Ayr Wellness Inc

Welcome to the AIR Wellness second quarter 2023 earnings call. Joining us today are AIR's president and CEO David Goubert 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 Forum 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 the 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, we may reference non-GAAP financial measures such as adjusted EBITDA and adjusted gross profit. 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 call over to AIR's president and CEO, David Goubert. You may begin.

Good morning, everyone, and thank you for joining the call today. We're proud to walk you through our second quarter, which represents a meaningful step in AIR's journey to generating cash flow with significant year-over-year improvements in revenue, adjusted EBITDA, gap loss from operations, SG&O optimization, and expense management. Throughout today's call, we'll discuss AIR's continued progress in these regards via updates to our optimization plan, our growth forward plan, our customer-centered approach, and our financial and balance sheet health. Beginning with our Q2 results, we grew revenue 18% year-over-year, and adjusted EBITDA 79% year-over-year, improved our gap loss from operations by 81% year-over-year to a loss of 4.5 million, excluding discontinued operations. We experienced a modest sequential revenue decline while achieving 12% sequential growth in adjusted EBITDA, beating our Q2 adjusted EBITDA guidance. And our adjusted EBITDA margin of 25.2% represents a further expansion over Q1, which is ahead of schedule, as we expected to achieve 25% adjusted EBITDA margin by the end of 2023. These significant improvements to profitability metrics can be largely attributed to the execution of our 2023 optimization plan, a plan designed to optimize air cash flow and cash position. As a reminder, the optimization plan focuses on four key areas. First, our sales growth, leading to improved operating leverage. I will lay out shortly the foundation for growth that we've been implementing in recent months. Second, expense reductions, which are reflected in our results as we're generating improved SG&E margin and adjusted EBITDA margin in 2023. our stronger gross margin, which are also reflected in our results, their increased operational efficiency, improved internalization, skewer rationalization, more efficient purchasing, pricing optimizations, and discount management. And finally, unlocking working capital via better inventory management, where we still have opportunity ahead of us to make a great impact during the second half of 2023. In Q2, We experienced the full benefit of headcount actions taken in February 2023 reflected primarily in gross margin as that workforce worth sizing was focused on the grow and make aspect of our business. At the same time, we continue to see improvements in our cultivation operations with a percentage of packageable flour increasing approximately 23% in the second quarter compared to our last year average supporting further that improvement in gross margin. Further workforce actions were taken in early July, specifically targeting SG&A, resulting in the month of July in a 28% year-over-year increase in transactions per labor hour, which is a key retail KPI for us. Due to those actions, we expect SG&A as a percentage of sales to decrease further into three results and beyond, as AIR tightly manages expenses and revenue increases throughout the next few quarters, providing stronger operating leverage. To further unlock working capital, we are planning to tap into our inventory more aggressively, which we see as a significant resource for cash generation. It is for this reason that we are maintaining our expectation for adjusted EBITDA margin in the mid-20s for the remaining of the year due to expected margin pressure from further inventory depletion efforts offset by our expense savings and optimization efforts. In each market, we intend to continue to keep our production right size to demand while selling through aging inventory and realizing further synergies between our grow-make operations and retail, wholesale, and purchasing. On the revenue front, we continue to implement our grow-forward plan. which provides the foundation for further revenue growth in the second half of the year and beyond. While I will detail where we are in each market in a few minutes, I want to highlight a few new key elements of our growth strategy. As I become increasingly accustomed to AIR and our contemporaries in the industry, I've had the opportunity to experience firsthand what makes AIR unique. One of my key takeaways is the personalized approach taken in air cannabis dispensary across our footprint, being the neighborhood store that is part of the community at scale. The interaction between our bartenders and our customers are among our best attributes. And as an individual coming from a customer-centric retail background, this is something I'm thrilled to see. As AIR continues to make progress on its existing foundation in its retail experience, e-commerce, customer loyalty program, and digital ecosystem, this personalized neighborhood approach will remain at the center of how we approach our customer relationships. This provides us with the best opportunity to build long-term loyalty and lifetime value among our customer base. This type of customer loyalty at retail is designed to provide air with a platform to better introduce and proliferate our CPG portfolio, which we are in the process of simplifying and relaunch in coming months. And then experience true synergies between these two aspects of our business. From our market standpoint, we are pleased to be in a position where we have diversified catalysts on the horizon to drive both short-term and long-term revenue growth opportunities. To name a few, three retail locations to open in Ohio, expecting all three before the end of the year. Larger output from existing Massachusetts cultivation to fulfill wholesale demand. The introduction of Kiva products in Florida this fall. Further store opening in Florida, and accelerated ramp-up of the 10 new stores already opened this year, the continued growth in New Jersey, including the expansion of Eatontown, which was completed this month, the build-out of two Connecticut stores by early 2024, and the build-out of our two additional retail licenses in Illinois by early 2024. The build-out of these growth catalysts is mainly hitting our 2023 CapEx budget that remains unchanged at $30 million for the year. More broadly, potential for adult use legalization looms in Florida, Pennsylvania, and Ohio. While we're focused on growing our business in the current environment without relying on these catalysts, we are preparing our operations to be ready when these windfalls take place. Turning now our attention to AIR's balance sheet, while Brad will provide the specifics, I would like to highlight the fact that we remain laser-focused on improving the short- and long-term financial health of AIR. I am pleased with the progress that we have made in recent months. The announced actions during Q2 and subsequent to Q1 have resulted in the extension of the payment terms of $53 million of debt obligations the opportunity to defer an additional 69 million of debt obligations if certain contingencies are met, and the resolution of what could have been a significant near-term dilution event for shareholders related to our GSD New Jersey acquisition. As a reminder, AIR has engaged Mollis & Company as its financial advisor to advise the company on pursuing extensions of future debt maturity. At this time, we cannot provide further information on this topic. However, we look forward to progress updates in the future. I'll now turn the call over to Brad to walk us through the financials for the second quarter of 2023 before I share a bit more details per market.

Brad? Thanks, David. Q2 sales, 116.7 million, represents an increase of 17.8 million, or 18%, compared to prior year sales of 98.9 million and a decrease of just under 1 million or 1% from prior quarter. The year over year increase was primarily driven by retail growth from Florida improvements and expansion, along with the ramping of New Jersey adult use, offsetting a wholesale business that is roughly flat year over year. Retail sales increased 1% sequentially, but were offset by a 13% decline in wholesale. primarily driven by greater than expected demand in Massachusetts wholesale during Q1, leading to a shortfall of sellable flour in Q2. Additional capacity is now online in Massachusetts with current wholesale revenue expected to surpass Q1. We will continue to fine-tune the S&OP process to respond to the ever-changing landscape in Massachusetts. In retail, transactions continue to increase each quarter, up 6% sequentially and 46% year over year, offsetting dollar per ticket compression of 5% and 15% respectively for the same periods. And same store sales for stores open greater than 12 months were roughly flat quarter over quarter and up 8% year over year. Q2 gross profit of $56.6 million represents an increase of 20.6 or 21% compared to prior year. and an increase of 8.4 million or 17% compared to prior quarter. Q2 adjusted gross profit, a non-GAAP measure, with 69 million representing an increase of 17.5 million or 34% year over year and up 3.8 million or 6% quarter over quarter. Q2 adjusted gross margin of 59% is ahead of our expectations for the quarter of maintaining in the mid 50% range and was primarily driven by cultivation improvements and cost optimization efforts, including actions on headcount taken in the first quarter, providing us with a more efficient base going forward. In addition, internal sourcing remained high at 69%, with a healthy 50% when excluding Florida from this metric. Loss from operations was 4.5 million, which represents an improvement of 19.2 million or 81% compared to prior year and 17.2 million or 80% compared to prior quarter. This represents a significant improvement driven by the expansion of gross margin and overall efforts to reduce expenditures with total SG&A costs down 5 million or 10% sequentially. SG&A as a percentage of sales was 40% during the quarter, down from 48% and 44% in prior year and prior quarter respectively. Q2 adjusted EBITDA of 29.5 million, an all-time high, represents an increase of 13 million, or 79%, year-over-year, and up 3.2 million, or 12%, quarter-over-quarter. Adjusted EBITDA as a percentage of sales increased year-over-year and quarter-over-quarter by 850 basis points and 280 basis points, respectively, to 25.2% in Q2. The sequential improvement was largely due to cost-saving and margin optimization measures taken throughout the first half of the year. Moving to the balance sheet, we ended the quarter with a cash balance of $60 million, and subsequent to quarter end on July 7th, closed an upsizing of our Gainesville Cultivation Facility mortgage, contributing a net $14 million of cash proceeds, resulting in a pro forma cash balance of approximately $74 million. Cash payments during the quarter include $10 million due under the GSD earn-out, $7 million of principal debt pay-down from scheduled amortization and maturities, as well as $7 million of CapEx payments, keeping us on track for the estimated $30 million of total CapEx for the year. Operating cash flow from continuing operations remained positive year-to-date, totaling $2.8 million of cash, provided which represents an improvement of $34 million from prior year. We expect further improvement through 2023 and expect to have positive operating cash flow for the full year, although there may be quarterly swings through the nonlinear trend of working capital outflows, such as tax payments. In addition, in Q1-23, we filed for the employee retention credit, totaling $12.3 million, and as of Q2, we are still anticipating receiving this incremental cash. Strengthening the balance sheet and preserving cash is the number one focus of the company, and we've been busy on that front. In January, we reached an agreement to mutually terminate the acquisition of Dispensary 33, preserving the purchase price consideration of $55 million, including $12 million of cash. In March, we divested the Arizona business, resulting in over $20 million of cash proceeds and the elimination of $22.5 million of debt and any potential earn-out contingent consideration. In May, we reached an agreement on the GSD New Jersey and Sierra Naturals earn-out amendments which defers approximately $28 million of cash obligations through 2024 and averted a potential substantial equity dilution. And we also announced that we retained Mollison Company LLC as our financial advisor. In June, we reached contingent agreements to defer principal or amortization payments for two years on an aggregate principal amount of approximately $69 million of debt obligations, contingent on an extension of the maturity of our senior notes. And most recently in July, we closed the $40 million refinancing and upsizing of our Gainesville cultivation facility mortgage, resulting in $14 million of net proceeds and marking our second such mortgage upsizing of the year, totaling $24 million of an aggregate net proceeds. Each deal respectively with long-term maturities and an attractive cost of capital of roughly 8% currently. At the same time, we've been making similar efforts on the operations side. aimed at the same goal of preserving cash and strengthening the balance sheet, including the headcount reduction of over 400 positions over the course of the year, excluding Arizona, together with the optimization efforts that have resulted in improvement across the board on key financial metrics. Looking ahead, we are positioning AIR for sustainable long-term growth and profitability across all our markets, while prioritizing the financial health of the company. The recent actions we have taken to grow our Florida footprint and production capability expand our Eatontown store in New Jersey, and build out a retail footprint in Ohio are intended to enable us to accelerate forward-looking growth, followed by additional growth milestones as Connecticut comes in line and we seek to double our Illinois retail footprint through strategic partnerships. We continue to expect revenue and adjusted EBITDA growth in the second half of the year and into 24, and to generate positive cash flow from operations for calendar year 2023. With that, I'll now turn the call back to David.

Thanks, Brad. I will now provide some high-level updates on our progress in our individual state markets and where our focus lies in each. Starting with Florida, as many of you saw, we just announced just last week that we have signed an agreement to be the exclusive Florida licensing partner of Kiva, which operates some of the most well-known edible brands in the country. We anticipate launching Kiva in Q4. In terms of product mix, only 6% of our Florida sales have traditionally been in the edibles category compared to the market average of 14%. So the Kiva partnerships provide us with significant opportunity to grow in that crucial high margin segment with a well-known brand that in Florida can only be booked in our stores. The timing of this launch will be paired with the completion of the CAPEX project we've undertaken in our Gainesville facility to greatly improve our edibles production capacity and quality. Still in Florida, we continue to see strong customer transactions and same-store sales growth in our dispensary footprint across Florida. In our 42 dispensaries that were opened before 2022, we've generated 13% more revenue in Q2 2023 than we did over the same quarter in 2022. Our total number of customers served in Q2 was up 3% sequentially and 33% over last year, resulting in our transactions continuing to trend upwards with Q2 transactions up 9% sequentially and 82% year-over-year. And while we are continuing to see price compression in Florida, this has been fully offset by our continued customer and transaction growth leaving us with healthy fundamentals. Now, with all our Florida stores rebranded as air cannabis dispensary, our primary focus will be further ramping our 10 most recently opened stores and opening two additional locations before the end of the year, as we continue to deepen our relationship with our customers and better ingrain air as the go-to neighborhood dispensary. In Nevada, The work we highlighted last quarter to increase our adjusted EBITDA dollars and margin, which included better leaning into our purchasing power and creating more efficient promotional structures, has continued to pay off. This continues to translate into outperforming Nevada results, continuing to grow quarter after quarter, with adjusted EBITDA in the quarter reaching its highest level since Q3 of 2021, despite roughly 30% price compression, according to BDSA. Pennsylvania is a similar story to Nevada, where in a steady market, we maintain our improved margins thanks to our optimization efforts in this state. This is a market where we see the opportunity to improve inventory turnover, to generate cash, and we'll be increasing our internalization efforts. Now turning to New Jersey, our retail locations continue to grow and come into their own. we see opportunity to further growth in our Eatontown location with the opening of our new extension, which nearly tripled our POS stations and increased in-store occupancy from 22 to 162 people. The extension is celebrating its grand opening this week. This is a high-traffic location that previously struggled to keep up with demand. It's now a beautiful new store with great energy, and initial feedback from customers has been great. Moving to Massachusetts, as Brad discussed earlier, we have begun to see green shoots in the wholesale market and ramp cultivation production to meet demand. And on the retail side, we have recently received approval at all three of our Greater Boston adult use locations to extend our hours of operations in the evening, better mapping hours of operations to our customer traffic patterns. In Ohio, We anticipate the opening of our three retail locations before the end of the year. The opening of retail presents the opportunity to internalize from our Palmer cultivation facility. The flower from Palmer continues to be of excellent quality and is being well reviewed within the market. We anticipate a gradual wholesale ramp throughout the remainder of the year. In Illinois, while our two stores in Quincy are experiencing, as expected, a bit of a tougher environment given competition across the border in Missouri, we anticipate further growth as we bring online our two-paper license in early 2024, one in the Chicago metropolitan area and the second in Bloomington Normal. Last, Connecticut remains a 2024 story for AIR. We are building out retail locations, which we expect to open in early 2024, and working on siting our cultivation facility. Overall, we continue to remain laser focused on cash flow generation and building our foundation for further growth. We reiterate our goal of generating positive cash flow from operations for 2023. To conclude, allow me to take the time to thank our team who continues to relentlessly push us forward and build a company that we all know AIR can and will be. I shared in our last call how excited I was with the new company leadership being in place, and I'm really pleased to see how the team is continuing to gel and making tremendous progress. It's not an easy proposition to get leaner and more efficient while at the same time setting the foundation for future growth, but proud to say that is exactly what's happening at AIR. We will now take your questions.

Thank you. We will now begin the analyst question answer session. To join the question queue, you may press a star, then one 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 two. 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. We will now pause for a moment as callers join the queue. The first question comes from Russell Stanley with Beacon Securities. Please go ahead.

Good morning and thank you for the questions. Congrats on reaching 50% of retail sales from your own brand, Export. I'm just wondering is there Is there room for additional improvement from here before you risk compromising product variety? And if so, which markets may offer the best opportunity there?

Hey, good morning, Russ, and thanks for the congrats and thanks for the question. I think that we're happy with that mix of our internal brands for now. Just a reminder that we're also in the process of of rationalizing and revamping our internal brand, and that will be something that will come later in Q4 and in Q1 of next year. But overall, happy with the breadth, I would say, of products that we have in our own brands and the results that we're having from that standpoint. Now, more to come as we rationalize our brand and relaunch them in coming months.

Great, thanks for that. And if I could, just on the margin topic, following up on your comments around margin improvement, EBITDA margin improvement tracking or tracking ahead of your own expectations and understanding your guidance is unchanged there given the focus on inventory reduction. But just wondering what the drivers of the margin surprises relative to your own forecast, where those drivers were. Thanks.

Yeah, and we're... We're happy. I mean, that was clearly the focus for us was on the increase of the EBITDA dollar, and we're happy to get to a place where we're at that record EBITDA dollar at over $29 million. I would say that it's the result of the efforts in different places. One of them has been the implementation of a different way of working by states where we have our GMs that really manage overall retail, wholesale, purchasing at the same time and can optimize that. And the best example I would say is probably Nevada, where we, quarter of the quarter, we're recording record EBITDA thanks to that effort. So that's one part of it in the way we're working. Another part of it is the effort that's been made from efficiency of our Glomake and the actions that have been taken on that front. And then that's more on the cost of goods And then on the other side, from an SDM standpoint, I mean, there's actions taken as well to improve our efficiency on that front. Some of it will show up actually later. And I think we mentioned the efforts from a retail standpoint where we improved efficiency 29% year over year in July for that. So when you take these different aspects, meaning a better way of managing the state from the wholesale, retail, and purchasing together, plus the efforts from a GrowMake standpoint and efforts on corporate and retail G&A, that's how that comes up together. And then as a follow-up to that, I think that we see that continuing for the second half of the year, but we know at the same time that with the inventory that we have on hand, maintaining that level in the 20s, from an EBITDA standpoint, it's what we're... what we're planning to do for the second half of the year.

That's great, Keller. I'll get back in the queue. Thank you.

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

Hi, good morning, and thanks for taking my questions. And congrats on the Q2 results. First off here, just want to ask on the retail segment, growth is a little bit slower. the quarter, but still trending upwards, which is good to see. Just wondering, you know, you're taking significant actions across the retail portfolio, expanding the in-town New Jersey store, rebranding most of the Florida stores. Wondering if those activities may have had a temporary impact on retail revenues in the quarter or whether, you know, you don't think that that was a headwind at all.

Thanks, Andrew. So, yes, somehow happy to see that we keep growing retail. It's a 1% growth quarter over quarter. There are some headwinds in there in some places. I would say the biggest headwind is probably in Florida on the price compression that we felt like everybody else, I would say, in Florida. So all the efforts that have been made in Florida transitioning to air cannabis dispensary, to opening the new stores and so on. All that has broke a lot of results in Florida from a number of transactions, number of customers and so on, but has been offset by price compression. When we talk about New Jersey, we've seen good results in New Jersey in second quarter, but the expansion of Eaton Town actually officially started this week. I mean, we had the grand opening on on Tuesday, so that's more of a Q3, Q4 story in New Jersey, but good results over there. And then on the rest of the network, I would say it's been a bit more of a steady ID where the focus has been on improving the bottom line, like in Nevada or Pennsylvania. And then Massachusetts, I'd say the key things are happening in Q3 with expansion of our hours in Bag Bay and soon to come in the other two stores. Some headwinds, I would say, the first place being in Florida from a price compression, but good things are happening rather in Q3.

Great, that's helpful. And then maybe turning to the wholesale side and more specifically on Massachusetts, great to hear you're experiencing more demand in, I guess, beginning of the third quarter here. What do you think is driving that? Is that heirs, brands and products taking market share or seeing increased demand from customers? Or do you think there's also a factor with maybe some third party supply beginning to come off the market as some companies begin to exit the Massachusetts cultivation business? What do you think is the bigger driver behind the increased demand you're seeing there?

Yeah, to be honest, I think that for now it's more of the latter, meaning as I was sharing before, we're in the process of redefining, revamping our brands and our products, which means that we expect stronger effects from that in Q4 and Q1 of next year. And for the message set market from a wholesale standpoint, I think that the market is getting more balanced. now that it was before so you were getting to a place that we see that that supply and demand are getting to a better place so i think that we're um in the process of of benefiting from that uh more balanced market than it was before where where it was in a place where there was way more supply than demand i think that that has that has changed uh and is in the process of of changing in that market for us um it did not really show up in our Q2 results because we had worked on reducing inventory and reducing our capacity, and our capacity increase is hitting us now, I would say, on the good side. So we're confident for the future, but we think that it's a better market situation than yet a strength of our brands.

Great, great. Glad to hear that. Well, I'll get back to you. Thank you for taking my questions. Thanks, Andrew.

The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.

Good morning, everyone. Yeah, just wondering to further your commentary on sort of the balance sheet and some of the strategic initiatives you guys have done as of late. I'm just wondering if further asset dispositions are potentially in the mix at all, and if so, what you're kind of seeing in the industry with respect to valuation or just the capitalization of potential buyers that might be interested in entering the space?

Good morning, Matt, and thanks. I'll take the first half of the question, and Brad, feel free to add more. We're very happy with the footprint that we have today in the states that we're in. As we discussed before, I think we had some adjustments to make to make sure that we were in the right states for us and the states that we are are all accretive to our business. So we feel good with where we are and the efforts and the investments that we're making in those states. So there's no, at this point, question on our side on de-investing or doing any of that in any of the states. We're actually If you look at the states we're in, whether it's Florida, Nevada, New Jersey, Pennsylvania, Massachusetts, the, I'd say, openings of Ohio, and increasing our footprint in Illinois, I think we're going to get to that later. I think we're happy with the states we're in, and we're not looking at . Brad, I don't know if you want to add something.

Yeah, I mean, I don't think there's much to add in terms of valuations. We're not seeing a lot of activity in the market, and we're not getting inbounds. And in terms of what we're looking for, we haven't been active on M&A. Growth is not – it's something we're focused on more internal with our existing footprint, and we feel we're built for growth with our AU catalysts in Florida, Ohio, Pennsylvania. So it's really not something that we're looking at in terms of going out and acquiring new states or new companies.

Got it. Thanks. And then just one more question for me. I think you touched on this a little bit already with respect to the expectation for a mid-20s adjusted EBITDA range. Are there any assumptions in addition to what you talked about that you think are necessary in order to get their continued increase in your own brands through vertically integrated sales or not competing as much in the price compression in Florida? Just anything that... you know, goes into that assumption? And do you think that in order to achieve, let's call it a 25% EBITDA margin into the back half of the year, that you'll have to sacrifice some growth in lower margin activities?

I think it's actually rather the other round, meaning that we still have a pretty significant inventory. Pretty flat, you will get it quarter to quarter, which means that we have a bit of a war chest from an inventory standpoint that will have a bit of a negative impact, obviously, for the second half of the year on the margin. But at the same time, all the efforts that we've talked about from a cost of goods, from an SG&E standpoint, and from a revenue growth standpoint, will help us leverage better our costs. And overall, we think that they're going to even out. for the second half of the year and get us to maintaining that 25% range.

Great. Okay, thanks for all that. Okay, thank you.

The next question comes from Scott Fortune with Ross MKM. Please go ahead.

Thank you for the questions. Just kind of follow up on that. If we look at the cash flow profile into the second half of 23, can you kind of step us through? Obviously, you've mentioned the improvement in inventory. Is there a right level of inventory or as far as days of turns that you're looking from that standpoint to get to? And then kind of continue to step us through on the tax strategy and the payments expected in the second half. I know you said it could be lumpy here, but just kind of

a little more color on how the operating cash flow kind of plays out here in the second half that'd be helpful yeah sounds good i'll take the first half of your question on the uh inventory and turn to brad on on the rest of the question so from an inventory standpoint i would say that today we're about 85 percent um inventory when you compare that to our quarterly sales and when you look at best in class meaning that that runs in a 50 to 60 percent um inventory and we think that uh getting halfway by the end of the year would be actually a job well done. So that's kind of how we're looking at it from the goals I would say that we have from that standpoint. What I would add from an inventory is that on one side, we've seen great progress in some states and making great strides in reducing inventory and getting to the right place in some states. And then in other places, and specifically in Florida, We've had a record shed house harvest during the Q2 that has represented a pretty significant bump in inventory for us, which actually is a good thing for the state, but that has been something that's got us to a place where inventory remains the same. But big picture, we're at 85% of quarterly sales and halfway to best in class is pretty much what we're looking for for the end of the year.

On the just more general color on operating cash flow, you know, there's various drivers impacting operating cash flow. Of course, profitability, also working capital timing. So understanding there will be swings in terms of the timing of payments, the timing of collections, how successful we are in reducing inventory to David's point, the time we receive ERC credits. So there's a lot that goes into it in terms of the puts and takes. Overall, we're managing cash flow. based on these variables and balancing these puts and takes with the target of being positive cash flow from operations for the year. In terms of tax specifically, I don't want to talk too much in terms of tax strategy. We typically pay on a one-year lag, and we've been fully paid in for 21. So we expect at the end of the year, the majority of our balance will relate to the 23 tax liability.

I appreciate the color there, Sam. And if we can follow up a little bit on the FDA side, you know, this is decreased quarter to quarter, you know, it's at 40% with kind of flatter growth from that standpoint. But you indicated, you know, continuing to move that down, maybe a target low 30%. Just kind of step us through kind of the different levers or different cost efficiencies, optimization that are still look to pass through on the SG&A side and how we can look at that towards the end of the year here.

Yeah, no, happy to. And when we spoke to the 30%, that's for adjusted SG&A, and that's still our target to exit the year, roughly 30%. I believe we're at 34% today. We were at 37% at the end of the year. So we made progress, and there's still more progress to be made. We took additional actions in July that will help bridge us to that 30%. And so what we mentioned is while we expect to see some pressure on adjusted gross margin, it should be offset by the SG&A leverage. And so that'll maintain the mid-25% or mid-20% adjusted EBITDA margin. To the extent, you know, pricing pressure lets up or inventory depletion efforts subside, there's upside, you know, to the 30% adjusted EBITDA range. That's probably more of a 24 opportunity. But, you know, that's kind of how we're looking at it for the balance of the year.

I'll jump back in the queue. Thanks, Scott.

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

Hi, good morning. Thank you for taking my questions. Just first, about the Florida market, just looking at the environment there. I know that you mentioned pricing and discounting. Do you think that that's going to continue to happen? And for how long do you see that sort of pressure persisting in that state? And then just looking into 2024, in terms of your expectations for expanding your footprint in that state, do you have any rough estimate in terms of the store that you plan to open?

um and and when could that could that happen in terms of the cadence there thank you yeah thanks very cool um i'll i'll answer first to the question regarding the the pricing and what we see from floyd standpoint and then then i'll address the uh the stores and what we see for for the remaining of this this year and for 24 and um why there's a bit of a change on that front in 23 and not in 24. so from the pricing standpoint um Obviously, we don't know if there's going to be more price compression happening in the second half versus what we've seen recently, meaning it hasn't stopped and there's still price compression happening. That said, for us, I think one of the key things that's happening is that agreement that we have with Kiva and the fact that we're going to be launching the Kiva products by Q4. And if you look at that, it involves high-margin products. Our edible mix is only 6% of our current mix and overall edible is 14% of the mix in Florida. So through that partnership plus the CapEx investment that we're doing in Gainesville, that is part of that 30 million for this year, by the way, but we expect to actually close the gap or be close to closing the gap on edibles and that will help us overall also, I would say, avoid some of that price compression. So not sure what's going to happen. And I think it's also a different story when you look at different form factor, then less price compression on flour, more price compression on oil products. But that's how we think about the price compression and the situation for Florida. When it comes to the stores, so we're already open 10 stores this year. We're planning on having another two or three by the end of this year that would get us, let's say, to 64 stores by the end of this year. And then we're still in the mindset that we'll open in the range of 10 stores next year and get to 75 by the end of 24. The reason why we're, I'm not going to say we're pausing, but we're going not as fast as we had planned on those stores for the second half of the year. I'd say there's two main reasons for that. The first one is we really want to focus the team on the ramp up of the 10 that we've opened so far this year, and they haven't ramped as fast as we want them to ramp. And hey, resources are limited, obviously, and we want to make sure that we put our resources on the right thing. So for us, it's important that the team is focused on getting the best out of the 10 stores that have opened so far this year, and getting the right recipe on ramping up fast. And then we'll put again the pedal on the metal on opening new stores in Florida. So that's, I'd say, one reason. The second reason is that we also want to opening pretty fast on the stores in Ohio, in Connecticut, and in Illinois. And that's seven stores coming up between the end of this year and I would say the very beginning of 24 in these three states. And for us, it's important to have that focus for the remaining of the year. So it's a bit of making sure we're having the right recipe on ramp up of new stores in Florida. And at the same time, making sure that we're very focused on opening the stores in Ohio, Illinois, Connecticut.

Thank you very much for that caller. And then just maybe looking at Pennsylvania, in terms of the price environment there in that state, I think that we've heard some betters talking about stabilization. Are you seeing something similar?

Yeah, so Pennsylvania, that's a market that's been roughly flat on market size year over year, but continues to add stores as folks look forward to what is going to be a massive adult use market there. BSA has flower pricing down roughly 4% this quarter in Pennsylvania. We were able to make up about half of that by increasing our transactions, but overall we were slightly down in Pennsylvania because of that. So we are seeing a bit more compression than other states. Some of our other markets, you know, which are not medical, have adult use and are called more stabilized, have seen more stable pricing and even a recovery in some states. I think Pennsylvania, Florida, you know, two markets that are still ramping ahead of adult use that are medical today are seeing a little bit more of the compression this quarter and this year.

And the other color I would add to what Brad is saying is that despite that, we're seeing the fall of EBITDA and the EBITDA in Pennsylvania maintaining or continuing to grow, which is a bit of that similar story as Nevada. a state that is kind of steady from the top line with a bit of compression, clear focus on how we work better as looking at the 360 approach on the state, and it's paying off on that side. So a bit softer on the top line and doing good on the bottom line.

Thank you very much. I'll call back Nicky. Thanks.

Thanks, Eric.

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