the medical program, roughly the same number as Florida, making it one of the most important medical markets in the country. California, which remains the largest cannabis market in the world, grew 13% year-over-year and 10% sequentially in Q2 per BDS data. Beyond the massive growth offered from these three states, we are focused on going deeper in our other markets to further accelerate and diversify our growth in 2021. We see significant upside in Ohio and Maryland, where the rapidly growing medical markets both posted greater than 20% sequential growth in Q2.

Arizona and New York are working towards adult-use legislation and pose significant opportunities to drive brands to large consumer bases. Improving regulations in Michigan and Massachusetts are driving growth and creating increased wholesale opportunities for us as well. Seven of our nine markets are either states or cities with populations ranked in the top 10 nationally, and the growth in these markets validates our thesis of focusing on a strategic footprint. Second, we are now the largest wholesaler of branded cannabis products in the industry. Wholesale revenue in Q2 was $55 million after intercompany eliminations, an increase of 44% from Q1. While maintaining the number of doors sold into during the quarter, average revenue per wholesale account increased 44% sequentially.

We expanded the reach of our house of brands with the launch of Good News in Illinois and California, the introduction of High Supply to California and Arizona, and the extension of Mindy's Edibles into Michigan. In Q2, we completed the expansions of our facilities in Illinois and Pennsylvania, increasing our supply capacity in each state by 6x and 4x, respectively. As we benefited from our enhanced cultivation methodology faster than expected, we were able to bring incremental supply to market in Q2, providing a dramatic increase to revenue and market share in both states. As we bring additional supply to market in Q3 and Q4, we expect our revenue and market share will accelerate. As an organization, we've repeatedly proven our ability to gain leading market positions by expanding wholesale capacity and driving our house of brands on to every retail shelf.

In the first half of the year, we secured the funding to propel our next leg of growth with $50 million in tenant improvement allowances to increase our wholesale capacity in Ohio, Massachusetts, and Michigan. As we grow our operations in these states in 2021, we are taking the same approach and again, expect to gain meaningful material market shares. Third, our retail strategy is outperforming. Our Q2 retail revenue grew 39% quarter over quarter. In our stores open for the entirety of Q1 and Q2, number of tickets increased 12% sequentially, and average basket size grew 18%. Same-store sales increased 31% sequentially. In Illinois, while state retail grew by 18% from Q1 to Q2, our existing Illinois stores grew sales by 37%.

A testament to the effectiveness of our retail leaders and teams, nearly 75% of our retail revenue growth was driven by existing stores, with the impact of recently announced store openings still to be seen in Q3 and Q4. Our Sunnyside model is producing stronger same-store sales, attracting more customers, and achieving a disproportionate share of the market. As we recently announced, we just opened our ninth retail location in Illinois, the most stores of any operator in the state. Sunnyside Schaumburg is located adjacent to the largest shopping mall in Illinois and at the heart of one of the densest areas of stores, hotels, and restaurants in the state. This is another example of how our retail locations are strategically carrying outsized cultural and brand-building potential.

With more store openings planned in Illinois, Pennsylvania, Ohio, and Massachusetts, we look forward to further accelerating retail revenue and market share across our footprint. Fourth, we are taking share in California, the largest, most competitive cannabis market in the world. Our team has been hard at work rightsizing the brand portfolio on the Continuum platform, lowering costs, and optimizing our supply chain in the state. As a result of their efforts, revenue is growing, gross margin is expanding, and we're increasing operating leverage. Starting with top line, California retail sales grew 10% quarter-over-quarter, while Cresco Labs' total California revenue increased by 41%. We are taking share. Revenue from Continuum Distribution was up 35% sequentially, driven by own brands like Cresco, Mindy's, FloraCal, and High Supply, as well as continued strength from core partner brands....

Wholesale penetration continued to grow in Q2, and we're now distributing to nearly all of the state's Tier one dispensaries. While we're encouraged by the substantial increase in gross margin during the quarter, we're even more excited about the immense gross profit opportunity offered by the state in twenty twenty and beyond. With a continued focus on increasing operating leverage, we've optimized the portfolio of brands in our platform, appointed new leadership in the state with extensive CPG and distribution experience, and completed a thorough value chain analysis to further improve the efficiency of our distribution business. California remains one of the most important cannabis markets in the world, and with improving regulations and state retail sales projected to reach $7 billion by 2025, California will continue to be a key driver of growth for Cresco Labs. Fifth, we're generating substantial operating leverage as we scale.

While revenue increased almost $28 million from Q1 to Q2, SG&A, on an absolute basis, decreased to $1.5 million. On past calls, we've discussed the necessary investments we've made within our operating platform to ensure our organization can scale exponentially. These infrastructure investments over the last 12 months are beginning to pay off. With $28 million of incremental sequential revenue, we're able to drive a $13 million increase to adjusted EBITDA. This emphasis on increasing efficiency and operating leverage has also allowed us to successfully manage through the pandemic. We viewed the challenge as an opportunity, focused on continuous improvement, and executed operationally. That is how you deliver shareholder value. We're investing our resources in the most strategic markets. We're now the largest wholesaler of branded cannabis products. Our retail strategy is outperforming.

We're taking share in California, the largest, most competitive cannabis market in the world, and we're generating substantial operating leverage as we scale. In June, we hit our next major milestone, generating positive free cash flow for the month. We're executing on all levels and accelerating into the second half of 2020. These results could not have been achieved without the outsized contributions from every member of the team. Over the last twelve months, we've made strategic appointments to fortify our organization with professionals that have proven track records of rolling up their sleeves and driving meaningful impact in high-growth industries. The team of leaders we've assembled are elevating Cresco Labs to the next level, promoting diversity of thought and creating step change increases in our performance.

Again, I could not be more proud of our Cresco Labs family for how we've taken care of each other and for what we've accomplished in the first half of the year. With that said, I'm thrilled to introduce our new CFO, Dennis Olis, to discuss our financial results in more detail. Dennis joined us in July and brings with him an extensive background of management experience at large, publicly traded companies, including Motorola and Allscripts, where he was the CFO and held other leadership positions, overseeing operations, M&A, financial reporting, corporate development, internal audit, and the list goes on. I've thoroughly enjoyed working with him over the past couple of months, and he's an exemplary addition to our best-in-class leadership team at Cresco Labs. With that, I'll pass it over to Dennis.

Dennis Olis (CFO)

Thank you, Charlie. It is a pleasure to speak with you all today. Before I jump into the second quarter financial results, let me first begin by saying that I am so excited to be a part of this industry and even more excited to be the new Chief Financial Officer at Cresco Labs. I firmly believe in the strategy of this company and believe that our best days lie ahead. My current attention is primarily focused on five initiatives. One, preparing for access to the U.S. capital markets and the move to U.S. GAAP reporting. Two, automation in everything we do. Three, improved integration of the finance organization with operations. Four, improved cash performance, and five, continued focus on cost management. Excelling in each of these areas will position Cresco Labs as a leader in the cannabis industry and maximize shareholder value.

Moving to the second quarter results, as Charlie discussed, the company has solidified itself as the foremost operator in the industry when it comes to branded products and wholesale distribution. I'll begin my remarks by reviewing the financial highlights from the second quarter, then discuss our balance sheet and capital agenda. Please note that all numbers are stated in U.S. dollars. Despite Q2 being the first full quarter impacted by the COVID-19 pandemic, Cresco Labs achieved the largest top-line growth in our history and recorded Adjusted EBITDA. Most importantly, we did so while improving operating leverage. Revenue in the second quarter was $94.3 million, up almost $28 million sequentially on an absolute basis and 42% quarter-over-quarter.

We increased revenue by at least 30% in every single one of our U.S. markets, with the exception of Massachusetts, where adult use was halted for part of the quarter. We are excited about our strategic footprint and the meaningful impact Ohio, Massachusetts, Maryland, New York, Arizona, and Michigan will have on our growth heading into 2021. Revenue mix in the second quarter was comprised of 58% wholesale and 42% retail. Even with the four recently opened Sunnyside locations and additional store openings planned for later this year, we still expect to derive the majority of our revenue from wholesale as more supply is harvested from new rooms at the recently completed facility expansion in Illinois and Pennsylvania. Second quarter operational gross profit was approximately $44 million or 47% of revenue, compared to $32 million or 48% of revenue in Q1.

It is important to note that operating costs associated with the expansion of our cultivation facilities in Pennsylvania and Illinois in Q4 of 2019 and Q1 of 2020 were attached to Q2 sales, which impacted overall gross profit in the quarter. Now that the expansion costs are behind us, the revenue we will generate in Q3 and Q4 will carry a materially lower cost per gram produced. As a result, cost of goods sold will normalize, and we expect to return to a 50% plus operational gross profit margin in the second half of the year. SG&A expense in Q2 was $45.2 million, a $1.5 million dollar decrease in absolute dollars from Q1, and an improvement to 48% of revenue from 70% of revenue in Q1.

SG&A, excluding share-based compensation and one-time costs, was 35% of revenue in Q2, compared to 50% in Q1. This reduction to expenses during a quarter where revenue increased by 42% is a true testament to our team and their ability to create efficiencies and streamline the business during an extremely challenging operating environment. As we continue to focus on efficiencies and execute on our growth opportunities, we expect SG&A as a percentage of revenue to continue to trend downward throughout the remainder of the year. When it comes to managing through economic downturns and industry threats, we know that actively controlling costs is the most critical component to not only mitigate the current risk, but to put Cresco Labs in the best position to address the threat head-on and grab market share on the back end.

We've taken the opportunity to rationalize costs and create efficiencies, and as a result, have become a stronger, leaner company. Second quarter Adjusted EBITDA was approximately $16.5 million, a 419% increase from Q1. In the reconciliation provided in our press release, you will see we have excluded the impact of non-cash and one-time items from Adjusted EBITDA to offer a better view of how profitability is trending quarter-over-quarter. In Q2, we increased pay for essential workers during state-mandated shelter-in-place orders and incurred other expenses to keep employees and customers safe. We have adjusted for these COVID-19-related expenses, as well as one-time costs associated with the integration opportunities related to Origin House and the termination of the Tryke transaction.

The positive performance of Adjusted EBITDA during the quarter gives us tremendous confidence in our overall strategy heading into the back half of the year. While revenue increased $28 million, Adjusted EBITDA increased by $13 million, meaning approximately 15% of each marginal dollar of revenue dropped to the bottom line. Net loss also improved sequentially, but we continue to believe Adjusted EBITDA is the best measure of our performance, as it does not include the impact of biological assets and other mark-to-market items. Turning to the balance sheet, we entered the quarter with $71 million in cash and cash equivalents, an increase of $2.4 million from Q1. As expected, inventory and biological assets were elevated this quarter as a result of our two major facility expansions being completed.

Second quarter CapEx was $12 million, most of which was funded by tenant improvement allowances. Again, we have about $50 million in tenant improvement allowances owed that we will use to expand our cultivation and production operations in Michigan, Massachusetts, and Ohio. We therefore expect out-of-pocket CapEx to remain low for the remainder of the year. Operating cash flow improved significantly to -$9.9 million in Q2, and in June, we achieved the next major milestone by delivering positive operating and free cash flow for the month. We, as a leadership team, are very pleased with the results this quarter. Our performance in Q2 was driven by 30% growth in eight of the nine states and increased operating leverage across our footprint. We are investing our resources in the most strategic markets.

We are now the largest wholesaler of branded cannabis products in the industry. Our retail strategy is outperforming. We are taking share in California, and we are generating substantial operating leverage as we scale. Cresco Labs is well-positioned to go deeper and gain material share across all of our markets this year and beyond. We are exiting Q2 with a month of positive cash flow from operations and look forward to accelerated growth and profitability in the second half. Thank you for your time today. I'll now pass the call back to Charlie for final remarks.

Charlie Bachtell (CEO and Director)

Thanks, Dennis. In the first half of 2020, we were required to operate differently in nearly every aspect of our business, and in Q2, every aspect of our business became stronger. In today's macro environment, it is unceasingly important for an organization to have strong fundamentals, a true focus on culture, a proven business model, and a responsible capital agenda. At this stage in the industry's development, it's critical that we continue to provide the thought leadership needed to develop the responsible, respected, and robust cannabis industry that we all want. We've managed this by maturing our organizational structure, enhancing and diversifying our leadership team and board, emphasizing social equity and inclusion through our SEED programs, community business incubator, and restorative justice initiatives, and proactively engaging with regulators and legislators at the state and national levels.

We've taken these critical steps to pursue our vision of being the most important company in this industry, to fulfill the responsibilities of being a stakeholder-focused organization, and to achieve the incredible potential that lies within Cresco Labs. Thank you for your time today. I'll now ask the operator to open the line for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Vivian Azer with Cowen. Your line is now open.

Vivian Azer (Managing Director)

Hi, good evening. My question is on your market share gains in California, please. You know, given how many of your competitors have indicated that it's a challenging market, I was wondering if you could dig into it a little bit, whether you're finding particular success around certain form factors, certain price points, or is it just a function of the fact that you over-index to the key retailers? Thanks.

Charlie Bachtell (CEO and Director)

Thanks, Vivian. This is Charlie. Thanks for the question. You know, I think we're finding success in California because we are really kind of getting our legs underneath us, right? The Q1 was a lot of integration of the Origin House assets to really complete the Cresco Labs California assets, and we're bringing products to market. You know, we've got the supply, we've got distribution optimized, so we've become a better operator out there as well. For specifics on market dynamics, I'm gonna have Greg add some additional color.

Greg Butler (Chief Commercial Officer)

Hi, Vivian. Thanks for the question. I think this is very similar to our question, I think, in our last earnings call on how I answered for you. It says, we looked at that market, where do we wanna drive better growth out of? And I think if you look at what's driving our volume growth relative to the market, growth of doors, we opened more doors. So I think part of your question was, you know, are you getting in the right doors? The answer is we are, and we're expanding our doors. The growth of our own brands, so rolling Cresco Labs brands in the market, we're successfully getting those brands in. They're being reordered while we're also growing our partner brands, like Kings Garden, is also showing growth in the market.

So I think it's a combination of both, increasing points of distribution with our doors and then also, you know, improving brand velocities as we continue to scale in the market.

Vivian Azer (Managing Director)

Terrific. Thank you for that color. It seems like you guys had an accurate view of the marketplace. My quick follow-up is also on California, and perhaps, Greg, you've already answered it, but it's for Dennis. You have had reorders, but as we kind of think about the sequential growth in the quarter, is there anything that we should take into account just in terms of selling, given how many brands you've launched in that market? Thanks.

Greg Butler (Chief Commercial Officer)

Let me start, and Dennis can obviously give you some commentary. I think you're gonna see, as Charlie mentioned in his opening remarks, we've just started launching those brands in, and so you are getting both those first orders with dispensaries and then repeat orders with those dispensaries. I will tell you, looking at the numbers, though, it's not that it's just coming from the one-time orders. It's both new accounts plus existing accounts ordering more, which I look at as a healthy metric to down, not only just, you know, paying to get distribution, but also getting distribution and being able to continue to sell, and so that's where the volume decomp is coming from, but I'm sure Dennis has other-

Dennis Olis (CFO)

Yeah, just to add on, with what Greg said, we did see pretty substantial growth in that market quarter over quarter, due to the fact of the new branding and that, and adding new products into that market. We would expect to see that growth continue into Q3 and beyond.

Vivian Azer (Managing Director)

Very helpful. Thank you so much.

Operator (participant)

Thank you.

Charlie Bachtell (CEO and Director)

Thank you, Vivian.

Operator (participant)

Our next question comes from Matt McGinley with Needham & Company. Your line is now open.

Matt McGinley (Managing Director)

Thank you. Can you give us any color in terms of what you saw in terms of the revenues flowing through from the second quarter and into the beginning of the third? As you've noted in the past, the wholesale revenues tend to have a step function increase when they occur, but I'm not sure how much of that, you know, step function happened in the second quarter versus, you know, will occur in the third quarter.

Charlie Bachtell (CEO and Director)

Sure. Thanks, Matt. This is Charlie. I'll take this one. You know, I think what we saw in Q2 was a bit of an expedited timeframe to get to increased yields from our methodology. You know, we changed cultivation methodology early in the year. We had, as we've noted, the significant expansion of our facilities in Illinois and Pennsylvania. And as I noted on the last call, you know, usually, your first harvest is never as good as your second harvest, is never as good as your third harvest out of a new room in a new facility. And really, what we experienced was a bit of an expedited ramp-up in the quality of the yields that we were getting out of our new square footage.

So it was nice to see a bit more of that in Q2. As I mentioned on the last call, too, new supply really started coming into the market in the mid to late May period. So still a portion of Q2, about half of it. But we do expect it to continue to increase as we go into Q3 and Q4, as we said on our last call.

Matt McGinley (Managing Director)

Okay. And for Dennis, on the cash flow from investing activity, the number was, I think, positive $15 million in the second quarter, and you said the CapEx was $12 million, so there was some benefit. I think part of it was sale-leasebacks would have helped you around $27 million in the quarter. So I guess the question is: What was that benefit in the quarter? And if it was sale-leasebacks, I think you mentioned that you have roughly $50 million in tenant reimbursements.

... that will accrue over the course of 2020, how much of that is left over the course of this year?

Dennis Olis (CFO)

Thank you. So, we did have some sale-leaseback for three sites in the quarter, which were Marshall, Fall River, and Barleycorn, which did represent a pretty significant increase of funds into Cresco in the second quarter. As we look at the tenant improvements that we've got remaining, the credits like is in excess of $50 million right now. We will use that to continue to expand into other states now that our expansion and cultivation centers in Pennsylvania and Illinois are complete.

Matt McGinley (Managing Director)

Okay. Thank you very much.

Charlie Bachtell (CEO and Director)

Thank you, Matt.

Operator (participant)

Thank you. And our next question comes from Derek Dley with Canaccord Genuity. Your line is now open.

Derek Dley (Head of Canadian Equities)

Yeah, hi, guys. Congrats on a really strong quarter here. Just curious to know the impact on gross margin that you guys had during the quarter, roughly, you know, from the expansion that you guys were undertaking in Pennsylvania and Illinois, as well as the integration of Origin House. I know you mentioned you expect to see 50% operational gross margins over the back half of the year, but can you quantify what that impact was during the quarter?

Charlie Bachtell (CEO and Director)

Yeah, thanks, Derek. This is Charlie. I will, I'll let Dennis handle that.

Dennis Olis (CFO)

Thanks. So what happened in the second quarter is, again, the cost of cultivation that we incurred as we expanded our sites, both from a headcount standpoint and adding headcount, and starting to build out the cultivation rooms in advance of shipping the developing the product, that cost was attached to products that shipped in the second quarter of the year. So just to kind of illustrate that point, the cultivation cost per gram in the second quarter was 40% higher than the cost to cultivate the same product in Q1.

So now that we have incurred that cost in the second quarter, and that's behind us, we will start to see a material improvement in the cost per gram in those cultivation centers, actually improve even off of the Q1 baseline as we enter into the second half of the year. So in total, it was a couple hundred basis points that it cost us for the quarter, and that's why I feel confident with making the statement that we will have gross profit, operating gross profit in excess of 50% in the second half of the year.

Derek Dley (Head of Canadian Equities)

Okay, that's helpful. And you mentioned same-store sales were up, you know, really strong, 31%. I guess my question here is, you know, in terms of the capacity that came online. I think, Charlie, you mentioned you kind of only had like half of the capacity online in Q2. So when I think about same-store sales, I mean, was there still more demand that, you know, potentially could have been met or, you know, likely will be met in Q3, just, you know, you didn't have the supply available? And with that same-store sales, I mean, roughly, do you have a split between dry flower and concentrate?

Charlie Bachtell (CEO and Director)

Yeah, so I'll take the first half of it. Yeah, I think we're seeing both, in particular in Illinois and Pennsylvania, two very strong markets, that still are what I would classify as significantly supply constrained. That incremental supply we were able to bring on in the second half of Q2, it was helpful. But, you know, we still have a lot of, and when I say we here, I mean the markets themselves in Illinois, in particular, still has a lot of new stores and new doors to open. I think we're still in the mid 60-70 in as far as doors that are open in the state.

Derek Dley (Head of Canadian Equities)

Yes.

Charlie Bachtell (CEO and Director)

And again, even the incumbents, you know, can open up those second locations. So 55 is gonna expand to 110 just with the incumbents. Now you have the additional 75, new licenses that should be granted here in the coming weeks, fingers crossed. So I think when we see new doors and it becomes even that much more sort of accessible throughout the rest of the state, we're gonna see really the demand uptick with it. Greg, more on the overall?

Greg Butler (Chief Commercial Officer)

Hi, Derek, and good to see you. I think the only thing I'll add to your question, which you asked around rough percentages, so let me start. You know, it's pretty much what we've seen as we've gone month by month. The dry flower is about, you know, up and down around 40%. And so that's kind of what we're seeing. From a demand perspective, I think what you look at, if you look at even Illinois monthly data, this market continues to grow. As more supply comes on, it continues to be consumed, to Charlie's point, as it becomes easier for customers to get access to the product, that will help continue to fuel demand.

And so, we look at that as there is still headroom for us to grow.

Derek Dley (Head of Canadian Equities)

Okay. That's helpful. And just last one for me. Just in terms of, you know, you mentioned looking into twenty twenty-one. I think four states there, Ohio, Massachusetts, Arizona, and Michigan. You know, how do you feel about the current footprint where you stand today? Are there any areas where, you know, you think you can go a bit deeper? I'd imagine you're not looking to add to the footprint, but any areas that, you know, will be a slightly higher focus in twenty twenty-one?

Charlie Bachtell (CEO and Director)

Yeah, it's a good question. And for sure, I think there's some of those markets, even one of our largest markets, Pennsylvania. We have room to grow in Pennsylvania from a retail footprint standpoint. You know, we have currently licenses to open up six stores, and you can have licenses to open up fifteen. So there's definitely still headroom there. And Dennis had mentioned, too, the tenant improvement allowances in the Michigan, Massachusetts, and Ohio markets to build out the capacity in both of those markets. So I think we're going to go deeper in each of those markets that we talked about. We have the room to be able to do it, and we have the funding. So we're really excited.

It's nice to see, again, the expansions we did in Illinois and Pennsylvania on the production side earlier in the year, dovetailing nicely into the expansion opportunities we have in those markets leading into 2021.

Derek Dley (Head of Canadian Equities)

That's great. Thank you very much.

Charlie Bachtell (CEO and Director)

Thanks, Derek.

Operator (participant)

Thank you. Our next question comes from Pablo Zuanic with Cantor Fitzgerald. Your line is now open.

Pablo Zuanic (Research Analyst)

Thank you, and good afternoon, everyone. Charlie, can you... I mean, congratulations on the quarter, of course, but I realize that these are supply constraints markets, but you are not the only one increasing capacity in Illinois and Pennsylvania in particular. There's a number of other companies doing that. So help me understand, in the case of Illinois, you have nine stores, Pennsylvania, I think three, right? Pennsylvania could go to 150, Illinois, like you said, 175. If you can talk, one, about, you know, wholesale market share in Illinois and Pennsylvania, and particularly in Pennsylvania market, where you have so few stores compared to the total, how do you build a brand, right? And is your wholesale share, you know, skewing to certain formats more than others? I just find that right now it's a great place, right?

Some markets that are supply constrained, you're bringing in new capacity, but things could change in six months or 12 months. Help me, help me understand that. Thank you.

Charlie Bachtell (CEO and Director)

Yeah, sure, Pablo. Thanks for the question. I think, you know, the way that I would answer it was almost in the question, right? So, I don't. We don't rely on our retail to build our brands. We rely on our wholesale to build our brands. We rely on other doors being open and us selling into them. It's always been the focus of the organization. So really, market penetration is the way that we believe you build brands in this space, especially in these markets that are supply constrained. So you have to have the capacity to be able to produce the brands, and you have to have that distribution ability to make sure that you get them into those stores. So really, the... we're encouraged by more and more stores opening.

We don't look at it as we only have, you know, a small amount out of the total stores available in the marketplace. We're big advocates for more retail doors. We think that's the future of this industry. That's why we've laid out our sort of strategic play, is focusing on the middle two verticals of that value chain. Brick-and-mortar owned retail is definitely important, but we think long-term value is driven by us distributing our products, our brands, into all of the other stores, too.

Pablo Zuanic (Research Analyst)

Are we in already at a place at in the industry where some of your larger competitors begin to not take your brands because they prefer to take from independent players? I'm just trying to understand if your growth wholesale through third-party stores is going to be mostly, you know, smaller, independent stores. If you can help give some color there. Because it sounds like, you know, others are following a similar strategy, but at some point, I would assume that those doors begin to shut, unless you have a brand that has to be a must-have, and I don't know of any brand that's a must-have right now, really. But help me understand that. Thank you.

Charlie Bachtell (CEO and Director)

Yeah, absolutely. And I think, and I'll start, and then I'm gonna have Greg do some follow-up. But again, I think this is where our thesis comes into play, especially in these markets that we've been talking about. When there's caps on the number of doors that you can actually own yourself, it really limits the ability for any of our, you know, us or our large competitors to really dominate from a retail side. There's only a couple of markets out there that are relevant to the discussion, you know, and the strategies of our peer set that allow you to have a significant number of own brick-and-mortar. So I think there will always be more independents. There will always be those shelves that need products on them.

Still, at this stage of the industry itself, I'm talking about for the foreseeable year, futures here now, there's a demand from the consumer side that you have variety in your stores. So, you know, having brands from other producers is the best way to provide the good consumer experience for the consumers that are coming into your own retail. Greg, anything to add?

Greg Butler (Chief Commercial Officer)

Not much to add to that, other than if you look at our California marketplace, where we are driving our brand growth through wholesale doors, we've successfully sold into that market on both the larger players and the independent players on both sides. And we are also selling into the MSOs across markets where we operate. So I think we actually are showing that in an assortment strategy to Charlie's point, customers are looking for different options. And much like any other industry, we're just seeing that you can get onto both your doors and other doors, and we're seeing it in California and in our markets.

Pablo Zuanic (Research Analyst)

One last one, Charlie, and I know it's hard to predict from a regulatory perspective, but if New Jersey goes reg, right, everyone assumes that the states that are around it will follow, Pennsylvania in particular. But, you know, if the lag were one or two years, as the legislatures try to, you know, agree on the path forward, how damaging would that be to the medical program of Pennsylvania? If New Jersey, you know, flips a switch on first of January, and then, you know, Pennsylvania takes another year or two to follow. Or the demand is so strong that it's not something to worry about. Thanks.

Charlie Bachtell (CEO and Director)

Yeah, I think, you know, I agree that New Jersey has the ability to be a catalyst, right? But I think those states are already having these discussions independently. I think that's one of the... you know, if you want to look at the other side of the coin of COVID, and we talked about this on the last call, there are opportunities that get created from that sort of an event. And regulatory changes that could have taken years to develop get expedited because of the need for jobs and for tax revenue generation. So I think, you know, Pennsylvania, I don't think Pennsylvania is looking at New Jersey as they're having this conversation. They started their process last year. You know, they did their listening tour.

They went around every county in the state. I think now, again, it's been expedited a bit with a $5 billion-ish dollar hole in their previously balanced budget. But I think, you know, your second part of your question on, you know, if they take too long, you know, it takes time for them to put proper legislation together. This is why the government affairs side of the industry has been such a focus of Cresco, from our very beginning, is that we have always, this is us being the most important company in the industry, right?

It is making sure that this industry develops in a responsible way, that we're seen as resources for legislators as they're thinking about how to do this, that we've given ourselves the ability to be in the room with the people holding the pen that are going to design the way that this industry looks going forward. And so it's, you know, while it's not only our responsibility, it's the responsibility of all top operators, but we take that responsibility very seriously to make sure that we're there, and we're a resource to help those pieces of legislation and regulation get developed and get launched. So, you know, we like the challenge. We definitely accept it. It's part of our foundation.

Pablo Zuanic (Research Analyst)

Thank you.

Charlie Bachtell (CEO and Director)

Thanks, Pablo.

Operator (participant)

Thank you. Our next question comes from Michael Lavery with Piper Sandler. Your line is now open.

Michael Lavery (Managing Director and Senior Research Analyst)

Thank you. Good evening. You mentioned automation as a priority. Can you elaborate a little bit on how that may play out and what we should expect, and how much, if any, of a driver it is towards near-term gross margin boost? I know you called out the mechanics of how this quarter was a little depressed, and it seems like it will pretty naturally snap back, but how much maybe over and above that should or could this give a lift in the next few quarters, or is it a little further out? Just kind of bring to life your thinking on automation a little bit, please.

Charlie Bachtell (CEO and Director)

Sure, Michael. Thanks for the question, and we'll have Dennis provide some color.

Dennis Olis (CFO)

Yeah. So when I think about automation, I think of it in two ways. One is, as we continue to improve our cultivation and the yields that we're getting out of our cultivation centers, we've got to make sure that we automate the back-end packaging to allow us to maximize the sell-through of finished goods into the marketplace. So that's one process, and we're gonna make the necessary investments to help expedite the packaging and the back-end processes to keep up with the improved yields that we're seeing out of our cultivation centers. The other aspect that I look at from an automation standpoint is just really a back-end operation and really affects SG&A more so than the manufacturing cost.

There, I'm talking about your payable systems and ERP system, those types of expenses that we're gonna have to make in this company to get us to the next level, to get us GAAP ready, so that we can list on the U.S. exchange when that becomes available to us. Just to improve the overall internal processes, recognize that, reduce some cost in the long run, but actually improve the efficiency of our back-end operations.

Michael Lavery (Managing Director and Senior Research Analyst)

Okay, that's helpful. Thanks. And you touched on preparing for a U.S. listing, so I assume that's some of the answer to this follow-up. But you know, looks like there's some potentially politically favorable winds at the federal level for the industry near term. What, if anything, are you doing differently to prepare for that or you know, just to be in the right position to take the most advantage of what might be coming?

Charlie Bachtell (CEO and Director)

Yeah, you know, I mean, it's a great question, and it's a little bit of, you know, looking into the proverbial crystal ball here. But I think we're doing the things that we need to be doing in order to be ready for it, both from a strategic nature, from an operational nature, and then definitely from a legal compliance and regulatory perspective, too. So yeah, I would agree with you. You know, we're bullish on there being some favorability in the relatively near term. You know, I think we're all of the position that these conversations, they were, you know, it's possible that they're better, depending on the outcome in November.

But I can tell you, the conversation is happening in all of the potential administrations that would be in office in the next session. So it is. Things are headed in a good direction. Those conversations are happening in rooms and behind doors that they've never happened behind or in before. So yeah, it is incumbent upon us to be ready for the access to the U.S. exchanges and also everything that goes along with that.

Michael Lavery (Managing Director and Senior Research Analyst)

Great. Thank you very much.

Charlie Bachtell (CEO and Director)

All right, thank you.

Operator (participant)

Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Your line is now open.

Scott Fortune (Managing Director and Senior Research Analyst)

Good afternoon, and congrats on the quarter. Thanks for taking the questions. Real quick, I wanna focus back on California, and you're selling into the top doors there. Kind of what's the overall penetration of those doors? And picking up here, you know, more local jurisdictions are looking to add retail doors and sales in California here. Kind of your sense of that occurring, and what's the strategy of moving down to penetrate all of California? And then just follow up on that, where are we with the Origin House synergies and finalizing those efficiencies from the integration side of things?

Charlie Bachtell (CEO and Director)

Scott, thanks for the question. Greg's gonna take that one.

Greg Butler (Chief Commercial Officer)

Yes. So I think, Scott, thanks for the question. Two parts to your question. One is overall penetration in the state, and I think the second part is just in a quick update on how we're progressing against synergies. You know, we're really pleased on how we're opening doors in the state. You know, as we look at, and I know it's, it's always somewhat of a changing number, but as we look at, doors in that marketplace, about six hundred fifty open, legal doors, and we tend to be in the 75% penetration of those doors. So we have a really good, strong, presence in the state. Obviously, that also means that they open more doors in the state.

... So hopefully the proof is in that number, that we can get into the doors as they open up. And so, you know, more access to products, as I mentioned before, does drive overall growth, and so increased points of distribution in California, for us, is a real driver of growth. And we feel like we are quite confident that we can continue to hold that market penetration as we go forward. The second part of your question on synergies. The last call, when we gave an update, as you said, we were in the middle of integration, we highlighted some of the comments that we were looking at. One was, doing a labor review, and we are on track of delivering that number, that we committed to.

And now, as Charlie mentioned in his opening remarks, we're now doing a go-to-market value chain assessment of where else can we find incremental synergies, which we will. So, there's no risk on us not delivering against our previous commitments, and we are currently in looking for more.

Scott Fortune (Managing Director and Senior Research Analyst)

Okay. Thanks on that color. And then just to kind of follow up, your seventeen operating retail doors right now as stores, you're adding one more in Illinois. What's kind of the timing in Pennsylvania and kind of is there a number or target for the end of the year, twenty twenty here, as far as stores here for you guys?

Greg Butler (Chief Commercial Officer)

Yeah, I think, let me start by saying Illinois, 10 doors is our max in the state. Nine currently open, one more to open, which our goal is to hopefully have that completed in this year. On Pennsylvania, as we look in the state, our goal is to have our Philadelphia store, as we previously mentioned, opened in the back half of this year with two additional as well.

Scott Fortune (Managing Director and Senior Research Analyst)

Okay. I appreciate the color, and I'll jump back in the queue. Thanks.

Charlie Bachtell (CEO and Director)

Thanks, Scott.

Operator (participant)

Thank you. Our next question comes from Russell Stanley with Beacon Securities. Your line is now open.

Russell Stanley (Managing Director and Equity Research Analyst)

Hello, everybody. First question, just coming back again to the sequential growth in wholesale and understanding in Illinois and Pennsylvania was additional supply that makes that possible. But just in terms of actually selling the product, how much of that growth really was into the new stores that opened in those markets as opposed to existing wholesale customers? And just wondering, you look at your wholesale customer base now versus maybe three to six months ago, is that base in terms of sales now more diversified or less? Any color on that would be great.

Charlie Bachtell (CEO and Director)

Thanks for the question, Russ. Greg's gonna add some color there.

Greg Butler (Chief Commercial Officer)

Hey, Russ, thanks for the question. Just to kind of recap to make sure I'm following. Your question is, how much of that new inventory are we pushing through our own retail versus our partner retail? You can trust in our numbers. Our wholesale business actually grew faster than our retail business. We've always committed to ensuring that we have a fair and equitable approach to how we distribute our supply. We've continued that approach in Q2, and I think you're seeing that in our financials. And so I can say, as you look at that, the growth of our cultivation isn't fueling a Sunnyside at the expense of our other partners in the state.

Russell Stanley (Managing Director and Equity Research Analyst)

Okay. And just, for my follow-up, just, specific to Illinois, wanted to ask about two dispensaries, in particular, the Danville and several other locations, because those are interesting. I guess, can you provide any color on how they're performing and what the sales split looks like between residents and out-of-state, and I guess how that experience informs, you know, site selection going forward?

Charlie Bachtell (CEO and Director)

Yeah, this is Charlie. I'll take that one. So both of those stores are performing well. They, you know, they're set up also to provide a different level of accessibility. I mean, they're newer stores for us. You know, the number of points of sale are 15-20 plus. So they're bigger stores. They're positioned from a location selection standpoint that way also. So they cast a bigger net and capture, you know, as much or if not more, foot traffic or throughput than some of our city stores. So they're performing well and, you know, in the higher level of our operating stores.

And then as far as Illinois resident to out-of-state mix, I think they index a little higher for out-of-state mix than some of our other stores that are in the Chicagoland area, but not to a fairly significant extent, so still mainly driven by Illinois.

Russell Stanley (Managing Director and Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from Andrew Partheniou with Stifel GMP. Your line is now open.

Andrew Partheniou (VP of Institutional Research)

Hi, congrats on the good quarter, and thanks for taking my questions. Most of them have been answered, but maybe if I could dig a little bit on your store productivity. Obviously, has grown substantially both on basket and ticket sizes this quarter. Just wondering, you know, with the stimulus checks and, you know, potentially further stimulus coming, how would you say that trend is sustainable into Q3?

Charlie Bachtell (CEO and Director)

Thanks, Andrew. Thanks for the question. Greg will take that one.

Greg Butler (Chief Commercial Officer)

Thanks for the question. I think if I just repeat your question, was if you look at our trends on same store sales, across our customer transaction trends versus average basket size trends, what you are seeing is, as more product supply comes in the market, you're seeing growth on baskets, which is very encouraging, but you are absolutely correct that most of our growth in retail is coming from incremental trips.

... I would say more of that growth is coming from both our ability to get people in and out of our stores efficiently, open stores in new locations, and so that's what's driving our growth and also customers coming in. I would say the basket side, in addition to supply, of course, stimulus checks does help with that, and so, you know, like all retailers, we saw some growth associated at the same time that those checks were issued, so any further issuance would definitely be a driver for basket growth, but if you look at the volume of growth, where it's coming from, it's coming from just more customers entering our stores, coming into the industry, which has been a steady trend pre-stimulus issuance and then post.

So I wouldn't say that that's overly driven by checks.

Andrew Partheniou (VP of Institutional Research)

Thanks. That's helpful. And, maybe, on a separate topic, could you just remind us, you know, what was your utilization in your Illinois and Pennsylvania expansions in Q2, and where you guys are at in Q3? Obviously, it takes time to ramp up, and, you know, the SG&A cost control that you guys have had is really impressive. Kind of looking to see how that could trend in Q3.

Charlie Bachtell (CEO and Director)

From a utilization standpoint, again, I think we saw a limited utilization of the new square footage into the marketplace in Q2, really in the back half of the quarter. And so again, I think we expect that to ramp up, you know, throughout Q3 and into Q4. And even though we saw, you know, the improved performance out of those facilities, maybe a little faster than expected, we still expect, you know, ramp to continue through the coming quarter. I'm excited about it. Anything to add there, Dennis?

Dennis Olis (CFO)

Yeah, this is Dennis. From an SG&A standpoint, the savings that we saw in Q2 was really across all functional areas. So it was a concerted effort to drive costs and some inefficiencies out of the organization. As we look forward into Q3 and beyond, we certainly expect to continue to see some leverage improvements as a percentage of sales. But we will make investments in people and processes. Some of the automation that I talked about. We'll continue to market our brands and drive retail sales up, so there will be some continued investments. We're not afraid to make investments to generate long-term growth opportunities, but nowhere near at the same rate that we expect revenue to grow.

Andrew Partheniou (VP of Institutional Research)

Thanks for that. That's helpful, and congrats again on the quarter.

Charlie Bachtell (CEO and Director)

Thank you.

Dennis Olis (CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Glenn Mattson with Ladenburg Thalmann. Your line is now open.

Glenn Mattson (Managing Director and Equity Research Analyst)

Hi, congrats on the results also. And, like the previous call, most of my specific questions have been answered. But I was curious about, Charlie, maybe your thoughts, industry-wide on the trend over the last, you know, nine or 12 months or so has been to kind of, retrench and really for the better operators to really focus on, key markets and drive profitability. You know, but now we're starting to see, pretty good profitability from a number of names. So I'm curious as to what you think in terms of your thoughts about when the... You know, maybe just philosophically, when you think you would switch towards maybe looking at other, territories again, and when you think the industry might also, start to move back towards that trend.

Charlie Bachtell (CEO and Director)

Sure, Glenn, thanks for the question. You know, I think it's fair to say that we, you know, we've always kept half an eye on what's going on in the markets around us. It's just, you know, when you come back to our thesis of making sure that we're in the most strategic states with the most strategic geographic footprint, we're pretty selective in the states that we do go after. As I mentioned on the call today, seven of our nine markets are either in the top 10 from a state population or from a city population in the country. You know, we've had our eye on what's going on.

I think most of us are understanding that the best and highest return on a dollar invested right now is probably in your own infrastructure, as it exists, as these markets are growing, as you've already made investments, as you've already established infrastructure, and you have management and executive teams in place. You know, there's definitely still some strategic markets out there that we've continued to look at. I think all of us are making sure we're on firm, solid footing, and we'll look opportunistically at things that become available, but also very selectively.

Glenn Mattson (Managing Director and Equity Research Analyst)

Okay, thanks for that. And just as a follow-up, more specifically on Massachusetts, can you just tell us, you know, you called that out. Obviously, it had the issues with the adult rec. So, adult rec's been back almost for three months now. Give us a sense of how you feel like that bounce back is going. And, remind me, I think you have two more, retail stores that... Is there an update on when those would open, or if you're working on that, or,

Charlie Bachtell (CEO and Director)

You're right, we do. We have two more opportunities in Massachusetts, and Greg will address some of the specifics on the market dynamics.

Greg Butler (Chief Commercial Officer)

Yeah, you're absolutely correct, on your statement of that question, which is: How is our business performing? You know-

... we, we obviously saw a dip in Massachusetts as stores went to Meadow Link, and so that had an impact in the market. But coming back from that, we're seeing our results, not only getting back to where they were pre-shutdown, but now accelerating faster as we go forward. So that's pretty encouraging. As we look forward, our sales team out there has done just a fantastic job of opening up wholesale doors, and getting our brands where we can into those shelves, and then our retail business is showing a really healthy ticket growth as well in the market. So we're really encouraged as we look at the results coming out of Mass after the reopening.

And to Charlie's point, I think, you know, we've always said at Sunnyside, and I'm sure you're aware in Massachusetts with town licensing and whatnot, approving a dispensary to open can be tricky and timely. But our goal, as we've said, is to have our stores open, at least our Sunnyside open by end of Q4, early Q1 of 2021.

Glenn Mattson (Managing Director and Equity Research Analyst)

Okay, great. Thanks.

Charlie Bachtell (CEO and Director)

Thank you.

Operator (participant)

Thank you. Our next question comes from Andrew Semple with Echelon Wealth Partners. Your line is now open.

Andrew Semple (Equity Research Analyst)

Hi, guys, and congrats on the excellent quarter here. If I'm doing my math correctly, and I'm looking at the retail business, your average store is running at over $9 million in annualized sales, and I'm looking at $39 million in your retail business and 17 locations. That's very impressive and probably, you know, amongst the highest in your peer group. But I'm just wondering, are there any concerns about you being able to handle higher volumes at these locations? Does throughput and capacity become an issue in growing same store sales in the second half of this year, particularly in markets like Pennsylvania, where perhaps demand is much stronger than anticipated?

Charlie Bachtell (CEO and Director)

You know, thanks for the question. Greg, you want to take that?

Greg Butler (Chief Commercial Officer)

Yeah. Let me give you some context. I think one of the things, we're so proud of our retail team and what they've been able to accomplish, given everything that's been thrown at them, this year. I think as you look at those numbers, you know, we're pretty proud of those numbers as well. I think it's a testament to that team's ability to figure out how to restructure our stores, how to get people in, how we're processing customers, how we're managing inventory, and our assortment, and so we feel good. You know, we're confident that we can continue to show results like we have over the last couple of months. Obviously, there are some things that would help us with throughput, which is incremental POS stations in the store.

Our ability to expand our stores would all help. But from a team perspective, you know, we're heads down, figuring out how do we just continue to process the demand that we know exists. Let me leave it at that.

Andrew Semple (Equity Research Analyst)

Perfect. Switching gears to Ohio, just wondering if you had any information on the four Ohio stores that are pending final closing. Would you be able to provide any pro forma sales figures there, and any change in the timing of consolidating those four locations?

Charlie Bachtell (CEO and Director)

You know, this is Charlie. You know, we haven't provided pro forma revenue out of those stores. They're good stores, good locations. We're excited to bring them into the portfolio. As far as timing, it really is. It's a regulated, mandated, sort of period where you can't transfer ownership. So again, Q4 and Q1 are when those stores will become eligible for closing and then consolidation in our numbers. But yeah, good stores. We're excited to bring them into the portfolio. Very excited to round out our full vertical integration in that state. That state's gonna be a phenomenal state in 2021.

Andrew Semple (Equity Research Analyst)

Thanks for the color.

Charlie Bachtell (CEO and Director)

Thank you.

Operator (participant)

Thank you. Our next question comes from Kenric Tyghe with ATB Capital Markets. Your line is now open.

Kenric Tyghe (Managing Director and Equity Research Analyst)

Thank you and good evening. If I just circle back to the same store sales, particularly that basket growth, could you speak to what shift you saw in terms of, you know, digital versus, brick and mortar in the quarter, and to how sticky you think some of those changes may prove to be in the, you know, the world we live in today?

Charlie Bachtell (CEO and Director)

Absolutely. You know, at a high level, and then Greg's gonna add some detail to it. But, at a high level, I think what we found is, you know, I think we find a shift in consumer sentiment, like I think you're finding in all sectors when it comes to consumers and their purchasing habits, and that digital online order in advance pickup at the window, so to speak, is becoming a normalized way of purchasing products. And so I think, you know, that's something that not only did we see that trend starting to build pre-COVID, but, you know, through COVID, I think not only did it become a requirement, but now I think it's becoming part of the norm.

So, I think that's something that we fully expect to continue going forward. Greg, you wanna?

Greg Butler (Chief Commercial Officer)

Sure. Let's add a little bit of commentary. Again, thanks for the question. You know, one thing I should start with is, we made a pretty big switch, as COVID was coming to require online pre-ordering for our stores. And so obviously, that has a pretty big impact on your question about is it a brick-and-mortar or is it a pre-ordered? We somewhat forced that behavior, and so we're seeing that. I think as stores open up, I don't believe that everyone wants to pre-order their purchase. There's a lot of impulse purchase that will happen. So I do believe you'll see some return into the stores of their primary purchase. I think what we are seeing, though, a difference, and where we're changing even our approach, is-...

that more customers are engaging and connecting with our health advisors online through our telesales, teleservice group. And I think that behavior might stick, which is, does the role of our stores become more of a last point pickup? And where a lot more of the advisory information about products actually happens online, which would be a shift on how things were operating pre-COVID. So I think if you're looking at where the biggest impact to the business is gonna be, it's about stores being that pick up, pay, move along, and more questions being potentially asked elsewhere. Like I said, you know, we are still early as we are evolving through COVID. We're gonna keep watching it.

But that was what I'd say is the biggest shifts in consumer behavior we're seeing year to date.

Kenric Tyghe (Managing Director and Equity Research Analyst)

Great. Thank you. That's useful color. And just a final quick follow-up for me. Just Pennsylvania, if I understood you correctly, you saw yourselves taking share in wholesale in the quarter. Could you just speak to what your sort of door penetration is within that Pennsylvania market? And how, as Pennsylvania moves from, you know, where it is today to that sort of 150 cap, how you can continue to both, you know, differentiate your offering and your in-stock position, such that you can sort of continue to index or maintain that door penetration as that market ramps?

Charlie Bachtell (CEO and Director)

Sure, and this is Charlie. We have 100% market penetration there, so we're in every store, and again, how we maintain that as the additional stores and doors start to open is that we do prioritize making sure that we are a branded products company, and this is where the true strategy of Cresco can be potentially differentiated from the peer set, where we all talk about building brands and distributing brands, but you know, this is - this has been our model since day one, and so what we've learned is that the way that you keep those relationships strong and that you keep your products on those shelves is it's very simple. It's dotting I's and crossing T's. It's taking care of the fundamentals.

It's making sure that you have that quality, consistency, and availability, like the three pillars of really CPG and how you get shelf space. So, we continue to execute. We'll continue to have that penetration rate in that state.

Kenric Tyghe (Managing Director and Equity Research Analyst)

Great. Thanks, Charlie, and congrats.

Charlie Bachtell (CEO and Director)

Thank you.

Greg Butler (Chief Commercial Officer)

Thank you.

Operator (participant)

Thank you. Our next question comes from Graeme Kreindler with Eight Capital. Your line is now open.

Graeme Kreindler (Analyst)

Hi, good afternoon, and thank you for taking my question. I appreciate the commentary about the sequential growth and that 30% that you're seeing in all the markets outside of Massachusetts. I was just wondering, could you provide any details with respect to profitability in the individual markets? How many markets in the portfolio right now are profitable or were in Q2? And I guess from the acceleration that you're seeing into Q3, you know, how many other that were on the cusp of reach that breakeven point or close to approaching that? Thank you.

Charlie Bachtell (CEO and Director)

Graeme, thanks for the question. Dennis, you wanna respond?

Dennis Olis (CFO)

Yeah. Thanks, Graham. We don't provide individual state profitability. That's just something that we just don't disclose. I can tell you from an operational margin perspective, other than the issue that we saw in Pennsylvania, we saw a margin, operational gross margin improvement in most of our sites. But again, in terms of profitability, we don't disclose that at a state-by-state level.

Graeme Kreindler (Analyst)

Okay, understood. Thank you very much.

Charlie Bachtell (CEO and Director)

Thanks, Graham.

Operator (participant)

Thank you. Our next question comes from Jason Zandberg with PI Financial. Your line is now open.

Jason Zandberg (Equity Analyst)

Hey, thanks for taking my question. And, like the question before me, first of all, congratulate you guys on such a fantastic quarter. If my math's not mistaken, you have shown the highest quarter over quarter growth from Q1 to Q2, so you're definitely separating yourself from the pack. What I wanted to... You know, most of my questions have been asked. Just wanted to know, if you're seeing any trends from a product category platform, you know, as we've seen this nice growth across, you know, all your markets. Are we starting to see differences in terms of, you know, growth in edibles over flower?

I know you're in a number of different markets, but any overarching themes that you're seeing from a product category level?

Charlie Bachtell (CEO and Director)

Jason, thanks for the question and the commentary. I think this is best suited for Greg.

Greg Butler (Chief Commercial Officer)

Hi, Jason, and thanks for the question. So I think you're asking, you know, as we look across both total market and then within individual markets, any major shifts we're seeing across forms. I will tell you, flower is and remains king. It continues to be the largest segment of the market, as flower is available, and quality flower comes into the market. It continues to help it increase its average run rate share, about 40% of total sales. I think one of the hypotheses that many of us had coming into the COVID crisis was: Do we think that because of the respiratory concerns of this disease, would have an impact on inhalables, and would we see a shift to edibles? And that was, you know, as back in March, everyone kind of planning it out.

I think if you look at the data, it's not really playing out that way. We're seeing that most of the segments are holding their respective shares. Now, you know, in some of the markets we operate in, shares are evolving as forms become available. So some markets are a bit more mature, like California has a very mature, edibles market vis-a-vis some of our other markets we play in. And so you get growth as quality products come into the market. But once you get to that kind of level, there isn't a huge variance this year, at least year-to-date, on how these major segments are performing.

Jason Zandberg (Equity Analyst)

Okay, great. That, that's good color. Just if I could ask another question. I believe I heard you say that you were in all the Tier One dispensaries in California. Correct me if I'm wrong on that, but what I'm looking for is, what's your definition of a Tier One dispensary? Is that a certain sales level? Can you comment on that?

Greg Butler (Chief Commercial Officer)

Let me take it. And so I think just to clarify our comments is that we're not only entering California, but we're also gaining doors in Tier One accounts. So I don't know if we said all Tier One accounts, but clearly, we are moving it up with those accounts. We look at them from a combination of, in our definition, of a Tier One account, which is total revenue and the square foot of that door. The importance of that door, of just its position in the market, that's how we define it. And so that would be, as you hear comments from us, between Tier One and Tier Two, it's a combination of both absolute volume that's going through the account or its relative importance in that market.

Jason Zandberg (Equity Analyst)

Okay, great. Thanks for the clarification.

Operator (participant)

Thank you.

Greg Butler (Chief Commercial Officer)

Great.

Operator (participant)

I'm not, I'm not showing any further questions at this time. I would now like to turn the call back over to Charlie Bachtell for closing remarks.

Charlie Bachtell (CEO and Director)

I just wanna thank everybody for joining us today on this earnings call. Again, couldn't be more proud of the team for what they were able to put together in the quarter, which was, you know, by all accounts, a very challenging quarter, to have to manage work, life, and everything else going on in this environment. So thanks, everybody, for joining today, and we look forward to talking to you in November on our Q3 call. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.