Ayr Wellness Inc

Welcome to the AIR Wellness first quarter 2022 earnings call. Joining us today are AIR's 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 March 31, 2022. 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 AIRS management discussion and analysis for the quarter ended March 31, 2022. I will now turn the call over to AIR's CEO, Jonathan Sandelman.

Jonathan Sandelman Thank you all for joining us. When we last spoke, AIR was in the midst of completing a major cycle of CapEx and working its way through the regulatory process in a number of key states. We are pleased to say that we've made significant progress on these fronts and are now just beginning to unlock the revenue stream that these investments will provide. We are very pleased to be approved for adult use sales in New Jersey at all three of our stores. And in Massachusetts, our long-awaited Back Bay store was approved on May 12th for a June open. We are optimistic that our Greater Boston Watertown location will follow quickly in its steps. Our team has worked hard and made great strides to get us to this point. These investments along with our four cultivation facilities, represent significant expenses front-loaded by AIR, and we'll begin to see the revenue benefits from those investments now that the facilities are built and approved. Though these assets will have very little impact on sales and margins in Q2, we anticipate a significant ramp in AIR's revenue and profitability beginning in Q3 and Q4, as we outlined on our last earnings call. Beyond these specific assets, we've made great progress throughout our business. AIR has experienced 90 percent year-over-year revenue growth, doing so in the face of macro headwinds and without the aid of stimulus checks. The company has consistently gained or maintained share in most of the major markets in which we operate. Since we introduced our refreshed brand portfolio in November, we've completed 20-plus launches of our 10 national brands across our markets, and we'll launch 50 more brands, rebrands, and new product releases over the next 90 days, such as Road Tripper in Nevada. an exciting reformulation rebrand of Entourage Vapes in Massachusetts, and Levia's ViaDrain drops in Florida. Our flower brands are number one in our established adult use markets of Nevada and Massachusetts per BDSA because we focus on great products grown exceptionally, and while it's still early days for our brand portfolio, We are building it with data-driven, consumer-centric insights that resonate with our customers across different price points and product categories. On the cultivation side, while we've always aimed to be the largest producer of a high-quality flower at scale, we understood that it was always going to be a process. We are currently bringing online some of the best cultivation facilities in the country across our footprint. and we are pleased to say that the quality of our flour is the best it's ever been. We're combining this with an approach to genetics, which includes building a bank of unique and cutting-edge strains and consistently rotating genetics through our operations to keep our offerings fresh and our customers coming back for more. This is what our flour customers want, and we will provide flour brands like Kind and Lit with the genetic platform they deserve to consistently delight our customers and build a loyal following. We will continue to invest in our quality and invest in our brands. I will now hand the call over to our Chief Financial Officer, Brad Asher.

Thanks, John. Q1 sales of 111.2 million represents an increase of 52.8 million, or 90% year-over-year, and flat quarter over quarter. As discussed by our peers and corroborated with third-party data, many of our markets continue to experience pricing pressure during the quarter, resulting in a decrease in overall market size. For these states, we had a sequential decrease in sales, but at a lesser rate than the market, meaning we were able to hold or gain market share in each of these states. In Nevada, for example, our market share, according to BDSA, is at an all-time high. In Florida, which continues to see growth in their expanding patient base, our same-store sales increased 5% quarter over quarter. On the wholesale side, we increased sales 5% sequentially, driven by an increase in nearly every market, despite the competitive environment during the quarter. Q1 adjusted EBITDA of $19.5 million represents an increase of 6% year over year. The sequential decrease in adjusted EBITDA of $6.7 million was largely driven by a decrease in adjusted gross profit of $5.4 million. The adjusted gross margins in Q1 of 52.1%, down from 56.7% in Q4. As indicated in our last earnings call, we started Q1 with lower base pricing due to the compounding effect of Q4 price compression. Adjusted gross margins still remain north 50%, which is in line with our peers, we expect a similar level of gross margin next quarter with opportunity for upside in the second half driven by increased internal sourcing and economies of scale from our cultivation facilities coming online. This lower gross margin phase, we have largely been able to offset increases to wages and supplies by recognizing improvements to our yields as well as closely managing labor utilization by leveraging database KPIs. After adjusting for non-cash charges, such as stock-based compensation, depreciation, and amortization, operating expenses decreased by $2 million or roughly 4.5 percent sequentially on a dollar's basis. This is the result of optimizing headcount and realizing efficiencies across the board as we continue to fine-tune the integration of our recent acquisitions. In Q1, headcount decreased sequentially from 2,380 to 2,240 employees. which is inclusive of the acquisition of Levia and Tahoe during the quarter. As referenced on our last call, we anticipate any further increases in SG&A to be highly correlated with significant milestones of sales growth, such as adult use retail in Massachusetts and New Jersey. Moving on to the balance sheet, we ended the quarter with a cash balance of $78.7 million, with $33.2 million spent on CapEx over Q1. This represents payment of roughly half the outstanding CapEx for remaining projects, all of which are either operational or near completion, leaving approximately $37 million of remaining CapEx to be paid over the course of the year. $21 million of cash used in operating activities during the quarter was largely driven by the $23.5 million of tax payments, leaving just $7 million relating to our 21 tax obligations, which was subsequently paid in early April. Other uses of cash flow during the quarter include $22.7 million paid for M&A, including Tahoe Hydro, Levia, and the PA Naturals final earn-out. The next earn-outs are estimated to be payable in Q2 of 23, and the cash portion of these is roughly $20 million. Included in financing sources of cash are the proceeds from the $26.2 million mortgage loan at 4.625 percent, which closed during the quarter. After self-funding our CapEx investments to date, Our real estate portfolio represents a significant opportunity for liquidity to further strengthen our capital position. This loan represents the first monetization of our real estate portfolio, which totals approximately $180 million of owned properties. And subsequent to quarter end, we closed the financing on another property with principal of $25.8 million and interest based on prime rate plus 1.5 percent, currently at 5.5 percent, demonstrating the strong financing options for AIR's high-quality assets. Year-to-date, this represents the second financing linked to our real estate portfolio, which in the aggregate has unlocked $52 million of valuable capital in our business, with an industry-leading blended interest rate of 5.06%. Our board and management team regularly evaluate ways to optimize our balance sheet, and we see these financings as excellent sources of value to our company and our shareholders. Particularly given the recent geopolitical uncertainties and the volatility in the broader capital markets with cannabis equity valuations impacted, we remain focused on financial discipline and maintaining a significant cash position. We will continue to focus on optimizing our balance sheet, including efficiency in our cost structure and capital deployment. I'll now pass the call over to Jennifer Drake, our Co-Chief Operating Officer.

Jennifer Drake Thanks, Brad. John mentioned some of the great regulatory progress we've had since our last call two months ago, and I want to start by highlighting why these approvals were worth the wait. In Massachusetts and New Jersey, we'll have some of the best located dispensaries in the Northeast, between Back Bay and Watertown in Boston, which are both imminent, the Somerville conversion to adult use to follow, and the adult use conversion of our New Jersey locations, which were approved this week, and where we have three of the only five operating dispensaries in the central region of New Jersey, which has a population of 3.4 million people. In our opinion, location is the most important thing in Massachusetts and New Jersey, because in each of these states you can only have three adult use stores. So you want those stores to be in the best locations possible. We think it was worth the wait for approval to open next to the Apple Store in the Back Bay in Boston, and that the very reason we were made to wait in New Jersey is because our central region locations drive so much customer traffic. Before we get to some of the business highlights that many of you look for on these calls, I want to take a moment to talk about margin structure. The foundation for the assets that we are now beginning to turn on is created by consistent investments, including investments in our people, our technology infrastructure, our processes, especially those processes that support flower quality and efficiency, our brand, and our customer relationships. EBITDA margins have been lower for us in recent quarters, particularly in Q1, as we continue to make SG&A investments ahead of our expansion. an investment we began making in the second half of last year. We anticipate SG&A as a percentage of sales to decrease in Q3 and Q4 of this year when our expansion assets contribute to revenue and when we realize the economies of scale we expect from our strong asset base. While we could have chosen not to spend some of these SG&A dollars, we believe continuing to invest at a reasonable pace puts our forward earnings power in a much stronger position. We're in this for the long haul and extremely aligned with our shareholders. We've been making good progress on the 2022 milestones that underpin the Q4 run rate revenue and EBITDA expectations we discussed last quarter, set out in the last earnings call and in our management discussion and analysis, which as a reminder, were for $800 million of revenue and $250 million of run rate EBITDA in Q4 based on the assets we will turn on in the third and fourth quarters. Now let's talk about other developments in our business. In Nevada, we continue to buck the trend of challenging markets. As you've heard from others, the total addressable market in Nevada decreased in the first quarter. At the same time, our retail share hit an all-time high in Q1. We will continue to bolster our position in Nevada, where Kindflower has been the number one flower brand in the market for the better part of the last 12 months, with new product launches over the summer, including Entourage, Styx, Haze, and Road Tripper. Arizona is starting to show the improvements that we've been making. Now that our 80,000 square foot cultivation facility is online, generating its first sales this month, in fact, we see opportunity for even more improvement. The new cultivation is one of the best facilities we've built, And we're receiving great feedback from wholesale partners who see the flower that's come from our first harvest. And as we dial in the facility with subsequent harvests, we expect yields and quality to be even better. Outputs from this facility will drive our in-store product mix and our wholesale business, which we expect to drive both revenue and EBITDA generation. Massachusetts was a more challenging environment in Q1, largely because of the wholesale channel. In retail, we've largely been maintaining share despite having only two medical stores and no adult use retail yet. Our Massachusetts footprint is about to change massively. And next quarter on this call, we'll be talking about our adult use openings and how those stores are ramping. In New Jersey, we are thrilled to have received the approval for adult use conversion. Central Jersey has been the most underserved region of the state, and we are looking forward to opening our doors to adult use customers in the next few weeks. And like Massachusetts, next quarter on this call, we will be talking about how those doors are ramping. Across our Pennsylvania footprint, we continue to hold share with our eight stores, and we are now planning to open our ninth Pennsylvania store in June in the city of Indiana. an underserved area in the western part of the state that's home to Indiana University of Pennsylvania. And finally, an update on Florida, where our top line continues to grow and Q1 was another record revenue quarter for us. We're selling double the biomass we were selling a year ago, driven by our expanded selection of offerings and store growth at 47 stores as of this month. We're planning to open at least two more stores before the end of Q2, and with more to come through the back half of the year. We're seeing positive trends from our Florida cultivation, where flower quality and yields continue to improve. We've added some recent photos to the investor deck online. We've been growing some really beautiful flower in Gainesville. And remember that it takes at least a quarter for cultivation improvement to show up in the bottom line. The improved harvest we had in March, to get cured and tested through April, and show up in the stores in May. Plants take time. It continues to be an incredibly busy time for us at AIR. We can feel our hard work and our investments into the business ready to begin contributing to the second half ramp that we've all discussed. And while as an industry we've gone through a period of slightly slower growth, we think it's important to remember that growth is not uniformly up and to the right. and that the long-term demand prospects for cannabis are exceptional. I'll now pass it back to John for final remarks.

The CapEx cycle that we've undergone over the last 18 months has been a challenging and exciting time for our business. But now that we're nearly through the construction and completing the final stages of our regulatory approvals, we're excited about finally turning on the power of these investments. and getting back to what we've been known for, being good stewards of capital and being strong operators that improve the businesses that we manage. We thank you all for your continued patience and thank our team for their hard work and dedication as we built for the future. And we look forward to you being by our side as AIR realizes its next phase of growth over the second half of this year.

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. In the interest of time, we kindly ask that you keep to one question and one follow-up. We will pause for a moment as callers join the queue. The first question comes from Matt Bottomley with Canaccord Genuity.

Good morning, everyone. Thanks for taking the questions. Just first on the recent positive news in Massachusetts there with your licensing for the Back Bay location, can you give any other color on if there's going to be any medium to longer term change in the retail versus wholesale strategy? I anticipate, obviously, a lot more product flowing through there, which would bode well for margins, but Massachusetts from the read-throughs in Q1 from all of the MSOs seems to be a market where the wholesale side of things seems to continually face pressures in the last three, four quarters here.

Thanks for the question, Matt. I think it's really important to keep in mind the structure of the Massachusetts market. First of all, for our business, as we've said, we've only had two medical stores up until next month when we open our Back Bay location, which will be our first adult use store. That's going to hugely change our ability to pivot our own strategy and our own biomass between retail and wholesale. It's going to improve margins. It's going to improve revenue. So we're really excited about that and about Watertown, which will follow, and Somerville in the future. So the way that our business is changing is also the way that the entire market structure will be changing as more stores open in Boston. And as we've said so many times, 60% of the population lives in greater Boston. It has about 10 dispensaries. There are 200 in the state. 10 of which are where all the people live. That is changing. It's changing over the next 12 to 18 months, and the supply-demand dynamic in the wholesale market will change with it. One other point I want to make with respect to the Massachusetts market, and in particular the wholesale side, is that quality is key. The most important thing is to have a great product and have brands that people want, And it's extremely important to have that great product because you want your product in the wholesale market to be what people take first. And quality genetics and quality well-grown flour is the backbone of being the product and the brand that people want to take first.

Got it. Appreciate that. And just one other question for me, pivoting now to New Jersey. So congrats on that announcement earlier this week. In terms of what you expect, obviously the step function growth in the second half of this year, I know New Jersey is going to be likely a big contributor to that. But can you give any indication on how you anticipate that market rolling out? I imagine you can't give – specific numbers but you know you guys have three dispensaries now of I think it's only about 17 that are adult use operational so a good you know optionality there for market share but what are also your expectations of how the regulatory commission is going to allow this sector to ramp up or the retail footprint more specifically just given that it is pretty limited to start and I imagine those stores will all see incredible demand but just more broadly speaking you know how do we get up to kind of 100 locations or more in the next little while here?

Well, I think the first thing we're focused on is our own business, similar to Massachusetts, making sure that our stores have the supply and the variety that customers want. We're really excited to be three of five operational stores in central Jersey. Central Jersey is almost as big as northern Jersey. It's 3.4 million people versus 3.6 in northern Jersey. And as three of five stores, the prospects for us are going to be pretty impressive. Obviously the market is going to grow. Obviously we're going to be a big part of that. And I think that the biggest driver of that growth will be other people opening their stores with time. And that will be an excellent market for us on the wholesale side in the future, but for right now we're extremely focused on providing the best providing the best products to our customers that we can. That's always been our focus. It's been our focus in medical. It will be our focus in adult use, and it's our focus across the board. I really think, though, it's so important to stress the exceptional locations that we have in central Jersey. It's the best ratio of population to dispensaries in the country, and we have three of five stores in that region. region and it's just an incredible opportunity for us.

Okay. Thanks so much.

The next question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.

Hi there. Good morning. Congrats on the Q1 results. First question here, I'll just continue on New Jersey. What steps have you taken to ensure adequate supply for the start of adult use sales in that state in the coming month? And could you also expand on which of your own brands and product formats may be available to consumers on day one of you launching adult use sales and how that shift of brands and formats may change once your expanded cultivation facility is online and generating product in the second half of this year?

Sure. Thanks for the question. So as we alluded to earlier, our locations in New Jersey are just great, and we've secured approvals for all of our three stores to open simultaneously, which was unique amongst the ATCs in New Jersey. And we believe that it's probably one of the reasons we had to wait, because our stores are so well located and would generate such demand. As a result, we have stockpiled large amounts of biomass to be able to sell into the adult use market, anticipating that it would be, you know, a gangbusters beginning of the adult use market in that state. Over 3,000 pounds sit in our vaults currently. We have also supply agreements for almost 1,000 additional pounds per month, and we generate our own biomass of a few hundred pounds, 300 pounds per month from our existing facility, but our new facility, which is about to come online, will generate 1,000 pounds per month. So we feel very comfortable with our supply and have been probably even greater than, certainly actually even greater than the state guidelines have asked us just because we know that our stores are going to generate such demand.

Great. Thanks for that, Jen. Second question, on Massachusetts, the wholesale dynamic is shifting in that state fairly quickly. Just wanted updates from the air team, whether you guys are still confident you can find a home for all that incremental capacity coming online in the state. And maybe if you could provide some color on that. What proportion of that incremental capacity your own two adult use stores expect to be open by year end might absorb as well as the medical stores open in that market?

Well, I think one of the important things about our stores in Boston is similar to the comments about New Jersey. They're exceptionally well located. So we have been trying to be conservative in terms of our expectations for those stores in terms of the sales that we'll generate. I mean, you've toured our – or you've seen the location for our Boylston Street facility in the Back Bay. I mean, it's an incredible facility next to the Apple Store, across from the Prudential Center, in the center of all the foot traffic of the Back Bay of Boston. It's just incredible. So as we think about what our – as we think about what our needs are in that store – Our candid guess is that we probably are going to be buying more third-party for that store than we otherwise might like to until our expanded cultivation facility comes online in the fourth quarter, because we probably won't have sufficient capacity out of our first two cultivation facilities to really meet both our wholesale business and the sails through that Back Bay facility. And I actually, I'm not sure if you've been to Watertown, but Watertown's only about six miles from the Back Bay. It's right on the Charles River. It's central Boston, probably not central Boston known to people who aren't from Boston, but it's on a main commuter route. It's an incredibly well-located facility. It's got a huge parking lot accessible from both sides of the street. And it's a big, big, beautiful dispensary. So we think that dispensary will also generate an incredible amount of business. And between those two stores, I think we're going to take up a lot of our capacity and still have some left over for wholesale, especially as some of the non-vertically integrated dispensaries start to come online.

That's great, Tyler, and I agree that Back Bay dispensary, excited to see that one open. So looking forward to that. Thanks for taking my questions. I'll get back and take you.

Okay, thank you. The next question comes from Matt McGinley with Needham. Please go ahead.

Thank you. If we simplistically break the gross margin decline into market factors like volume and price compression, which I think would probably have a longer tail versus the air specific factors like investing ahead of markets opening, how much of that four and a half point drop in gross margin rate was driven by those market factors versus the air specific factors? I guess what I'm what I'm hoping to understand is how much of the con is more of a timing issue versus a structural issue in terms of where your gross margin will ultimately land.

Sure. Thanks for that question, Matt. I'm going to answer and then I'm going to turn it to Brad to add. But I think it's important to note that our growth margin did come down a few points, probably the majority of which is market factors and price compression over the course of the first quarter. And in addition, as we become more vertically integrated throughout the business, which will really start happening predominantly in Q3 as we bring on some of these cultivation facilities, vertical integration will improve our gross margin again and we'll be able to get back some of those margin points that we're hoping that we'll be able to get back some of those margin points lost price compression over the first quarter. But I'd say the majority comes from price compression, and some additional comes from the fact that we are increasing sales in a non-vertically integrated way, and that vertical integration will backfill over the second half. So, Brad, what would you add?

Yeah, I would just add that that price compression, we see that highly correlated with compression in the market size. So if the BDSA market size is decreasing, those are the states where we're seeing pricing pressure. but we're still over 50% adjusted gross margins and expect to remain over 50% for the balance of the year.

Which I think is in line with industry peers or on the higher side of the industry.

My second question is on the cash uses. Between the operating cash flow loss, the CapEx, the acquisition-related outflow, you went through about $75 million in cash in the first quarter. Given the call for flat first half revenue, how should we expect that cash flow to trend into the second quarter? Where are your current cash balances and what will your primary go to if you needed to raise capital for the remainder of this year?

So our cash spend for 2022 has always been expected to be front loaded for two reasons. First, our CapEx is front loaded into the first quarter. We spent half of the CapEx we're going to spend for the whole year over Q1 and that's because you spend your CapEx when your assets are about to turn on and our assets are about to turn on. We're at the end of the building phase. We're paying our construction bills and we're turning on our assets now and into the third quarter. So half of our CapEx has already been spent for the year. In addition, we paid our taxes. We paid taxes in the first quarter and then finished paying in April. We don't have a large deferred tax liability on our balance sheet, unlike others in the industry, and that was the other major use of cash over the first quarter. Those two uses of cash, which were the lion's share of the cash use, are now done and will not be repeated throughout the year.

The next question comes from Andrew Bond with Jefferies. Please go ahead.

Andrew Bond Hi, good morning. Andrew Bond on the line for Owen Bennett. Thank you for taking our questions. So, first wanted to touch on the pricing risk that you lay out in the ND&A around your run rate guidance by the end of 2022, specifically the assumption that retail and wholesale prices remain relatively stable at current levels. So, we're seeing some data that overall market prices in some of your core markets are generally still under pressure. maybe showing some flatness in at least Arizona and Nevada in the last month or so. So can you give any incremental color on your outlook around these pricing in your core markets, maybe specifically Pennsylvania and Massachusetts where there seems to be a bit more pressure, and what levers you might have at your disposal to still hit those targets if pressures persist? Thank you.

So in terms of the pricing impression, we talked about how Q4 had a compounding effect. So each month we saw a few percentage points decrease in pricing. Q1 was an entire quarter at that lower price point. So as of right now, that price impression that we saw in Q4, especially in wholesale, has stabilized through Q1. So it hasn't recovered yet, but it has stabilized. So that's the assumption that we have running through the remainder of the year. That's what we've seen in the first quarter.

So I guess as we sit here at, you know, kind of the end of May, how is that tracking relative to your expectations into the second quarter as a follow-up? Thank you.

Aside from the few days around 420, I'd say it is tracking.

Great. Thank you. And then moving on to the brand portfolio, obviously you've made some pretty substantial progress expanding those 10 core brands into new states. and then more, you know, 50 new launches, I think you said, to come. So some of your larger MSO competitors have a much smaller brand portfolio. Some do go with a wider approach. Can you discuss kind of your overall brand strategy, big picture, how these 10 brands fit together for you within that, and then whether that has to do kind of with an overall specific form factor, different cannabis consumer segments, or otherwise? Thank you.

Sure. So our brand portfolio is really constructed so that we have an offering across form factors and price points for all consumers. Our power brands address the key form factors of flour, concentrate, levier beverages, and and vape, and we have a broader range of core offerings which can hit more of the accessible price points. Our 10 brands that are national and go across all of our geographies are very, very focused on meeting the customer exactly where they are for every customer. And they've been specifically designed and specifically created such that as we bring them into new markets, we can hit the markets exactly as the consumer in that market wants to address cannabis. So a Nevada customer is different to a Massachusetts customer, is different to a Florida customer. And we think it's really important to have a brand portfolio that can pivot to the market in which the portfolio sits.

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

Good morning. Thank you. Good morning. Thank you for the questions. Just another follow-up now on Florida and looking at that state. Can you provide a little more progress, kind of update on state-level metrics, on the store-level metrics you have, where you come from and the upside left to continue to drive the sales in those 47 locations you currently have? How does these, you know, you mentioned opening up new brands, entourage, the kind premium, and how does that affect, again, kind of Florida margin profile for that, or is that helping offset pricing? Can I just speak to kind of the progress and the upside you have continuing in Florida going forward here?

Sure. Thanks, Scott. So as we open more and more stores, That's one of the main drivers of increased revenue in the Florida market. So we're at 47 stores today, and we'll be at 49 by the end of this quarter, and we'll open additional in the second half of this year. So that store growth is really driving our revenue, and as you know, one of the key things for us in Florida has been growing more and better flour in our Gainesville facilities so that we can feed our stores with even more product. That's been the gating factor, the limiting factor for us in Florida. We've made tons of progress on it. I really, I think you were actually thinking of coming and visiting in our Florida facility today, actually. But we'll get you there, we'll get you there soon. But seeing the progress in that facility is just really an impressive and really encouraging precursor the additional excellent product that we're going to be pushing through our stores. I really encourage everyone to grab the most recent investor deck off of the website, go to the Florida tab and look at some of the flower that we've grown there so far this year. It's really very impressive. And as that goes, feeds through our stores, we'll be able to drive higher volumes and more premium pricing as we are able to provide our customers with a more premium product.

I'll just add in terms of that correlation of market size and pricing. We are seeing the market size expanding in Florida, and that's holding true on the pricing side as well.

And then I'll just follow up on that. How do you see the margins in Florida as you bring on these premium pricing there for you? Are we going to expect to see a little bit of an increase there, or is that stabilized by the promotional activity that's going on from the pricing side?

No, we're really excited about being able to provide these premium products, this premium flour, at more premium prices. I think we've talked about this before, that when we first took over Liberty, we really weren't able to hit the premium end of the market from a pricing standpoint because we didn't have the supply that supported that premium pricing. And with the improvements in our cultivation, we really do. And it allows us also to introduce some of our premium brands into Florida. So our kind flour, our sticks, pre-rolls, these things will, these brands in addition to the improved product will allow us to improve margins in Florida.

Perfect. And then real quick, an update in Nevada. I know you're adding, consulting the cultivation side of there. You're hitting new highs on the retail side. You've done a real good job in a tough market there. But how do you look at that retail footprint or kind of added cultivation? Is that going to be more going towards wholesale? I know you're all store right now, but how do you look at that mixed retail versus maybe moving to more wholesale in Nevada going forward here with more cultivation through the consolidation coming on board?

Yeah, we're very opportunistic about the way we think about pivoting between retail and wholesale in Nevada. With the acquisition of Tahoe Hydro, we do, you're absolutely right, have additional capacity on the cultivation side. That capacity is excellent premium, allows us to access both vertically integrated premium pricing within our stores as well as premium pricing in the wholesale market. And we can just be opportunistic about where we want to direct that capacity depending on the ebbs and flows of the market. I mean, Tahoe Hydro Flour, Tahoe Hydro Grown Flour, sells for $3,000 a pound in the wholesale market. It's incredible. It's very, very high quality, and we're super excited. And we're super excited about it for Nevada, But beyond that, the genetics and the kind of human capital talent that has come out of that acquisition have been incredible across the cultivation footprint of our business. It's one of the biggest reasons those pictures in the deck of Florida look as good as they do.

The next question comes from Russell Stanley with Beacon Securities. Please go ahead.

Good morning, and thank you for taking my questions. First, just following up on Florida, given the cultivation improvements that you've made and continue making, how many stores do you think you'd be able to support by the end of this year? I know you plan to add stores in H2, just trying to get an understanding as to how many you'd be able to support from a cultivation standpoint as we finish this year off.

Thanks, Russ. With respect to our cultivation and our retail footprint in Florida, we look at it two ways. First of all, and I think we've talked about this a lot, it's really important to us to have the best located dispensaries in Florida. We are consistently looking at new locations, trying to find the best locations in each town And we do that work ahead of opening stores. So we probably have a line of sight to 80-plus locations in the state, but we look at it from a cost-benefit analysis in terms of how we want to open them and what the timing looks like. So in terms of our expectations for the rest of this year, we think maybe we'll get 55 or 60 stores open. But, again, we'll continually look at the cost-benefit analysis of every location, and it's really important for us to have the best footprint. And in terms of I think your question was specifically can we support those, and absolutely. That's The whole point of our cultivation improvements and our goals in cultivation in Florida is grow as much great weed as we can so that we can open as many stores as we can.

Great, thanks. And maybe my follow-up just around the mortgage financing is congrats on tapping that unused balance sheet power. Just wondering, thinking midterm, where would you like your leverage level to be on a Jeffy Vidal basis.

We're really pleased with those deals. Those were multi-year relationships and those, I think, were the best opportunities to monetize our real estate portfolio. The ratio is something that we're constantly evaluating as our business is coming online into Q4. It's something we'll evaluate for other opportunities with real estate-based lending. But right now we're really pleased with the two deals that we've just closed.

This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.