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spk01: welcome to the air wellness second quarter 2021 earnings call joining us today our air ceo jonathan sandelman the company's cfo brad asher and the company's co-chief operating officer jennifer drake the company will discuss forward-looking matters on this call including targets for revenues and adjusted ebitda this forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended June 30, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the Reconciliation to GAAP Measures and Other Disclosure Concerning Non-GAAP Measures Contained in Errors Management, Discussion and Analysis for the Quarter ended June 30, 2021. I will now turn the call over to AIR CEO, Jonathan Sandelman. Please go ahead.
spk12: Thank you and good morning, everyone. We continue to go through our transformative time in our business. Those of you who have heard me speak over the last past quarters have heard me say again and again that our goal is to be the largest producer of high-quality flour in the United States. Everything we have done as a company throughout Q2 has focused on investing in our operations to ensure that our goal becomes reality, and it is working. In Florida, because of the improvement of our cultivation and our biomass output, we have moved from number seven at the time of closing to number four today in total flower output and increased our streams from two to 12. This has allowed us to open new stores at a rapid clip and greatly expanded our presence in what is quickly becoming a massive market. I told you on our last earnings call that we expect the value of our Florida operations soon to be larger than our entire market cap today. And I feel even more confident in that statement given our recent success. Our quality offerings and brands are resonating with the consumers in each of the markets we operate. Our wholesale presence has increased by three times, and our flour and other products can be found in over 280 retail locations, including 57 of our own stores. Just one year ago, our products were available in less than 100 stores, and we had only seven of our own. That is tremendous growth in one year alone, and we have announced a handful of exciting planned acquisitions, including the top-selling cannabis-infused beverage, Levia. As a premier U.S. cannabis company, we believe that everything starts with the plant. Everything we do at AIR starts with the plant because in all DPG businesses, everything starts with the quality of the product being sold. And every product we produce starts with the quality of the plant we grow. That is why we've made it our mission to be the largest scale producer of high quality cannabis flower in the United States. Why is that important? The cannabis industry is only going to get more competitive. We believe the cannabis consumer is discerning and will increasingly recognize quality. You may be able to fool this consumer once with a pretty box, but they'll learn quickly. and it's not the box that counts, it's what's inside the box. Success in the cannabis industry will increasingly be determined by what's inside the box. Being the largest scale producer of high quality cannabis in the United States uniquely positions Ayr to be the leading cannabis CPG company in the United States. As we build out our national brand footprint, We're building our brands around what's inside the box. We're delivering quality to consumers with great value. We're delivering affordable luxury. This is what many of the best non-cannabis CPG brands are built on, the brands that have real staying power. The focus of the AIR brand going forward will be KineFlower, Origin Extracts, and Levia, our newest proposed acquisitions. We are putting significant investments and marketing talent behind these brands nationally while continuing to complement them with our regional offerings. I've always said when the time was right, we would unify our retail brands. And now that we have moved from two states in 2020 to eight states, it is time. It aligns with our vision and our mission and our belief that everything starts with a plan. and that the commitment to the plant has to be the foundation of the leading cannabis CPG company. It doesn't happen overnight, and it's incredibly important to think big and to get it right. I've been talking more and more about our plans here recently, and we will begin rebranding all of our retail stores to air during the second half of the year. We will continue to think big in terms of footprint, and products and branding, and we will continue to deliver on those big plans. With that, I'll pass the call over to our CFO, Brad Asher, to walk through our financial results.
spk09: Good morning. As John mentioned, we are proud of the record results and significant growth in Q2, where sales increased to 91.3 million, representing an increase of 222% over prior year and 56% over prior quarter. This was driven by contributions from recent acquisitions as well as organic growth. The contribution from M&A expansion included 204% growth in Florida, driven by a full quarter of contribution relative to the 34 days in Q1. During this quarter, both the store count and daily average sales grew by roughly 20%. 825% growth in Arizona, driven by a full quarter of contribution relative to the eight days in Q1. and 307% growth in Pennsylvania, driven by the launch of the Rebel Flower brand, along with the commencement of our wholesale business in June. That resulted in 1.5 million of wholesale revenue in the first month of sales. We also achieved 158% growth in retail revenue, almost entirely from the same store growth with our newest store in Gibsonia, contributing just nine days of sale in the period. In addition, total sales from our original footprint in Massachusetts and Nevada increased 8% quarter-over-quarter. Adjusted EBITDA for the quarter was $27.4 million, representing a 225% increase over prior year on an apples-to-apples basis and a 49% increase over prior quarter. Adjusted gross profit increased to $53.1 million for the quarter compared to $18.1 million in prior year and $34.2 million in prior quarter. We believe adjusted gross profit, a non-GAAP measure, provides valuable insight into our performance by excluding depreciation and amortization, interest, and startup costs, as well as the fair value step-up of inventory from acquisitions. Justly gross profit margins of 58% represents a 40 basis point sequential decrease from the prior quarter. This trend is expected as we enter new markets and make an investment in acquiring customers. During this period, we expect gross margins to persist in the mid-50% range, as we wait for capacity expanding capital projects to come online. SG&A expenses in the quarter represented 30 percent of sales, a sequential increase of 200 basis points from prior quarter. The increase was largely due to our continued investment in building out infrastructure, including the addition of over 400 employees, representing an approximate increase of 35 percent of our workforce during the quarter. While we expect operating expenses to increase on a dollar basis, As we continue to expand our footprint, we expect SG&A as a percentage of sales to be consistent over the next few quarters until ultimately declining in 22 as we build more leverage throughout the year. Lastly, we ended the quarter with $123.8 million of cash on hand, demonstrating a strong capital position to fund our growth initiatives. We continue to invest in the future earnings power of the business by building up inventory and investing in CapEx in the amounts of $22 million and $32 million, respectively, year-to-date. This is in addition to the $38 million paid year-to-date in the form of cash consideration, deposits, and bridge financing relating to the M&A activities. Throughout this period of investment, we are maintaining a healthy balance sheet with positive working capital of $153 million when adjusted to remove any fair value markups of acquired inventory. This is relative to a negative working capital balance when performing the same calculation from the prior year period. Based on these Q2 results and the progress we see to date in Q3, we are targeting an estimated $100 million in revenue in Q3, with adjusted EBITDA flat sequentially over Q2. We remind you that these projections are subject to the assumptions and risks outlined in our Q2 MD&A. In closing, I will end by saying that I am proud of this milestone quarter and all that we've accomplished to date. The Accounting and Finance Department has gotten the onboarding of acquisitions down to a science. with both the speed and precision of a pit stop, only without the luxury of stopping. By quickly implementing our tech stack and methodology, it allows us to provide key insights and analytics in the business early in the process. In addition, we continue to make enhancements to expand compliance, including the buildup of our Sarbanes-Oxley program, which will be a requirement as an SEC filer. As a reminder, last quarter was our first reporting in US GAAP as a US filer. As such, we would like to announce that we've released a notice of change of auditor from M&P to the U.S.-based firm Markham, a top-tier firm with a substantial cannabis practice. We've enjoyed working with M&P, have no disagreements for unresolved issues, and would like to thank them for all their efforts. In addition, we look forward to working with Markham, starting with our Q3 financials. With that, I'll hand it over to our co-COO, Jennifer Drake.
spk05: Thanks, Brad. This quarter, we want to overview our business a little differently, focusing on the major themes of cultivation and production, retail, wholesale, and branding. John already updated you on our branding initiatives, so I'll start with cultivation. We have not been shy about our goal of being the largest scale producer of high-quality cannabis flower in the United States. We are a plant-obsessed company because the plant is the foundation of our ability to build strong brands. So we continue to make major investments in our cultivation operations, facilities, and talent. In Florida, our changes and improvements have already made a positive impact, and customers are noticing. Cultivation yields have improved over 50% since AIR taking over the business, upping the quality and amount of flour available at our stores, plus allowing us to add more offerings to our product mix, all while we are adding more and more new stores. By the fall, in Florida, we expect to complete the construction of 20 acres of hoop houses at our Gainesville cultivation, and these will add meaningfully to our biomass for flour, concentrates, and our newly launched edibles. Summing it all up with respect to Florida cultivation, When we bought the Liberty business five months ago, if there was flower available in the store, which was only three or four days a week, you'd be lucky to find more than a few strains to choose from. But today, we have flower consistently with more than a dozen strains available. Again, it all starts with the plant. In Pennsylvania, the cultivation projects we finished earlier this year had their first harvests in the second quarter. which we've sold under the Revel and Seven Hills flower brands, both at our own stores and at wholesale. The feedback on our flower from Pennsylvania's patient community has been excellent. We've said before that Pennsylvania is a market deprived of quality flower, but we are quickly filling that void with our own cultivation. In Q2, we also had our first harvest from the smaller of our two Arizona cultivations. The larger 80,000 square foot facility in Arizona will have construction completed in Q4. And next door in Nevada, we previously announced the very exciting acquisition of Tahoe Hydroponics, one of the state's premier producers of high quality cannabis flower. But what's really important about adding Tahoe Hydro to AIR is that we're adding an incredible bank of genetics and intellectual property and an abundance of high-level cultivation talent that can be deployed throughout our national footprint. Rounding out our cultivation news, in Massachusetts, we are not resting on our laurels. We are charging forward with an additional 100,000 square foot cultivation and production facility to increase our cultivation capacity to the maximum allowed so that we can meet the demand growth we expect to see in our wholesale business as more and more adult-use dispensaries especially those that don't have their own cultivation, are coming online in the state. Massachusetts is a great example of what we can accomplish throughout the country. By investing in cultivation and growing high-quality flour, we will provide best-in-class products in whatever form factor our customers wish to consume. This is how you build a world-class CPG company in the cannabis space. On the production side, we have a saying in cannabis, quality in, quality out. If you grow great flour and match that with Ayer's best-in-class SOPs, you reap the benefits with production of top-of-the-line concentrates, vape cartridges, and edibles. This quarter, we saw some exciting developments in the expansion of our branded products. In Florida, Origin Extracts and Big Pete's Cookies are first edibles in the market from the kitchen we opened in Q2, and gummies will follow soon in Florida. Thanks to the success we've seen with origin extracts in Massachusetts, where it quickly established itself as one of the state's top-selling concentrates, and now Florida also, we expect to continue to bring this strong brand to our markets nationally. Since our Arizona cultivation and production facilities have come online, we've begun our first extraction and wholesaling activities in the state, including haze premium concentrates and lit cannabis cartridges. And in Nevada, Our newly expanded production facility in Las Vegas has increased our capacity to manufacture extracted products for our growing wholesale business there. Finally, in our retail business, anyone who's followed AIR knows that our established retail locations are some of the most productive in the country. In Nevada, our stores average revenue of $20 million a year per store, with sales as high as $10,000 per square foot in our most productive store. That is really good. It's industry leading. And this type of excellent retail expertise will have a massive impact on new stores we open and our Florida retail turnaround, allowing us to pivot from investing in customer acquisition, which we're doing now, to our best-in-class retail experience playbook as our stores mature. And our retail stores are an amazing asset to us as we build our national brand. They're a laboratory to help us understand our customer, They let us know real-time with great data what the customer wants, whether that's micro-dosed gummies or premium terpene-rich flour or Levia cannabis-infused seltzer. With that, I'll hand it back to John.
spk12: Thanks, Jen. As you can see, we are laser-focused on achieving our goals of being the best and the largest producer of high-quality flour at scale and having the ability to create amazing brands that will lead the industry. We're excited to see our strategy playing out as planned and are encouraged by the strong results that we're seeing already. This top-line growth will continue with the addition of New Jersey and Illinois to our footprint. and the accelerating investments we're putting behind our brands to drive market share at retail and wholesale. Given the success of our efforts to date, we're raising our 2022 revenue target to $800 million, with $300 million of adjusted EBITDA reflecting substantial investments in growth. We plan to accelerate investments in our Kind, Origin, and Levia brands and the strategic marketing and operational talent behind them. We've added talent across all levels, deepening our bench across the marketing, technology, and operational professionals, focused on driving scalable processes across our regional footprint. We are still in the early stages of growth in this industry, and we believe we are perfectly positioned to become a leading force in cannabis CPG. a market we think could easily top $100 billion in revenue over the next several years. As long as we have the opportunity to grow at 100% or more year over year, we will reinvest in our business in branding, customers, capital projects, and M&A. This opportunity is in front of us, and we plan to seize it. We put out ambitious plans in 2020, and we delivered on what we said we would do. You will see us unveil some really exciting evolution of our air brand soon. We continue to think big in terms of our footprint and our products and branding, and we intend to continue to deliver on those big plans. With that, I'll hand it over to the operator to open up for questions.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. Our first question comes from Owen Bennett of Jefferies. Please go ahead.
spk04: Good morning darling, go for it, go for it. Yeah, yeah, there's a question already. There's a very interesting question there. There's a mean sort of price-to-price competition there, and everyone's kind of putting on a lot of it and wanting to know about this now. I just wanted to be speaking about the kind of price evolution now, what sort of price you're selling the flower at, and those competitive dynamics. And then the second question is on the Levia deal. So, obviously, cannabis beverage is relatively small today. I just wanted to get your thoughts on why you decided to go for a beverage brand and how you see that segment evolving. Thank you, guys.
spk12: John Sandelman, the first part of your question was scrambled, so I didn't hear it. I'll start with Levia, and then maybe you can repeat it. The way we thought about our strategy for cannabis, it was very simple, right? We thought about, like any other CPG company, who is the customer, what is the demographics, and what form factors would each demographic class like to enjoy their THC, right? And we wanted to make sure we had a form factor for each demographic class. It became evident to us that beverages was a form factor we were lacking. We did have a product called Counterpunch, and today BDS would say with Levia and Counterpunch, we have two of the top-selling beverage brands in the United States. We can't ignore what happens outside of cannabis. And we've seen the explosion of hard seltzer, right? It's now a $10 billion industry. As younger people want to drink something that's low calorie and provides a session experience. Levia is that product. It's a dominant product, 80% market share today in Massachusetts, and it's only in one state. It's zero calories. It's clear. It's five milligrams. And what you'll hear me talk about in the future is not the absolute milligrams, but the bioavailability of those milligrams. Consumers are very focused on the THC grams per dollar. And if your product doesn't have the science to back that up so that when they buy five milligrams, they actually get five milligrams, they'll go somewhere else. Lastly, Two points. One is we're very focused on the consumer that hasn't yet experienced cannabis. And we think having a national brand, a world-class product in beverages, could start inviting people who have never tried cannabis before, but like that form factor, into the cannabis world and the cannabis experience. Last point, the way I thought about it. When CPG does finally make its strategic move into cannabis, for me, the easiest place to make that move, that decision, that strategic acquisition is in the products they make every day, the products they know best. And for me, the easiest move for CPG to enter the cannabis world will be in the beverage and the can business. Because who knows it better than big beer, big soft drinks? With their massive distribution and bottling, for us, it would be an obvious move.
spk04: OK, very helpful. Yeah, the first question was on Florida. There's obviously a lot of talk around increased competition there and some pricing pressure. I just wanted to get your thoughts on kind of how that pricing environment has evolved. You're obviously getting a lot of impressive traction there. Are you having to kind of discount your flower yourself to drive those share gains?
spk12: So it's always interesting to enter a market that's been essentially a monopolistic market, right, with one dominant player having over 50% of the market. I think what you've seen us do in our other markets, we enter the market with the highest quality products, again, with the highest quality flour, which produces all the derivative products that are also high quality. We price it So that as we talked about, as I talked about earlier, it offers the best value for the customer. We have seen that over and over again, that business plan. High quality products offered at the best value to our patients and our consumers build market share. So is the old days of Florida where one dominant player doesn't feel that it might have to compete? I can't speak to that because I'm not in those strategy sessions, but we know what the playbook is. We know how to do retail, and we've been very successful at it, and we're just going to do what we always do, provide value for the consumer.
spk01: Our next question comes from Matt McGinley of Needham. Please go ahead.
spk08: Thank you. What's changed with your assumptions for EBITDA margin rate in 2022? Do you assume a lower gross profit rate, or are you assuming that G&A spend is higher than previously assumed? And moreover, how would the assumptions change for spending at the corporate level compared to productivity assumptions that you may have had on an individual asset level? Is this mainly increasing at the corporate level, or is there something changed with individual assets into 2022?
spk12: So I'll start this and then I'll hand it over to Brad. Look, I've said to my team over and over again, we're in an industry, as I said earlier in the call, that's growing over 100%. We're able to buy great companies, great brands at multiples of five or six. We believe, I believe, this is a once in a lifetime opportunity When I look at premium beverage brands, premium alcohol that grows between 5% and 8% and trades at multiples of 25% and 30%. So to be able to buy premium brands in a CPG-like world, okay, that's growing over 100%, we are investing. We are building out our existing portfolio while continuing to acquire. there hasn't been a single asset that we bought, no matter what the headline multiple looks like, that we didn't think we can improve. So in our modeling, we don't even think we're paying five and six. Because if you look at our track record, every asset we've acquired is better than when we bought it. So yes, we are investing. We are building, both in CapEx in branding, to build out our national brand, to provide the large-scale cultivation and quality flower on a national basis that we talk about. And that is reflected in the numbers. Brad, do you want to add to that?
spk09: Yeah, I would just, I mean, to reiterate on your point on the investment period, I would say that it's going to increase Over 22, I think you're going to see margins both from an SG&A perspective on a percentage of sales basis and gross margins improve as we bring cultivation capacity online, thriving vertical integration, and start to get leverage out of our SG&A base as sales are growing.
spk08: Okay, great. My second question is on the cash balances and cash flow. In looking at what you currently have in cash and what you'll need to spend in cash closing costs and CapEx, we need to assume you generate positive cash flow to fund that spend. Working capital investments obviously kept that negative in the first half, but do you expect to revert back to positive cash flow from operations, or might you need to raise capital to support this planned CapEx and cash closing costs related to M&A?
spk12: Brad, you want to take that?
spk09: Yeah, we definitely, as we're building up inventory right now, as each cultivation facility is coming online, we're definitely making an investment in cash. As those facilities are online, we definitely think operational cash flow will be positive going forward. We also know that the debt markets have been very receptive to us. We're also looking at the investments we're making in CapEx and know that we have owned real estate and leasehold improvements approximately the $200 million range without leverage. So we know there's a lot of options available to us.
spk08: Okay. Thank you very much.
spk01: Our next question comes from Russell Stanley of Beacon Securities. Please go ahead.
spk11: Good morning, and thanks for taking my question. I just wound up Florida, just following up there, understanding you've got the expected completion of the hoop houses, I think you said this fall, and you've guided exiting the year with 50 dispensaries in Florida. Just wondering, once the hoop houses are complete, what is your retail capacity at that point? How many dispensaries do you think you can support well?
spk12: With the hoop houses, we think we get to roughly 65 stores.
spk11: That's really helpful. But, Russ, to be clear, our goal is not to be solely at 65 stores.
spk12: You're just saying you're asking a question the assets we have in place today, what is the maximum number of stores? Yes. Let me be very clear. We're not looking to be anything less than one of the largest players in the state.
spk11: That's great. Understood. And that's what I was looking for, is just understanding how much runway you have in Florida before needing to to invest again in additional capex. Maybe just moving one question around Massachusetts. Michael Heaney And one other point. One other point.
spk12: We have 400 acres on this property.
spk11: Michael Heaney There's lots of additional capacity. Understood. Just around the Levia transaction, You're already really strong on wholesale in Massachusetts, and Levee, I think you mentioned, has an 80% share. I'm just wondering how much or how little overlap is there on the retail front? Are there complementary? Is there opportunity for some cross-pollination here? Are there shelves that Levee is on that you're not on yet and vice versa? Are there opportunities in that regard?
spk12: Yes, there's definitely opportunities. to distribute together on the wholesale side. A, just efficiently, we're in more stores than they are today, so we can help with the distribution of their products. They're in some stores we're not in, and they have good relationships. But equally as important, as we mentioned, it's the technology of the emulsion that's really interesting here. Again, you're going to hear me start talking more about bioavailability. You can't talk about bringing consumers real value, right? That's what we do on the retail side, high quality at a fair price. And if you define fair price solely about price per gram without talking about bioavailability, if your milligrams are five, and your emulsion only produced 30% bioavailability, you're selling one and a half grams of THC. And as we start to educate the market around the science, the consumer will start demanding products that actually do what they advertise. And I think that's very important. And what Jen talked about, is this technology is applicable far beyond beverages, tinctures, gummies, anywhere where we're infusing products. This quick onset, which is extremely important to the new consumer, 15-minute onset allows people to gauge whether they should have a second can or not. For many people, consumers who haven't tried cannabis, Their biggest issue is that I've heard bad stories of people consuming too much. Rapid onset bioavailability does away with those issues, and that's why it's important, and that's why you're going to hear Eric talk about it because it's a real edge for us.
spk11: Excellent. That's great, Coler. Thank you. I'll get back to you. Thank you.
spk01: Our next question comes from Scott Fortune of Roth Capital Partners. Please go ahead.
spk03: Good morning. Thanks for the questions. Real quick, I want to talk about bridging to the 800 million revenue guidance you have in 2022. I assume that's the addition of levy here in the Illinois acquisition, but can you step us through kind of the increase from 725 to 800, what you're kind of factoring in into that revenue guidance? Brett?
spk09: Yeah, I would really refer you back to our MD&A where we outline all of our assumptions that lead into that 800. But we talked about on the beginning of the call how we're making an investment to really bring forward a lot of the growth rate in this business. And so I think it's really just accelerating the growth. And I would refer you back to those MD&A assumptions to walk through state by state how to bridge from 21 to 22. Got it. I appreciate that.
spk03: And then secondly, in Nevada, obviously Nevada is opening up lounges as they come on board. Levia would probably roll out very well in there. What's the timing on Nevada cultivation there? And then what's the color, any color on Nevada as far as the tourism there and the third quarter, kind of the progress on third quarter with Nevada's growth going forward here?
spk12: But there was a lot of questions in there. Can you just start with the first one so we can address it?
spk03: Yeah, sorry. You know, Nevada is bringing on boards of the lounges, you know, from a regulation standpoint. I assume Levia would play well into that as far as that part of the kind of discussion here of acquiring Levia to work that into different states and how do you look at that expansion in different states and just color on Nevada, how that's trending with tourism coming back there in the third quarter.
spk12: Okay, two points. I think all the analysts on this call have heard us before say we're the local provider of cannabis in the market. That's why our business held up so well through COVID. Number two is Levia will go, Levia's purchase And strategy is to be the leading national brand in beverages, like I outlined. And so, Levia will go to every state we're in where the state allows us to sell an infused drink.
spk03: So is that part of how quickly came around for Nevada one of the key things that you're looking at for special lounges?
spk12: We didn't buy it specifically for Nevada lounges. We bought it because we see the consumer taste shift in the CPG world. Yes. That's where the consumer is today. He and she are into session drinking. That's on a national basis. The consumer today is not drinking hard seltzer in the lounges in Nevada. They're drinking it everywhere. Look at the explosion. It went from three years ago to relatively nothing to $10 billion industry. We think there's national demand. As I said, this product will be manufactured and distributed nationally wherever we have our footprint.
spk03: Thank you for that comment. And real quickly, is Pennsylvania using mobile and selling well up there? How is Pennsylvania trending as far as getting up to the same levels as the Massachusetts? Filling up Can you kind of get us through our progression?
spk12: Again, you're coming in a bit square, but I might turn this over to someone else who might have heard you better. But as we talked about on the call, on our first harvest, again, entering new markets with our edge, which is our cultivation and high-quality flower, the product sold out, first harvest, into the wholesale market within days. And the reviews were extraordinary. So we're just going to continue what we do in every state. Enter a new state, focus on the plant, focus on the product that we actually put in our boxes. Again, what we say at AIR, it's not the box, but what's inside the box. We never underestimate the consumer. The consumer knows, and we'll continue to do that strategy through Pennsylvania. But what we're seeing is, The consumer reacted extremely well to that, to those two new brands that hit the market. The rest of the question got scrambled, so if someone else on our team heard it, maybe they can answer the other parts of it.
spk05: So I think the main point was that our wholesale is doing extremely well in Pennsylvania. And as you said, John, we're selling out everything we make, similar to what we do in Massachusetts. So we expect it to be a super strong market.
spk03: Thanks. I appreciate the detail. I'll jump back in the queue. Thanks, Scott.
spk01: Our next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
spk07: Good morning and congrats on the Q2 results. My first question here, I just wanted to clarify on the Q3 guidance. I just want to be clear on the point that there's no New Jersey contribution expected in Q3 anymore within the $100 million revenue figure. Is that correct? Brad?
spk05: John, do you want me to take that one?
spk02: Sure.
spk05: So, Andrew, we're currently expecting, anticipating that we will still close in Q3. We're waiting for the approvals, but we have no indication at all that there are any problems with our application. So, we are expecting a little bit of contribution in Q3.
spk07: And that's included in the guidance, sorry?
spk05: Yes. Okay.
spk07: Thanks. My second question, it seems like the expectations for CapEx in Ohio seem to have moved a bit higher quarter over quarter. I believe it was $25 million for that market in the Q1 press release. It looks like $37 million in the latest update. I'm just wondering if that's reflecting your team perhaps moving a little bit more aggressively in that market. And could you just comment on your plans again for Ohio and perhaps the timing of when those facilities come online?
spk12: So we look at Ohio online. as a misunderstood state, right? It has, you know, 12 to 13 million people, it's virtually the same size as Pennsylvania within a million people, million population. So our strategy there is to build out the max facility that the law allows. And we mean to be a significant player in that market. Now, just to mind everyone about our strategy, we never enter a market unless we think two things. We can be vertically integrated and be a significant player. And so I am very focused on Ohio, the various opportunities. There's another round of licensing that are coming, and we love the market because it's large and there's a very limited number of licenses.
spk07: That's great, Khalid. Thanks. Just a final one, if I may. You obviously entered your eighth state recently in Illinois. Just giving your comments there, John, that you like to go big in markets, and certainly you've demonstrated that in the past. Is it safe to assume that's a state where you continue to look to expand your footprint? Thank you.
spk12: So I can only repeat what I've just said. Our strategy is very consistent to be vertically integrated in every market we go to and be a significant player. We don't feel we can build a brand that would resonate in our consumers' minds and with their wallet unless we're a significant player. And more importantly, that we're controlling the biomass. That's our edge. We're never going to be in a market where we can't control the quality of the products that we're putting in our box.
spk07: Gotcha. That's great, Collar. Appreciate your insights. Thank you.
spk01: Our next question comes from Matt Bottomley of Canaccord. Please go ahead.
spk06: Good morning, all. Again, congrats on the strong quarter here. I just wanted to do another follow-up on a previous question on the Q3 outlook. So appreciate the commentary that there could be a little bit of New Jersey contribution in there on the close. Are there any other, I guess, goalposts or categories that can be disclosed a little more with respect to new store openings? I think you have a dozen or close to 15 you want to open by the end of the year. So maybe just starting with the Q3 or Q4 expectations of new store openings and how that might relate to what you're expecting into Q3 specifically on the top line.
spk12: But let me address the stores and then Brad can address the second part. So we recently said we've opened our 39th store in Florida. We're planning on being at 50 by the end of the year. That's 11 just in that state alone, right? And we've also talked about our strategy of being vertically integrated in every state we go into because we want to control the biomass, the quality of the flour. what goes inside the box. And lastly said, if we can or do not believe we'd be a significant player in each state so we can control the branding and the relationship with the consumer, we wouldn't move into a state. So I think that gives you at least our vision, our strategy. Eleven we're public on. The rest is our strategy that we think we'll execute on. Brad, any other commentary on that?
spk09: Yeah, just in terms of bridging to Q3, I'd say there's three main drivers. One is the small contribution from New Jersey, which we referenced. Two is three months of Pennsylvania wholesale. We talked about the one month of sales we had this quarter. And then three is continued growth in Florida from new store openings.
spk06: Okay, appreciate that. And then just a second question for me, I think this one might be for Jen. Obviously, we get a lot of good data coming out from the Florida market weekly, volume-based, but a lot of good visibility in that market. Arizona is a market that seems to be progressing very well since implementation, so I'm just wondering if there's any metrics you can give. We can kind of see how large the state revenues is, and we know how many dispensaries there are, so we have an idea of sort of average contribution per store. So I'm just curious how your three stores are performing. and then how we should think about the mix between wholesale penetration in that market with the infrastructure you have, and obviously the infrastructure you're building out, versus that retail exposure as we model out Arizona into the next couple quarters here.
spk05: Yeah, thanks for that, Andrew. So I think what we've said is we've seen good growth in our retail stores at 50% from pre-COVID. pre-acquisition, pre-adult use. So we're very pleased with that. And we expect to bring the AIR playbook to Arizona the same way we brought it to Massachusetts when we first bought Massachusetts several years ago and really improved the retail experience there by bringing in some of that great retail playbook from Nevada. Arizona is even closer to Nevada, so it's an even easier thing to do. So we're really optimistic on future growth from the retail in Arizona because as an adult-use state, very close to our folks in Nevada, we think we're going to be able to do really good things there. On the wholesale side, as I mentioned in the call, we have our first cultivation online. in Arizona. And the bigger cultivation, that 80,000 square foot cultivation, which is really going to be the driver of a wholesale, is going to be finished construction at the end of this year. So it will be coming online next year, and it's part of that 800 million revenue guidance that we've given for 2022. So the big Arizona wholesale is next year.
spk06: Got it. And I appreciate that. So then on the Arizona side, Would a large majority of what's being cultivated in the existing build be going to service your vertically integrated stores? Is it fair to say that's where most of it goes?
spk12: No, that's not true. Let me tell you. Now, 80,000 square feet will be enough biomass to both have a retail. You can't have 100% of your own product in your stores. The consumer does want choice. Okay. There's enough biomass to feed the appropriate amount of air products, as well as have very significant wholesale business. But again, as we think about what I've said over and over, in Arizona today we have three stores. We have 80,000, a total of 90,000 square feet by the fourth quarter of cultivation. We want to be a significant brand in each state we are in. and we're gonna continue to execute on that strategy in every state we're in.
spk02: Okay, helpful, thanks all.
spk01: Our next question comes from Greg Gibbous of Northland Securities. Please go ahead.
spk10: Hey, good morning, John, Brad, and Jen. Thanks for taking the questions and congrats on the Q2 results. If I could follow up on Florida, You know, given the current revenue run rate is still kind of under 50% of the state average, you know, what are you assuming the average dispensary in Florida gets to to get to that, you know, 800 million revenue guidance?
spk09: Brad? So we're assuming that by the end of 22, our stores move more in line with the state average per store, which is in the $3 million to $4 million range.
spk12: But, Greg, you have to think about one thing. We're opening stores at a very quick pace right now, right? So you think a store doesn't get up to its full maximum usefulness until at least 90 days in. So by opening stores, we understand we're dropping the average per store while driving revenue. So that will normalize if the pace normalizes. But if we continue on this steep trajectory of opening up stores and grabbing footprints, Remember the reason why I moved into Florida, I got seriously concerned about being locked out. It was a land grab in my mind. My thought was not every municipality will have 10 cannabis stores in it. It's highly unlikely. And if we didn't do liberty when we did it, as I said on these calls, and you don't move at the pace we're moving, then it's highly likely you're going to be locked out of some of the best markets. So I am willing to let the average store drop while I continue on the pace of new store opening. And then when we're there with the appropriate footprint, you will see the average stores increase Simply because our stores now have flour seven days a week. They now have 12 strains of flour instead of two. The quality of the flour is much higher. Quickly, we've increased productivity by 50%. July was the best numbers in Liberty's history. So you can't open your stores if your productivity is not there, if you don't put products in your stores that consumers can buy. But the average will drop and will stay below the average because we're going for that land grab because we understand if we don't do that now, as I said just seconds ago, you'll be locked out of the best market. And that's why we're opening stores faster than anyone in this state.
spk10: Great. Yeah, understood, John. Appreciate that. That's helpful. And it was just kind of more learning about the assumptions that go into that $800 million, but that does make sense. Also, kind of, you know, with 30% EBITDA margins today, and, Brad, you were saying kind of flat adjusted EBITDA into Q3 with up to $100 million revenue, just kind of wondering, next year it's 37.5%. implied in guidance. You know, if we're looking at flat next quarter, do we think about just gradual improvement through year-end 2022, or is there anything we should really take into account on a quarterly basis?
spk09: Yeah, I think it's exactly that, the former. It's going to be gradual. And I think each quarter you'll see, starting in probably the second quarter of 22, is when we start to open up and realize sales from our larger cultivation facilities. At that point, you're going to start to see leverage be realized in 22 and gradual improvement each quarter from there on.
spk10: Okay, great. Thanks, guys.
spk01: Our next question comes from Howard Penny of Hedgeye. Please go ahead.
spk02: Hey, thank you so much. I just want to follow up, John, on your beverage comment that you'll have in every market. What does that look like? And I know this question might be premature because you haven't been closed on the acquisition yet, but will you be building protection facilities, contract out the third parties, and just assuming that the capital spending numbers that you've given don't include any of that? Thanks.
spk12: So thanks, Howard. It's a great question because it's one of the reasons, you know, it's the reason why Levy was so attractive. So if you look at the explosion of beverages, every time you go into a market today. The choice is incredible. So it turns out, if you want to build a new beverage brand, capacity is constrained on the bottling lines, the third-party co-packers. Very difficult to get your brand produced at a high cost. One of the other elements of the Levia deal that was so attractive is that these guys built their own assembly line. And they did it quickly. And they did it for very good value, very efficiently. And so we understood besides great brand builders, great emulsion, they're also great builders. And we will build our own assembly lines in every state that we go in so that we can control the quality and the cost. And these guides have the experience to do that.
spk02: Awesome. Appreciate that. Thanks so much.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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