Fractyl Health, Inc.

Welcome to the AERA Wellness second quarter 2024 results call. Joining us on today's call are AERA's President and CEO David Gobert and the company's CFO Brad Asher. Before we begin, we would like to remind everyone that certain comments from management during this presentation may contain forward-looking statements based on management's expectations. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as and must not be relied on by you as a guarantee, assurance, prediction, or definitive statement of fact or probability. Many of these risks and uncertainties are discussed in our most recent public filings, including our most recently filed annual information form and management's discussion and analysis. Numerous risks and uncertainties could cause the actual events and results to differ materially from the estimates, beliefs, and assumptions expressed or implied in these forward-looking statements and might not be expressed today. Several of these factors that will determine AIR's future results are beyond the ability of AIR to control or predict. In light of the uncertainties inherent in any forward-looking statements, you are cautioned against relying on these statements. While AIR may elect to update these forward-looking statements at some point in the future, AIR specifically disclaims any obligation to do so. During this presentation, you may reference non-GAAP financial measures such as adjusted EBITDA and adjusted gross profits. For a reconciliation of our non-GAAP measures to GAAP results, please see our earnings release posted in the investor relations section of our website earlier this morning. I will now turn the conference over to AIR's President and CEO, David Gobert. You may begin.

Good morning, everyone, and thank you for joining our second quarter 2024 earnings call. We find ourselves in an exciting time in cannabis, and particularly here at AIR. where we continue to mature as an organization and lay the groundwork for future growth amid a dynamic political environment that offers the potential for significant steps forward. We remain confident that reclassification of cannabis from Schedule 1 to Schedule 3 will be complete before Election Day and continue to work closely with our district peers to help bring the process across the finish line ASAP. We thank President Biden for his leadership in initiating and prioritizing the rescheduling process over the past two years, and are very encouraged to see the presumptive Democratic nominee, Vice President Kamala Harris, be so vocal on this issue. At the state level, we continue to see adult use progress in three of AIR's core markets, Ohio, Florida, and Pennsylvania. Yesterday was a historical day in Ohio where AIR was among the first operators to launch adult use sales while polling on the Florida adult use referendum remains strong, and Pennsylvania continues to take steps towards passing adult use VIH legislation. We'll discuss each of these markets in detail later in this call, but the conversion of these markets to adult use provides massive opportunity for AIR, and we've made it a key priority to ensure that we're ready to capitalize on all three if and when they happen. Diving into our Q2 results. Revenues were mostly in line with the low end of our guidance and flat to Q1. However, adjusted EBITDA margins did not meet our expectations, coming in below target level. The margin underperformance stemmed from a combination of factors, including what we believe to be tightening consumer wallets that is affecting spending trends across various industries, especially among our core customer base. Wholesale price moderation within several key markets where we previously have seen strength in recent quarters. Production increases in certain markets, which are not yet optimized from a cost standpoint. And a necessary step back in Florida cultivation and production, as we made upgrades to our existing Gainesville facility, which included cultivation process and equipment changes, and the automation of flower packaging, pre-roll filling, and gummy production, which we referenced on our Q1 call and still appeared in our Q2 results. We are confident these initiatives will allow us to take two steps forward in Florida, paving the way for longer-term sustainable margin and cash flow benefits. Overall, we are confident that our step back in margin in this quarter is temporary, and that with continued operation and advancement, and as upcoming growth catalysts come to fruition, we are well positioned for margin expansion particularly as we continue to anticipate a return to growth in the second half of the year. The actions that will enable that include furthering the progress made over the last 18 months in improving operations across our markets, continuing to invest in our CPG brands, investing in selling skills and customer experience in our retail locations, and ensuring that the company is best positioned for its next phase of growth, through the expected transition to adult use in three of our core markets, Ohio, Florida, and Pennsylvania. On the upcoming adult use transition opportunities, 77 of AIR's 93 dispensaries are located in Ohio, Florida, and Pennsylvania. And as a result, AIR is more levered to these three markets than any other MSO, and we plan to be ready for this opportunity. In Ohio, Adult use sales launched yesterday across the first tranche of stores approved by the state, and we're proud to say that all three AIR-affiliated stores were included. This is a historic moment for AIR, as it marks the first time in the company's history that we've been able to participate in the first day of adult use sale in a market. I'd like to take a moment to give a huge shout out to all the members of the AIR team who worked tirelessly to ensure that we were among the best positioned to capitalize on this significant moment. In the coming months, we plan to expand further in the state and are targeting to have eight air-branded stores open by early 2025, leveraging additional licenses awarded as part of the adult use rollout in connection with our affiliated licenses. As a reminder, we have the option to acquire each store after they've been open for one year for minimal consideration. Additionally, we continue to scale utilization levels at our Parma cultivation facility and our Akron production facility to support our stores and wholesale operations. We've recently scaled out the Parma cultivation facility from six rooms at 50% capacity to eight rooms at 100% capacity to meet anticipated wholesale demand. Meanwhile, in Florida, AIR remains active in state-level reform efforts having made a considerable contribution to the Smart and Safe Florida campaign. As we get closer to the November election, we encourage everyone to support the campaign and vote yes on three if you're a Florida voter. Additionally, in Florida, the recently announced build-out of the new 100,000 square feet cultivation facility in Ocala addresses one of the company's biggest weaknesses in the state. Even with the major improvements we've made to our Gainesville facility over the years, we have still lacked premium indoor growing flower. This new facility will more than double our current flower production capacity, which supports future store openings and more full-sum menu offering that opens up to new types of customers, even within the current medical market. The planned facility, which is expected to be completed in Q2 of 2025, is fully financed with IPR. Finally, in Pennsylvania, AIR maintains a leadership role in the industry push for adult use legislation and remains optimistic about the progress made in recent months, even though adult use cannabis legislation was not included in the recent budget. In Pennsylvania, AIR maintains a robust footprint of stores and two cultivation sites that are primed to convert to adult use. If and when that moment comes, we will not need additional capex or a material increase to our cost base. Diving into our operations, I will now touch upon key initiatives and progress across the business. As we look to the rest of 2024, we remain laser-focused on staying true to our business model of being a retailer of choice and a house of soaked-after cannabis CPG brands. All of the actions that we're discussing today ladder up to that ultimate goal. Across retail, we are focused on continuing the actions to anchor our positioning as the neighborhood store and utilizing our individual dispensaries to support their respective communities in highly localized way, training our buttenders to improve their selling skills and the overall customer experience in our stores, and increasing the number of contactable customers, bringing them into our digital ecosystem, which greatly increases the overall lifetime value. Across CPG brands, With the full re-managing of Kind and Haze now behind us, the relaunch of these brands is progressing well, with significant assets created to support our wholesale team and the in-store experience. Simultaneously, we remain highly focused on new product innovation and bringing new products to market under Kind and Haze, bringing Kind into all major form factors and increasing the overall scope of Haze premium offerings. I'd like to give our team a huge shout out for the launch of Hayes live resin and live resin gummies in July, as well as the launch of our all-in-one live resin and live resin vapes, which provides a much stronger delivery system for our premium vapes offering. As we continue the relaunch of these brands, supporting wholesale sell-through will be a primary focus. We expect this will drive further growth in wholesale in Massachusetts, New Jersey, Pennsylvania, and Nevada. Our efforts are beginning to show results, with kind retail sales growing by 15% quarter-over-quarter and kind wholesale revenue growing 43% quarter-over-quarter. Last, touching on operations, consistency, variety, and quality remain our key areas of focus. Our cultivation and production teams have undergone a massive transformation in their ways of working, simplifying standard operating procedures, providing more consistency across markets, and sharing our best practices across state lines. Improvements include the expansion of kitchens and extraction facilities, introducing 80 new strains into our cultivation facilities, resulting from our phenol hunting program, and the standardization of lights and nutrients across our facilities. These changes have allowed us to launch a significant volume of new products during the first half of the year. As the year progresses, we expect these operational changes to have further positive effects on cultivation efficiency and in giving our operating platform a more efficient cost base. I'll now turn it over to Brad to walk through the financial results before returning for closing remarks.

Brad? Thanks, David, and good morning, everyone. Q2 sales, 117.3 million, represents a decrease of less than 1% from prior quarter and an increase of just under 1% from prior year. With sales fluctuation less than 1%, sales are essentially flat relative to our guidance for the quarter, which called for revenue to range from flat to modest growth sequentially. Retail was largely flat quarter over quarter in six of our seven markets, with the exception of New Jersey being the primary driver of a 1% sequential retail decline driven by further price compression and market competition in the state, with the market store count growing 30% during the quarter to 150, which is up roughly 80% compared to the start of the year. However, in New Jersey, we were able to maintain better than implied market share as our retail share dropped approximately 15% quarter over quarter relative to the 30% increase in store count. Overall for retail, transaction count increased 2% sequentially and 1% year over year. and basket size decreased 3% sequentially with 6% compression year over year, driven by wallet share pressure and increased competition in certain markets. The 1% retail decline was partially offset by further growth in the wholesale channel, with 4% sequential growth representing the third quarter in a row of sequential growth. From a year-over-year perspective, wholesale represents a 50% increase, driven by increases across all five wholesale markets, with the most meaningful increases in New Jersey followed by Ohio. Q2 gross profit of 47.2 million represents a decrease of 3.5 million or 7% compared to prior quarter and 9.5 million or 17% compared to prior year. Q2 adjusted gross margin, a non-GAAP measure of 51.8% represents a slight decrease of approximately 120 basis points compared to the prior quarter as a result of the aforementioned retail price compression. In addition, wholesale representing 16% of sales represents the highest ratio since Q1 of 22. Wholesale has been operating at lower gross margins given price pressure, as well as not yet seeing the full benefit from economies of scale in certain markets, with Ohio and Massachusetts still expanding utilization to about 40% and 75%, respectively, up from just 15% and 44% to end last year. and there is typically at least a quarter lag for the reduced cost base to flow through within cost of goods sold. By Q3 of this year, we expect the Ohio utilization rate to reach approximately 50%, with the ability to flex into additional canopy based on market demand. In addition, in the second quarter, we began to see Florida cultivation yield improvement, complementing the success we have already seen in THC and overall quality in our Gainesville facility at the direction of our COO, George DiNardo. And we expect to see the benefit of COGS hit our margins in the second half, and we can already start to see the increase in flour volume in the state-published data, with flour market share in June representing the highest weekly average since September of 23. In Florida, we have also seen a gradual increase in the edibles category, with the launch of Kind Gummies last quarter complementing our exclusive Camino offering. As a result, gummies as a percentage of sales have roughly doubled from just 3% in Q1 to 6% in Q2, and we expect to continue to grow this segment from here. Internal branded retail sales were consistent sequentially with a slight increase of internalization of 150 basis points to 63.4% of total retail sales and 41.6% when excluding Florida. We feel this is currently at a healthy range with a potential opportunity to increase this further by a few percentage points driven by the expected ramping of Ohio adult use where we anticipate healthy levels of internalization. Loss from operations of $7.7 million represents an increased loss of $5.7 million and $3.1 million compared to the prior quarter and the prior year, respectively. Total SG&A costs represent an increase of $2.5 million and a decrease of $5.2 million compared to the prior quarter and the prior year, respectively. The increase in loss from operations was primarily driven by the gross margin pressure, as well as the increase in itemized adjustments in the adjusted EBITDA reconciliation, including startup and other expenses. which relates to the new indoor cultivation facility in Ocala, Florida, which we announced during the quarter, as well as the startup costs associated with unused cultivation capacity in our new retail stores. EDVACs were also impacted by one-time litigation settlement costs for approximately $1.4 million within SG&A. In addition to EDVACs, the balance of the SG&A increase is explained by a shift in allocations between COGS and SG&A. Q2 adjusted EBITDA of $25.7 million represents a decrease of $3.4 million and $3.7 million quarter over quarter and year over year, respectively. Adjusted EBITDA as a percentage of sales during the quarter of 21.9%, with 270 basis points below the prior quarter of 24.6%, and 330 basis points below the prior year of 25.2%. In addition to price compression, adjusted EBITDA margins were also adversely impacted by the change in the accounting for the Ohio cultivation lease. which was a result of the lease amendment this quarter, reclassifying this lease from a failed sale leaseback presented as debt on the balance sheet within construction finance liabilities to an operating lease liability. While there are no changes on a cash flow basis, the accounting will also impact the P&L presentation with approximately one million per quarter now recognized as rent expense as opposed to interest expense with the underutilized portion of the facility reflected within startup costs. The accounting change will decrease our adjusted EBITDA going forward However, notably improve our net leverage ratio. Moving to the balance sheet, we ended the quarter with a cash balance of $47.5 million, representing a $23.7 million decrease from the prior quarter, primarily driven by $21 million of interest payments, $7.2 million of non-280E income tax payments, and $10 million of scheduled principal debt payments. Year-to-date, this brings the total of scheduled principal debt payments to $16.3 million, leaving less than $7 million remaining for the second half of the year and just $17 million when looking out over the next 12 months. Year-to-date, we maintain positive operating cash flow from continuing operations of $2.7 million, which is in line with the six months ended in prior year. And while there are ebbs and flows each quarter based on timing considerations, including the semiannual interest payments for the senior notes, on a cumulative basis, we have maintained positive operating cash flow over the past nine quarters, We continue to expect approximately $20 million of total CapEx for the year, and we anticipate generating positive operating cash flow for the full year, as well as positive free cash flow for calendar 2024 when excluding the uncertain tax provision. We note that any contributions from the following three buckets are not included in our cash generation assumptions and would be considered incremental. One, the conversion of our outstanding warrants issued in February, totaling up to $50 million of net proceeds. Two, the receipt of an anticipated ERC tax credit with $10 million of $12.5 million of remaining proceeds. And three, the receipt of a potential tax refund from our previously amended returns with approximately $48.7 million of $50 million of remaining proceeds. In conclusion, this is a challenging quarter from a margin standpoint. However, we have identified the appropriate offsets in the past through cost savings, optimization, and scale, and I'm confident in our ability to continue to find the appropriate offsets here as well. With Ohio sales kicking off yesterday, representing the first of three significant growth opportunities embedded in our footprint alongside Florida and Pennsylvania, we have among the highest relative exposure to near-term adult youth catalysts in the industry. With that, I will turn it back to David.

Thanks, Brad. As mentioned on previous calls, we are dedicated to enhancing the overall health of the business and ensuring that AIR is proposed for sustainable and profitable financial growth across our footprint. We are pleased with the work we have done, but understand that further progress is necessary, which I am confident our team will achieve. As previously stated, we continue to anticipate a return to meaningful revenue growth in the back half of the year, coming from a diverse array of drivers. Setting aside Ohio, which we've already discussed at great length, we anticipate opening our first Connecticut store immediately which will increase our retail footprint to eight states and we'll remain on track to have a second Connecticut store by early 2025. We recently opened two new Illinois stores, one in June and one in July. We are targeting the addition of five stores in Florida in the second half of the year. And finally, we anticipate further growing our wholesale business, which already grew sequentially by more than 25% in the first half of 2024. For the third quarter, AIR expects revenue growth to be up low signal digits from Q2 based on the timing and ramping of the Ohio adult use rollout. AIR also expects to improve adjusted EBITDA margins from current levels in the second half of 2024 as the company rebuilds towards its 25% adjusted EBITDA margin target. AIR also continues to expect positive gap cash flow from operations for calendar 2024 as well as positive free cash flow for calendar 2024, assuming the elimination of 280 tax liabilities. Thank you to our entire team at AIR for continuing to drive forward all the progress we discussed today. Operator, we will now open up the call for questions.

Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. Analysts are asked to limit themselves to one question and one follow-up and then return to the queue if they would like to ask more. To withdraw your question, please press star then 2. Our first question is from Russell Stanley with Beacon Securities. Please go ahead.

Good morning, and thanks for taking my questions. Just wanted to come back to the three, I think, three key challenges you've highlighted during the quarter. I guess, which was the most prominent headwind for margins and related to that? Can you elaborate on what you're seeing with respect to the consumer? Thanks.

Hey, Russ, thanks for the question. And so I think, you know, looking at margins, it's largely been a game of offsets for us. We've had, I think, overall, you know, pretty consistent adjusted gross margins over the last couple of years. And it's not because our business is static. There's volatility in terms of price compression, cost inflation. We've been able to counter that over the last couple of years with scale, with optimization. And we spoke about some of the benefits that we're expecting to hit, which are the improvements that we're seeing now in cultivation in Florida. better utilization from our facilities in Massachusetts and Ohio, Ohio adult use kicking in. So we're expecting those to hit in the second half and help us counter some of these pressures. In terms of pricing, I'd say it's certainly not severe like we've seen in 22. It's more modest, but it does have a compounding effect. The 1% or so each month does have a compounding effect, and so it's important that we continue to realize these benefits to counter that, and we expect to do that in the second half.

That's great. I'm wondering as well in Florida, congrats on securing financing for that facility. I just wanted to clarify the Q2 25 completion timeline. Is that first planting or is that first harvest? I guess related to that in the interim, I think you're working to drive improved sales per store. I'm wondering if you can talk to where you'd like to be on sales per store relative to the state average. Thank you.

yeah uh hi rest um thanks for the for the question um it's david here so we expect completion in in q225 so that means probably the first harvest rather in q325 as uh the timing and we're on time for what we uh so far on what we expect on that that facility and to your point that that's going to make a big difference for us meaning as As you know, today we're the only top MSO in the state that doesn't have indoor flowers. So for us, it's a gap that we absolutely need to fulfill. And so it's going to help, let's say, on the sales per store in the sense today that we're underweight on flower versus oil, meaning when you look at the market share that we have on oil products versus flower products, there's a huge difference there. So I'd say that it's gonna help us cover that gap on the same store basis, as well as giving us the opportunity to continue to open more store as hopefully Florida turns adult. And I would say, even if it were not, again, it's something that's gonna help us cover that gap from a flower standpoint, both from a quantity and from a quality by having indoor flower.

The next question is from Andrew Semple with Bentham Financial. Please go ahead.

Hi there. Good morning. Just wanted to ask on the second half of the year, you mentioned wholesale growth. I'm assuming that Ohio is expected to experience wholesale growth there. But what are your thoughts about your other two key wholesale markets, namely New Jersey and Massachusetts, and what's your expectation there for continuing to drive wholesale growth in those two states?

Yeah. Morning, Andrew, and thanks for the question. So you're spot on, meaning that when we look at the growth of wholesale, which we saw some good growth of wholesale in Q1 and Q2, And for Q2, I think it was up 4% to Q1 and 50% to last year. So wholesale is definitely improving. And you're right, meaning the three states that matter most, I would say, from that standpoint for us is obviously Ohio that turned adult yesterday, and that's great news. And then Massachusetts and New Jersey. So Massachusetts, we've ramped up production to the level that we want, and we have really good cost of goods, I'd say, in Massachusetts. We see the ramp-up continuing on that, and so we expect Massachusetts to be really a support for the growth of wholesale in the second half. New Jersey, we continue to see more retailers coming in and dispensaries opening in the states, which gives us hope that we will continue to increase our wholesale in New Jersey for the second half. We're happy with what we saw in New Jersey wholesale in Q2. We were at a good level from that standpoint. So I'd say probably rather a stabilization of wholesale in New Jersey, an increase of wholesale, continued increase of wholesale in Massachusetts, and definitely a significant increase of wholesale in Ohio.

Great. That's helpful. And maybe my follow-up here would just be on the guidance. You mentioned returning towards the 25% EBITDA margin target. Sounds like the language around that might have shifted a little bit. So I just want to clarify whether the team is still expecting EBITDA margins of 25% for the full year or whether you're now planning to exit at that run rate, 25% EBITDA margin level.

Yeah, thanks, Andrew. So, you know, with margins, we mentioned in our guidance that there's also quarterly fluctuations. I think that's what we saw this quarter. Building back towards 25% is, you know, our target and where we expect to be ending the year.

The next question is from Scott Fortune with Roth Capital Partners. Please go ahead.

Yeah, good morning, and thanks for the question. Just want to focus, again, a little bit more on 3Q guidance, low single-digit to mid-single-digit growth, and how much of that is coming from Ohio as Florida is seasonally softer in 3Q. You mentioned kind of wholesale increases, but just kind of unpack that. where you see that growth coming on in 3Q, just a little more color of the markets driving that growth. Is this mainly Ohio and a little bit of wholesale? Just kind of unpack that a little bit more. That'd be great.

Yeah, of course. And good morning. So I'm going to talk about second half and we can give some color about Q3. But overall, when we look at the second half, From a retail standpoint, obviously Ohio will be a very important element in the growth in the second half and in Q3. And then the other two main things from a retail standpoint is the rebound in Florida that we expect, and probably that considering the season that it's more Q4 than Q3 when it's Florida, but we expect some in Q3 and significant in Q4. And then it's the opening of the new stores that we have. So two new stores that just opened in Illinois, one store that opens imminently in Connecticut, and then we plan five stores opening between now and the end of the year in Florida. So those three elements, meaning the adult user lounge in Ohio, the going back to growth in Florida, And the opening of the stores, of the eight stores in Illinois, Connecticut, and five in Florida, that's really the elements of the growth in the second half of the year from a retail standpoint. And on wholesale, as I was sharing earlier, it's mainly Massachusetts and Ohio.

That's helpful from that standpoint. And just to clarify, your production and capacity footprint in Florida moving forward, obviously adding the indoor, you said it would double capacity. But right now, obviously, with your facility in place, you can support about 70 stores. What's the expectation there? As you bring on the new indoor and the flower focus there of kind of the store capacity with the new indoor kind of capacity and production that you're bringing on board here.

Yeah. So the new facility will allow us to double capacity of flower versus what we have today. And that's going to serve two purposes. The first one is closing the gap that we have on flour mix in the existing stores. So call it 70-ish stores by the end of this year and more next year. We're really under mix, I would say, on flour. So the first purpose is really helping us covering that gap, mainly by having indoor flour, which adds up to the menu and completes, let's say, the offer that we have from a flour standpoint. And then the second benefit is allowing us to go way further in the stores. We've said and we maintain that, that we want to maintain pretty much our 10% market share in number of stores in Florida, and today there's about 650, so we're kind of right there. We expect that that trend will continue, and especially with adult use passing, we expect that trend to continue and the number of stores to grow, continue to grow, and we want to maintain that 10%. That means that let's imagine that by end of 26, there's a thousand stores in Florida. We will want by then to be at a hundred stores. And we need that second facility to be able to have enough flour for that amount of stores.

The next question is from Frederico Gomez with ATB Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my questions. First question is, you mentioned the utilization in Ohio, I think it was about 40%. Is that a function of taking, I guess, a cautious or measured approach as that market ramps up, or is it just a function of the time, I guess, it takes to increase the production there? Just trying to understand whether you're going to be fully ramping that, or are you just going to be waiting for the market and see what's the demand there?

Thanks. Thanks for the question. I think it's a combination of the significant scale of that facility that we have, plus wanting to, I'm not going to say be cautious, but be balanced in the approach that we have. We grew significantly the number of rooms, meaning that Until recently, we had six rooms single-stack. We moved to eight rooms double-stack. But you're right, that's still only 50% of the capacity of that facility that's really significant. So we'll see how that goes. I mean, we can go triple-stack, and we have more rooms also that we can open. So it's already a very significant increase from, I'd say, six-room single-stack to eight-room double-stack. We know that we have more capacity if need be. We want to be balanced in the approach. It's already a very significant increase.

Thanks for that. And then my second question is still about Ohio. In terms of that wholesale market there, your penetration with the stores and the expectations in terms of how the market is going to grow with adult use, any call you can give in terms of

uh you know your expectations for wholesale uh specifically and the ramp there yeah so first on the market itself and and obviously i mean we're we don't know anything yet meaning we just have the data from the first day yesterday which which by the way we're happy about um but we have high expectations for ohio and when we look at that we we like we heard it's going to double at least we think that's that's fair and especially when we look at the number of dispensaries per capita and the revenue that is there today per capita. So we think that it's going to grow significantly. We see that in our results. It's one day, so we're not going to do anything with that one day. But what we can tell you on that is we sold in one day yesterday what we usually sell in a week before. That was the amount that we had yesterday. So we think that's going to be a very good market. We have a significant penetration in number of doors from a wholesale standpoint, and that's why we're increasing so much the capacity there.

The next question is from Yewon Kang with Canaccord Genuity. Please go ahead.

Hi, good morning. This is Yewon Kang on behalf of Matt Bottomley. Thank you for the question. So just my first one here is regarding the top line performance. Sequentially declined about half a percentage point here. Could you provide some more color behind the puts and takes and what happened throughout the quarter that led to the sequential decline, whether it was pricing pressures on the wholesale level or inflationary pressures on consumer spending? Just wanted to better understand the trends that happened throughout the quarter. Thanks.

Yeah, thanks for the question. And in our prepared remarks, we mentioned it was primarily retail driving about a 1% decline in retail, which was partially offset by an expansion in wholesale. So wholesale does continue to grow. It grew 4% sequentially. But the retail decrease primarily came from New Jersey, and we've seen the store count really increase in that state. That's been driving both competition and pricing impact. And we've got to remember that we've been in largely a same-store footprint for over a year aside from Ohio medical stores. So it's been largely the same footprint, and New Jersey was the primary driver this quarter.

Thank you. And if I could just ask a second follow-up question regarding Ohio. Obviously, the market launched yesterday. Is there any indication that you could give us in terms of sales growth that you've seen yesterday versus the Tuesday of last week? And if you have any plans to increase your retail footprint to the state maximum of five going forward. Thank you.

Yeah. So, again, it's one day, so very little signification. But basically what we saw yesterday is we sold in one day. what we sell in seven days. So it's a 700%, I think, versus last Tuesday on what we saw in sales yesterday. But again, very little signification of that, and we'll need quite some time to be able to gauge what the right level will be. And as you know, we have three stores for the moment in the state. Our goal is to get to the max of eight by early 2025. So that will trickle between Q4 and Q1 of next year, but we'll get to the eight stores as soon as possible. All locations are identified, all are locked, and we're in the process of permitting and really hitting the ground running on the construction of those stores.

This concludes the question and answer session. I'd like to turn the conference back over to David Gobert for any closing remarks.

Thanks a lot, everyone, and thanks for being on the call. I'd be remiss if I didn't recognize a significant change that we announced last week to our board of directors with a resignation of executive chairman and former CEO John Tillman and the appointment of our longtime director, Luke Hager, to the chairman position. We really want to thank John for his role in founding the company, his years of service in the industry, and the foundation that he helped build for us here at AIR. And at the same time, we're excited for the years ahead in working even more closely with Lou, who's been in the AIR family for a long time, first as an owner of Sierra Naturals that was acquired as we dispatched, and has been a board member since 2019. So we're excited to work closely with Lou, and we're excited for the continuation. And at the same time, to close, I really want to reiterate that growth in the cannabis industry is not a straight line. It's never a straight line. But we're really confident that the crucial work that we're doing now will allow us to large steps forward in the year to come. Thank you.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.