Q3 2020 Harvest Health & Recreation Inc Earnings Call
[music].
Good afternoon, and welcome to the harvest and let's see.
<unk> third quarter 2000.
Well actually no.
Well, that's the company's performance outlook at.
At this time, all participants will be able to listen only mode. The call will be <unk> prepared comments by management followed by a question answer session ask a question. Please press Star then one on your telephone keypad withdraw your question. Please press the pound.
Do you need assistance please signal.
Especially by pressing the Star key followed both Euro today's conference call is being recorded I'd now like to turn the conference over to your host.
[laughter] director Investor Relations hardest. Thank you you may begin.
Thank you Jim Good afternoon, everyone and welcome to harvest third quarter 2020 earnings call.
On today's call, our founder and Chief Executive Officer, Steve White, and Chief Financial Officer, Deborah Keely.
Earlier today, we issued a press release announcing our results for the quarter ended September Thirtyth 2020, the press release and Powerpoint presentation are available on the company's website and filed with the Canadian Securities Exchange and see Dar.
Before we begin I'd like to remind you that comments on todays call will include forward looking statements, which by their nature involve estimates projections goals forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in.
The forward looking statements.
Certain material factors or assumptions were applied in drawing a conclusion or making a forecast in such statements.
These forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events.
We undertake no obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise, except as required by applicable law.
Additional information about the material factors and assumptions, forming the basis of the forward looking statements and risk factors can be found in the company's filings and press releases with the Canadian Securities Exchange and SEDAR.
During today's call harvest will refer to certain non IRS measures that do not have any standardized meaning prescribed by IRS, such as EBITDA and adjusted EBITDA, which are defined in the earnings press release, we issued earlier today.
Reconciliations to identify our EPS measures are contained in the press release and our filings. Please.
Please note all financial information is provided in us dollars unless otherwise indicated I.
I will now turn the call over to Steve White Harvest founder and Chief Executive Officer. Please go ahead.
Thank you Christine.
Good afternoon, everyone and thank you for joining us.
I appreciate your continued support and interest in harvest and the opportunity to provide you with an update on our organization.
Given the significance of last week's election results and the potential impact for both the industry and the harvest will provide some commentary on the watch now comes before reviewing our third quarter results.
[noise] and I'd like to start in Arizona.
As many of you may be aware last week, Arizona voters delivered a rezoning victory for potential candidates consumers, but by voting, yes on prop seven.
A ballot initiative to a lot of it will be implemented recreational Canada sales here in Arizona.
This historic outcome represents another significant milestone in the inevitable March towards a full repealed prohibition in the United States.
The success of the recreational initiative in Arizona is uniquely significant for several reasons.
But I want to focus on one.
The Motor Protection Act.
The border Protection Act or VPA as it's often referred.
Effectively prevents the legislature from altering successful ballot initiatives, which means that the rules and guidelines delineated in the initiative will remain in effect unless superseded by another ballot initiative.
This unique feature of Arizona's constitution inform how we drafted different critical provisions of the recreational initiative allows.
Allowing some flexibility where appropriate but ensuring that fundamental aspects of the initiative be enacted as intended.
Let me be very specific here.
As an industry when you evaluate the opportunity for medical and recreational programs across the country. We tend to focus on the revenue that that the state is expected to generate but that only tells part of the story.
We typically cannot accurately predict the stability of the regulatory structure or the number of potential competitors long term in a given market.
The stability of the market structure and predictable number of competitors is what makes Arizona unique.
Because of the license structure, specifically detailed in the initiatives, we have a high level of confidence in our understanding of how licensee will work and the maximum number of potential competitors that can operate on.
Yes, and until the market structures changed at the ballot box.
Talk a little more about this later.
Devoted protection that is the biggest reason, we view, Arizona as a market with a stable regulatory structure that affords us higher confidence in the long term viability of investments.
As outlined in the crop to seven existing medical operators may apply for a recreational license on January 19 2021.
The Arizona Department of Health Services will then have 60 days to approve or reject the application otherwise it was assumed approved.
Theoretically this timeline may permit recreational cannabis sales, Canada sales at the end of the first quarter of 2021.
Let's be clear however that.
While we have a strong and experienced regulator and mature medical market. We do not expect the expansion with Canada of the candidates market to include recreational sales to be perfect.
As we've seen in other instances where existing medical markets were expanded to include recreational use.
We expect that there could be some regulatory delays logistical constraints or supply shortages in connection with the rollout.
But given the maturity and stability of the Arizona medical market. We would expect these hiccups to be relatively short term and readily addressable in nature.
Similar to other newly operational recreational markets, we expect strong demand.
We are confident that the industry in Arizona will be able to adapt and meet the needs of both medical patients and recreational consumers.
Harvest has been preparing for the implementation and rollout of recreational cannabis consumption in Arizona, and we'll be ready to serve consumers assume is allowable.
We've already begun a significant awareness and marketing campaign designed to boost our company profile and educate potential consumers about the availability of recreational cannabis coming in 2021.
We have increased our own internal production secured additional product supply and invested in technology and store Refurbishments.
Our organization is well positioned and ready to welcome recreational consumers, while continuing to serve our existing medical patients.
Now a little bit about the market.
One conservative economist hired by the campaign to estimate tax revenues forecast, but the Arizona cannabis market will reach.
Approximately $2 billion at maturity.
For him to be correct, Arizona would have to have lower adoption rates and any other recreational state of maturity.
Needless to say, we are more optimistic on the market potential and we believe that the market will exceed $2 billion at maturity.
The time it takes for the market to reach maturity will depend on several factors, including first the timing of initial recreational cannabis sales second the ease of implementation for existing operators third availability of product to supply market demand is for the sophistication of the illicit market.
In these areas, Arizona compares favourably to previous markets that have expanded to a lot of recreational sales.
While the size of the market matters, so too does the number of licensed operators.
Arizona is unlike other recreational markets in that each licenses a FERC fully vertical.
As is the case in the medical market.
Existing operators in good standing in the medical market may apply for a recreational license, which means up to 130 recreational license applications may be submitted.
In addition in counties with less than two dispensers. The state may issue additional licenses in order to reach a minimum of two licenses per county.
Adding approximately 10 or store so storefronts.
Unlike other dispensary those newly permitted locations must remain within the county.
At some point in the future 26, social equity license May also be issue.
One way to estimate the expected average performance of the store would be to take the conservative 2 billion dollar total market size and divide by 166 stores.
Based on our view of the market, we have a high degree of confidence that 166 store locations represents a fair approximation of the total retail foot footprint in the state.
Buying those metrics the average store would realize a little more than $12 million per year in revenue.
In practice of course, some store fronts will underperform or exceed the average revenue generated per per store.
With the recent acquisition of three additional licenses in Arizona harvests expects to be operating at least 18 of those stores.
Pending necessary approvals, we plan to serve the recreational market are at our existing retail locations.
By co locating medical and recreational sales at our existing locations, we will be able to serve recreational consumers much more quickly avoid capital expenditures required to construct additional dispensers and realize greater operating leverage on those incremental recreational sales.
With the exception of the three newly acquired licenses, which we plan to use for three additional stores all of our stores are fundamentally ready to serve recreational customers today pending necessary approvals.
We will be working closely with the Arizona Department of Health services local municipal agencies and other community officials to position our dispensers commence recreational sales as soon as possible.
We do expect to provide more details on the development of the Arizona market during our fourth quarter results call in March when we will also introduce full year 2021 guidance.
Turning now to the broader election results in the U.S.
The election of Joe Biden as us President as a promising developments Mccandless reform. However, our optimism for reform is limited by developments in the Senate.
As an industry, we must work hard and with a unified voice in our efforts to garner support from electives, who come from states that have opted for candidates reforms, but.
But the Senate leadership, frankly has not been friendly to our cause in spite of big victories in each and every state that had the option to choose cannabis reform.
Our view on federal form has not changed.
We are confident that we will see federal reform and that it will be significant the public demands. It as is evidenced by candidates boats in five states. This last election cycle, but the timing of that reform is less clear.
This also means for us it's business as usual.
We will continue to build and operate our business, making intelligent investments increased our revenue and control our costs.
Now turning to third quarter results.
Harvest has a plan to return to profitability in our third quarter results Mark continued execution according to that plan.
I'll provide you an update on our continued progress discuss recent developments and provide an overview of our core markets. Then Deborah will present more detailed financial results and guidance.
Our third quarter results demonstrate improving quarterly trends and underscore the considerable progress we've made over the past few quarters.
Third quarter sales of $60 million to $61.6 million represents an 86% increase year over year, and an 11% increase from the second quarter.
Higher revenue sequentially was driven by growth in existing operations in our retail wholesale and licensing segments.
In September we opened additional relocate.
Additional retail locations in Phoenix, Arizona, and Cranberry Township, Pennsylvania.
Now turning to costs.
Over the past year harvest has been able to significantly reduce costs and streamline operations lowering cash operating expenses by more than $30 million on an annualized basis.
We are pleased by the progress that we've made and we will strive to keep to control costs moving forward as we continue to scale, our business and increased revenue.
On an absolute basis revenue.
And gross profit or increasing while overhead is decreasing resulting in higher adjusted EBITDA.
Third quarter, adjusted EBITDA increased to $10.5 million up from $4.1 million during the second quarter.
As part of our plan to improve our overall financial performance, we are actively managing our liquidity.
Harvest ended the quarter of 23rd quarter of 2020, with approximately $63 million in cash and $294 million in debt.
We have sufficient capital to service, our debt and 2020 and 2021.
And we have the flexibility to accelerate or delay capital expenditures as our capital position changes, we will make necessary adjustments to our plan to ensure that we meet our obligations while pursuing profitable growth.
Turning now to recent developments.
Since the end of the third quarter, we have opened two additional retail locations in camp Hill, and King of Prussia, Pennsylvania, while it has only been a few weeks we are seeing strong initial results from those locations.
On October 2nd.
We terminated the agreement to sell two additional California retail assets to high times holdings for $6 million as a reminder of the sale of eight cap, California retail assets was completed in June.
On October 28, 2020 harvest completed a bought deal financing raising gross proceeds of approximately $46 million Canadian or approximately 34, and a half million dollars use.
The company intends to use the proceeds for a combination of purposes, including debt service capital expenditures expenditures excuse me and working capital.
On October Thirtyth harvest completed the purchase and license transfer of th chocolate, including licenses for cannabis in Canada's products manufacturing, Colorado.
Consideration page paid was immaterial in the terms of the deal were not disclosed on.
On November 2nd Harvest announced the settlement of ongoing litigation with Divine Holdings.
Under the terms of the agreement harvest acquired three verticals.
Vertical medical licenses in Arizona in exchange for the forgiveness of the outstanding $10.45 million risk.
Receivable owed to harvest by Divine Holdings.
Harvest will also have the right of first refusal on four additional vertical medical licenses in Arizona.
We're very pleased with.
With this resolution.
Finally, with respect to the ongoing COVID-19 pandemic.
We have been able to manage any challenges related to COVID-19, while following CDC guidelines for best practices.
All of our facilities have remained online with modified operating procedures to safeguard employees patients and customers.
We continue to monitor our sales trends are impacted by COVID-19 them its macroeconomic repercussions.
As we've highlighted before part of our strategic plan includes making targeted investments with fast and favorable returns in our core markets.
During the three months ended September 2020, we spent approximately $4 million on capital expenditures with the majority of those investments made in Arizona, Florida, Maryland, and Pennsylvania.
Our four core markets or medical markets with limited license regulatory structures continued patient growth and future potential upside from recreational cannabis consumption.
Our home state of Arizona is one of the fastest growing medical markets in the US and is that now obviously poised to allow recreational use as early as the first quarter of 2021.
Harvest has the largest retail presence in the state with 15 open retail dispensers.
And with the recent settlement and the case with Divine Holdings we.
We acquired three additional vertical licenses, bringing our total retail presence to 18 locations when fully built out those locations are supported by cultivation facilities in Campo Verde, a mirage Phoenix, and Wilcox and processing manufacturing facilities in Flagstaff in Phoenix.
We are expanding into our cultivation and processing at the Phoenix facility as well as greenhouse cultivation at Wilcox with new capacity expected to be completed during the first half of 2021.
In Florida, we operate six open retail dispensers, an indoor cultivation and processing facility and a secure outdoor cultivation and processing facility. We are expanding our cultivation capacity with new product and store openings coming into the market in 2021.
Maryland has been a solid limited license medical market for several years several years.
In Maryland, we currently have three open retail dispensers, and a cultivation and processing facility.
This is a net wholesaler in the state of Maryland with strong sales outside of our retail operations.
The Pennsylvania market has experienced rapid growth and remain supply constrained harvest. Currently operates eight opened retail dispensers in Pennsylvania, and the cultivation and processing facility in Redding harvest has five retail licenses, allowing for up to 15 potential retail retail locations.
We are expanding cultivation and manufacturing operations to alleviate product supply constraints enhance margins and support the opening of additional retail locations in 2021.
Our focused strategy and commitment to investing in core markets is already contributing to our improved financial results.
We will continue to optimize operations, while pursuing profitable revenue growth.
We are very excited and well positioned to serve the recreational cannabis market in Arizona in 2021.
We look forward to demonstrating further progress on our plan to return to profitability over the coming quarters.
I'd now like to turn the call over to Debra who will discuss our.
Specific financial results and updated guidance. Thank you Steve Good afternoon, everyone I am going to provide an overview by third quarter financial results and updated guidance for 2020. Please refer to the press release and slide presentation football Decaf, we had a great third quarter building upon the momentum from our improved second quarter results.
Our strong performance in the third quarter was driven by a combination of revenue growth cost control and operating leverage.
For the third quarter revenue was 61.6 million, representing an increase of 86% year over year and 11% sequentially revenue growth was driven by growth in existing retail and wholesale operations and initial contributions from key new retail locations opened in September.
Approximately 85% of our third quarter revenue was derived from our core markets, Arizona, Florida, Maryland, and Pennsylvania.
Revenue mix during the third quarter was 75% retail, 14%, both south and 11% licensing effect.
As of November 10 harvest operated our managed 39 retail locations in seven states, including 15 open dispensary in Arizona.
Third quarter same sales.
Same store sales increased by 49% year over year FY 16 stores that were opened during both periods. Despite.
Despite the long operating history for our stores, we are still realizing strong growth in our retail bank.
For the 35 stores that were opened in both the second and third quarters of 2020 same store sales increased by 12% sequentially.
During the third quarter, we realized a 16% increase in traffic and a 4% decline in basket size compared to the second quarter. This represents a return to a more normalized pattern as our retail locations were opened 10 store visits during the third quarter. After COVID-19 safety restrictions to reflect that.
Gross margin before biological asset adjustment during the third quarter with 46.6% compared to 35% net third quarter of 2019 and 42.1% during the second quarter of 2020. This.
The sequential improvement in gross margin in the third quarter was driven by improved margin performance in our wholesale and licensing segments.
Partly offset by lower gross margins associated with our retail revenue, we remain focused on improving the profitability of our business and we expect our gross margins will continue to trend upward overall with some quarterly fluctuations due to mix and market changes.
Third quarter, EPS, DNA was down $21.6 million or 35% of revenue compared to 41% of revenue during the second quarter.
We expect EPS DNA as a percentage of revenue will continue to decline over time as our revenue growth outpaces increases in expenses.
Net loss for the quarter was 2.1 million compared to a net loss of 18.3 million during the second quarter of 2020.
Third quarter adjusted EBITDA, excluding the impact of biological asset adjustments was 10.5 million an improvement compared to the second quarter adjusted EBITDA of 4.1 million. This.
The sequential improvement was due to a combination of revenue growth economies of scale and additional reductions in operating expenses.
I'm. So proud that we continued to build momentum in the third quarter further improving our adjusted EBITDA. We really appreciate all the efforts from our team to improve and grow our business.
Turning now to guidance.
We are increasing our 2020 full year revenue target to exceed $225 million.
From our prior target of 215 to 229, the magnitude of our full year revenue in excess of $225 million depends on the timing of the number of events in process, including potential divestitures of non core assets, which may result in a decrease in revenue.
The revised target reflects the strong results year to date, while taking into account recent performance and the inherent lack of visibility given the current macroeconomic environment.
The revenue forecast includes continued growth driven by retail dispensary openings same store sales growth and new and expanded cultivation and manufacturing operations.
Forecast for 2020 assume no impact or disruptions that we don't successfully manage including has caused by the COVID-19 pandemic.
Harvest ended the third quarter of 2020, with approximately 63 million in cash and $294 million in debt as of November 16, Parvus had approximately 87 million and available cash.
Debt service for the remainder of the year is approximately $15.2 million, which we expect to be offset by incoming capital. We estimate sources of capital between 40, and $55 million potentially including new and extended financing arrangements and divestiture of non core asset.
During the fourth quarter, we already extended the debt maturity of 6.5 million due in October 2020 by one year to October 2021.
As Steve highlighted we received approximately $32.4 million in net proceeds from a bought deal financing in October.
Capital expenditures for the remainder of the year are expected to range between seven and $15 million. In addition to the 21 million spent during the first nine months of 2020.
We are actively managing our liquidity and have sufficient capital to service our debt in 2020 and 2021.
As Steve indicated earlier in the call. We are committed to returning to profitability through a combination of targeted investments operational efficiencies and scale and cost controls.
Over the past few quarters, we have shown considerable progress and we look forward to building on our recent accomplishments in 2021, we believe harvest is well positioned and we are very excited for the opportunity ahead with that let's open up the call to question.
As a reminder to ask a question you need to press star one on your telephone to fly a question first the pound or hash key.
Please stand by what we call the TNT roster.
Our first question comes from Kenric.
Bye.
Eightv capital markets. Your line is open.
Thank you and good evening Steve.
Steve Congrats on the quarter, great color on Arizona, I Wonder you spoke to the market at maturity, but certainly there are a number of industry groups now it's hard to handicap that first year potential revenues can you sort of speak to you. The reasonableness of the estimates that are out there in the public domain for the the first year of rack sales, Arizona or filing.
I wish to thank about the the ramp of rack sales in India. One just as an example, fine phase and then a quick follow up to that.
Sounds good.
Thanks countered the the difficulty and answer that in answering that question is we don't know in the direct sales begin.
And so I've seen some estimates and frankly not paid to close attention to them.
Because they are usually accompanied by a misunderstanding the Arizona market anyway.
What I can say is we do expect a significant expansion of the market in 2021.
But the the reason we're not ready to say what year. One is going to look like is because we don't know.
We can't determine the precise month in which those wrecks sales will begin so we're kind of handicap the what we're hoping to do is that.
In the next quarterly call, we will have a very good idea of when sales will begin and at that point. We can give you a good estimate of what our entire organization is going to do in 2021 and have further discussions about the development of the Arizona market. In addition to that so I wouldn't say that when you look at the maturity curve.
And you look at what has hindered other states I listed a number of factors that we've seen in other states that cause states to not mature as quickly as they could Arizona does compare favorably to most every state that we have seen add recreational sales to an existing.
Two existing canvas sales.
Thanks, Thats, great and just a clarification on on define our here expect our stores closed three stores to be in operation as a first off 21 discussion the or later and how should we think about not just bringing on those three but what would be that is a triggering event or how do we think about the other or that you have.
Thanks, Roger if used alone.
So to speak to that as well please.
Yes. So in terms of how quickly we are able to get those stores online.
We were not providing that information yet because.
This was a settlement that we just reached.
And then we do have some some locations in process, but that the process of getting those approved we aren't far enough along to give you precise timelines about when we're going to get them open.
Our understanding how good the market is going to be obviously as an organization. It's a high priority of ours to get those open as quickly as possible.
In the second half of your question was what I forgot sorry counter.
Honestly that was honest and as always at a first cost 21 ill, let us cover that'll diagnostics, if I could just squeeze one more quick one for Devin and get back in the queue.
They were just with respect to the revenue attribution and the gross margin profile that you generated this quarter is there in on material mix impact that is skewing that gross margin performance in quarter and your expectations that expands again both.
As a shared hfts, all boats kind of horizon or rising tide type of thing across the business any incremental color you could give us on not that skew to Pennsylvania, which skews and one rather be ready as well. Thank you.
Sure. So we were very pleased with our Q3 margins then as we as we talked about in the past margins are based on product mix and they may fluctuate quarter to quarter, we do not expect to see we do expect to see continued improvement in our margins as we increase our cultivation and manufacturing capacity.
And.
The Florida, Pennsylvania.
In Arizona.
Okay. Thanks, I'll get back in queue.
Our next question comes from airing grain was aligned global your line open.
Hi, good evening and congrats on the quarter.
So first question for me is also on Arizona, but more towards cultivation.
So first off just want to know if you could provide any color in terms of the cultivation expansion are you mentioned for first half 2021.
Any color you can provide in terms of how much additional opco.
Let's face your square footage, which would come on with that and then secondly, just looking at the market just considering there is doing a few more of the bigger MISO. So we're in there, but a lot of mom and pop how do you think that potentially kind of impacts the ability for operators tend to stay to expand cultivation to meet people use demand in such a quick.
Fashion. Thank you.
Thanks, Aaron so here's how I look at it it's interesting we have a lot of conversations about cultivation and Arizona are what I would remind everybody is that because.
It is a vertical of license it means that.
The current market, we have 130 licensees, who in that that allows us to have 130 store fronts, but it also allows us to have 130 cultivation facilities in the state of Arizona.
The proportion that you don't see in a lot of places obviously, what that means is for us. The most important thing to concentrate on his storefronts in the state of Arizona.
That being said we have said that we are a net buyer in the state of Arizona, we are working to.
Increase our existing capacity in the state the challenge that we have is when we look at the return on dollars invested in cultivation in Arizona, and we compare them to some other states that have shortages of.
Of supply it tends to be true that we would route rather allocate those dollars to some of those other states.
And so while we do plan on increasing our cultivation capacity in Arizona is not one of the highest priorities for the organization in terms of cultivation or just generally we don't think thats going to impact the market in terms of.
The size of some of the competitors, it's very interesting because Arizona has a wide variety of business models.
They have everybody who has like US 18 licenses all the way down to a number of operators, which was simply want some of those operators with one license of concentrated on the wholesale market, both with cultivation production and manufacturing.
And so they have the ability to compete just like anybody else and some of those models that they don't have extensive retail footprint, that's really the best place for them to be competitive and see that they can get into.
Into our onto the shelves of people with more stores.
So we have seen some of those smaller competitors are people with less licenses actually expanding their capacity in anticipation of this vote as well.
Thanks for that color Thats Super helpful. And then just turning back to the election, but more on a national federal basis, just given there's been a lot of speculation around potential changes to cap can best at the federal level.
The Senate still looks like it will probably be decided in January which might kind of impact that but I do want to kind of takes it back in and get your view in terms of how you think about standing up the business longer term prepared for different scenarios of legalization.
Typically as it pertains to our potential potentially building out brands of your wholesale business just given you've historically you've been more focused on automating now thank you.
Yes, I think it's a great question and the way we look at it is this is still.
And is going to be for the near future a state by state rollout of cannabis opportunities.
And when you look at.
You look at the opportunity set in front of each and every organization in Canada is that opportunity is dependent upon the particular states in which they operate.
And so we still believe that no matter what changes we do see ultimately do you see on the federal level, that's going to be how it plays out in terms of brands as we all know in the end or in the very long term brands are going to matter and they are going to matter more than anything else.
I've been pretty vocal in saying I think that it's a little bit premature to talk about that today, because we don't see a lot of brands, who have successfully crossed over a number of different states. Because we just don't have enough. We don't frankly have enough states, where they are able to sell their products.
To see if thats actually been effective.
So for US that this strategy is the same it's to take a look at how was state.
Rolls out its particular program examining the regulatory regime and make a plan about how we're going to be best positioned to capitalize on that particular market.
Yes, the vision that we have that's the vision that we are going to be pursuing over the next couple of years until something very major changes.
Okay, great. Thanks for the color ill jump back in the queue.
Thank you.
Our next question comes from Graham cleaner will eight capital your line is open.
Yes, hi, good afternoon, and thank you for taking my questions. Steve I just wanted to follow up on the discussion.
In the previous questions regarding the capacity and bring a whole circle with respect to that benchmark you talked about on potential 12 million per store on average in rack in Arizona. If you think about some of the other states that have recently gone like it seems like the real key differentiators for success in driving revenues that data.
That average is really been securing that supply having products on the shelf. So given what you said to add to the prior question.
Yes, harvest anticipating any meaningful supply shortages in the early days of rack in Arizona, you mentioned that in addition to expanding year on cultivation capacity are working to secure additional sources of supply. So how how tight is that market expected to get and are you doing the work now to make sure that day one.
There is an excess of supply.
For harvest and maybe the same can be said for some of the other players not in the Arizona market. Thanks.
That is a great question Graham Thank you.
So Arizona has let me give you. An example of the way that we've started looking at this to ensure that we were ready.
So first of all Arizona is not supply constrained as a number of other states who have recently come online are supply constrained.
But in Arizona, because you have the vertically integrated licenses what that allows you to do with each and every licenses have a retail store and an offsite cultivation and manufacturing facility as well.
So for US obviously with 15 and now 18 licenses were not going to have 18 different cultivation facilities.
That has allowed us as an organization to effectively lease the rights under some of those licenses.
Other people, who are interested in operating cultivation and manufacturing facilities.
In anticipation of rack.
The rack rollout next year many.
Many months ago, we started changing the way that we do those agreements and what we started doing as we started ensuring that when those facilities are productive that we have a right. The first right to take product that comes out of those facilities.
So for a number of months we have anticipated.
As a lot of people know our internal polling for the campaign has been consistent throughout this process. So at harvest we have been betting.
The the vote was going to turn out the way that it did and as a result, we've adjusted our business practices to capitalize on the opportunity and utilizing things like the unique licensing structure that we have in Arizona.
Okay got it understood appreciate that insight. There then it lot of talk about revenue potential here I'd be curious to get your thoughts specifically on Arizona retail on whether you think there is going to be any major differences on onto the four wall economics or the overall profitability at retail.
Is that expected to stay the same improve potentially to create a bit as you head into a rec market.
Well, if you think about the short term.
It would be when you compare it to other states what you've seen in other states is.
The there.
There is a package or a passage of a law that allows for recreational sales.
Thats, followed by significant infrastructure development.
So if you think about how Arizona is rolling out that's not the way it's going to be here. It is really true that in Arizona, you are taking existing stores and you're pushing additional customers into those stores.
So initially.
We're going to see an increase a significant increase in operating leverage in the state.
Very intentional and how we devise that initiative so that we take the existing infrastructure. That's already been developed it allows us to get the program online faster and it allows to allows us to not have the delays that we've seen in other states in getting in getting.
Supply out to everybody.
Okay got it.
And then just a last question ill jump back in the queue switching gears with respect to the guidance here.
And the increase in the quarter you mentioned, 85%.
The revenue this quarter comes from your core markets in terms of I guess, yes.
Look for for the remainder of the year and what's really driving that growth is that is that split is expected to meaningfully change at all on heading into the fourth quarter here and maybe you could give that a pecking order in terms of those core markets in terms of.
Growth rates.
On how thats changing I'd imagine that.
Something like Pennsylvania, where you're opening more and more stores as projects exhibiting AG pretty fast growth at this point in time.
So we expect to have full year revenue over 225 million how much of that over will depend on whether or not we complete divestitures before the end of the year. The 85% revenue comes from our core states, we expect that percentage to kind of stay in line and continue.
And as far as the mix between.
Retail and wholesale inline.
In licensing we expect that next kind of stay about the same us up.
Okay I understood. Thank you very much.
Thanks, Rob.
Our next question comes from Andrew pricing with Stifel. Your line is open.
Thanks for taking my questions and congrats on a great quarter guys.
I wanted to talk a little bit about the.
I was on them and the snowbird effect.
May not have occurred this quarter.
Could you talk a little bit about how that may have.
You know either benefited or impacted year.
Performance here and.
How is that different from the typical year, where.
Coal that is not necessarily in the picture.
Yes, I mean, we will it's a great question the.
The answer to the question probably does rely on fourth quarter results, though because a lot of what we a lot of the snowbirds, we see them.
Migrate if you will.
To the Arizona is warmer temperatures in the fourth quarter.
We don't know that a lot of.
A lot of the people who participate in the recreation or excuse me in the medical program or Snowbirds, because you have to have a permanent residence in the state of Arizona to have Arizona medical card.
What I would I think that that that question really has upon is in future years.
On the question of how good our how effective are we going to be in educating visitors on the availability of of recreational consumption in the state of Arizona.
And when you look at other states that are heavily dependent upon tourism they've struggled in that area frankly its.
And so we have some different plans.
Some different mechanisms to try to activate some of those visitors are when they do come to Arizona in the in the winter months.
And.
And typically in the summer months in Arizona, you see.
Residents of Arizona.
Not in the call the year, obviously typically sleep the hot weather.
How how has that impacted Q3, if at all.
So we don't know if it is that Amir material impact in Q3, what we have said in years past is that there is a seasonal slowdown in the summer months in Arizona.
But we havent.
Mentioned or Havent talked about that are disclosed any information related to this.
This particular quarter, what what you can do is there is some information that is published by the state on total consumption numbers.
And if you extrapolate from some of those numbers your hypothesis about co bid having a dampening effect those numbers are probably support your hypothesis that cobalt has a dampening effect on people migrating to and from Arizona during the hot and cold months.
And just to follow on on your comments of tourism and.
And the coming Rec markets.
[music].
I think you guys have.
Our partnership with the.
The cookies brand, which.
We haven't really seen a lot of successful guidance, but I would argue that cookies is probably.
One of the more successful ones.
How do you guys.
Our plan to leverage dive in.
In particular.
Do you think it could provide you with some kind of competitive advantage in the state.
Yes, obviously, we wouldnt have that relationship if we didnt think that it provided us with a competitive advantage and I would agree with you that they've done a fantastic job of.
Of carrying a name across state lines, maybe maybe one of the best to have actually successfully done.
Today, we've been real pleased with the success of our program with them.
And we do plan on continuing to leverage the partnership.
To drive consumers to our stores in both the medical and ultimately in the recreational market as well.
Thanks for taking my questions and congrats again on the great quarter.
Thank you Sir.
Our next question comes from Pablo.
Cantor Fitzgerald your line is open.
Thank you just two general questions.
Sales in the quarter.
Talk about whether your Korean retail stores that opened forming underperforming or being in line with the market I mean, I would counter the opening about $6 million to $7 million for an annualized terms.
On the advertising for the state is about nine to 10, So correct me if I'm wrong, but just remind us obviously you have 15 stores how.
How are they performing versus peers.
Related to that.
The standard logic over.
The way the plan is being developed and you are seeing over 150 stores people not open new stores with just over.
Or should we just rig services internet stores, but what are you from quarterly for someone else and I decided that excuse me, which is double my number of stores that the way to the.
The regulation. It allows you to do that right I am just wondering enjoyed case Joes jeans foot offering breaking your image stores because of just cash flow issue or what eventually you would open you would that what you're sort of counter fears of doing that thanks.
Thank you Sir.
I'll take the questions in reverse.
First the initiatives as drafted requires co location of stores. So.
It's not a choice that were making to not double the number of stores. It is a requirement.
And so it is going to be true in Arizona that existing medical stores will serve as both.
Medical and recreational patients through the exact same stores.
And that will be true of any additional licenses issued pursuant to the recreational program as well.
With respect to market share in Arizona.
I think I would suggest based on on the numbers that we have seen produced by the state of Arizona that you're.
That your numbers on the average stores are quite high.
And what Arizona does is they don't actually publish the actual revenue generated per store.
The information provided is the total amount of pounds.
Purchased at cash registers.
The challenge with extrapolating from that what the total market size in dollars is twofold.
One it.
Presumes certain pricing element.
Which I don't think is fair to presume because they are the people do charge vastly different prices in the state of Arizona.
And secondly, the way that people record.
The weight in the.
System, the Arizona system differs.
And so in some instances those weights are under recorded in some instances those weights are over recorded.
What I would say about market shares because we don't have enough information we havent.
We will be commented on what our market share it looks like in the state of Arizona.
We do anticipate once recreational sales start that we will have an avenue.
To be able to see or have some visibility into the revenue derived by the program because of the excise tax in the <unk> and how the revenues going to be dedicated to a number of programs.
When that information is available to us we will happily.
Talk about it being quarterly calls.
We don't have any shyness I would say that we are confident that when we produce that information it will show well for us.
Okay, and just on that point of MBS on early decision they've indicated that you won 91 made it on July nine before but it but I'll move on essentially the co location. That's it or would you sort of choice. As you said do you foresee that changing over the next 12 to 24 months. It is unclear whether it stays pretty much in the way.
It's a good question Pablo and the reason why I'm confident in telling you that it's not going to change is because the only way that it could change is if somebody ran another initiative and the citizens voted on it.
When we looked at how you draft the initiative in Arizona, and we lay that against the voter Protection Act that I discussed earlier, there were certain things that we wanted to make sure.
Would be implemented as we conceived of them.
The co location of retail dispenser uses one such things so that will be that will remain true in Arizona.
Less and until there is some other ballot initiatives that changes that which we don't expect that to happen.
In the very near future at all.
Thank you and just a quick follow up I understand the logic of not investing division in Arizona, you talked about return on capital. So can you just roughly give an ideal wholesale prices comparing Arizona, we've either Pennsylvania, Maryland for you just just for context. Thanks.
So with the comparing it to Florida, there there is no wholesale markets. So that one is yes.
So.
If you compare it to Pennsylvania, what I would say is this I mean, we haven't gotten into specific retail or retail or wholesale numbers or pricing.
In information, we disclose but what I can tell you, which can help you get there is that floor.
Florida is supply constrained and that obviously has an impact on pricing.
Arizona is not so so supply constrained.
And so that has an impact on pricing as well.
Well again I wanted to ask question distribute more philosophical but in addition to some people talk about more about on that would be based on site wholesale others. One on the retail side. We are here to your leasing because worries on its retail in other states would be more opportunistic right, but when you think about the case with Pennsylvania on the risk that Rick will be handled by an equal stores.
As a quarter of your strategy right.
I realize it's not a one size fits all right are you sort of sums most of retail I actually.
I want to know what other states, but it will be better just trying to understand that because the researchers to retail industrial tool for your South Dakota industrial coatings regulator, so that they will decide to handle the delaware of kind of issue. Thanks.
Yes, it's a great question and the way that we look at we do look at it as you mentioned is kind of state by state is it's opportunistic as there is a good word.
The way that we look at or what is instructive for us is about how a state is going to rollout a particular program. We often look at how they handle the distribution of alcohol.
And so in the state of Pennsylvania, which which you referenced it is a much more wholesale dependent market in cannabis than Arizona is for example, because of the numbers of licenses and the number of participants each part of the value chain.
But we do think that there are a number of states when we don't have.
The.
Certainty that that Arizona provides given the constitutional amendment, we look at a number of things. The primary thing we look at when we determine how we think of state is going to regulators, how they how they regulate alcohol sales.
Got it thank you.
Thank you Sir.
[music].
Our next question comes from Matt Bottomley Canaccord Genuity Your line is open.
Good evening, Stephen Debra, Thanks, again for taking the time.
Just going back there is done I know you added on part of the production.
Auction.
Mark opportunity here, so it looks like based on.
For the numbers that you are talking about potential upside here right.
At two and a half times increase from the current annualized run rate in that state. So can you give any color maybe at a higher level on your production was like what percent.
Of year year in year.
In capacity and maybe just giving you count that Dan because I know it depends on if you're starting flower or various different product and then also what your overall market penetration it by door count into the 130 or 40 outdoors that better on that.
So it has so a lot of questions in there, Matt I'll try to hit them in if I Miss some please.
Please follow up.
So in terms of market penetration for wholesale what we have told people previously is that in Arizona. We are a net buyer on the wholesale market.
So the wholesale component is not a significant component of what we do in the state of Arizona that has been different in the past.
And we have had market penetration to the tune of about 90% of open stores when when we were.
Wholesaling and distributing products that was quite a number of years back though the way that we look at capacity is there are a couple of ways that you could achieve capacity one way would be to invest the dollars necessary to increase your existing capacity in the state of Arizona by adding to our indoor are.
Greenhouse or outdoor production the other way to do it is through what I mentioned before in this through licensing arrangements.
And so given the fact that what we do and we're trying to decide as well what we know is we want to make sure that we have products on ourselves and that we want to account for increased demand as a result of new customers coming to our stores there.
There are a couple of ways, we get there and I would suggest that its probably going to be some mix of those ways to ensure that we maintain enough products for everybody who wants to come by them.
Appreciate that and then any commentary on everything and if the market for that.
Double or triple.
What you're correct.
Requirement.
Where they are today.
Yes at the retail level, though they would if the market doubled or tripled obviously, our retail capacity would would need to double or triple.
In terms of what we would need to do as an organization that would depend entirely upon our relationships in the marketplace.
And I can tell you one of the things that we have said is our plan. Our plan has always been in Arizona that we our retail focus because that is where the value lies.
Perfect and then maybe which ignored as.
Well, Dan you had added.
Theres, though do you have any commentary on I guess, firstly in New Jersey going.
The pressure on that market.
Nothing in the legislature, obviously you are talking about it has been a crystal ball, but there has been.
Gary coming up very arrogant.
Hey, Andy back.
Both in the legislature belt, and then any guidance on the Korean Pennsylvania out growing the number that.
Eight belles belt aren't as robust, but seems like an uptick so very strong growth so any commentary.
Growth of patient uptake that mark well.
What we have said about Pennsylvania is we recently opened a couple of additional stores and while it's early the returns have been strong.
That's about as much as we'd given in terms of the demand that we're seeing in the state of Pennsylvania.
And I'm, sorry, Matt remind me of the of your previous question, Yes, just also.
Explain legal.
Yes, yes.
Yep.
If you look at the map and we provided in the slide deck I think it's not a coincidence that a lot of the recreational states touch each other.
And so the new Jersey, ultimately not just new Jersey made a decision. They havent, we don't know exactly what the timing looks like on initial sales, but undoubtedly.
In the state of New Jersey starts realizing revenue from something that adjacent states are not realizing revenue from its going to put incredible pressure on those adjacent states to make changes.
You have heard a number of those adjacent states talking about this already.
The ones that you mentioned.
You've heard it from about Pennsylvania, and you've been hearing about Pennsylvania, you've also heard about New York.
Didnt surprise me I guess, Connecticut as well.
Wouldn't surprise me to see a run of legislative actions in order to bring rack sales to those states.
Perfect and just one final one for me and.
Maybe you can chime in as well and that are Steve as well.
It is another off but I know you love love them, but.
With Arizona going legal where you're positioned Arizona the definitely the White House and then we'll see what happens on it I mean, what do you think the market cost of capital potentially could be at least directionally I'd imagine.
But there, but do you think they will be meaningful.
Increase in potential.
Coming on to date that these changes and if that makes sense given that you're currently well positioned third at your current that but obviously the vessel refinancing or pushing out or something in the next two years might be beneficial anything tangible on that front that you can speak about some of the changes at the federal level.
Yes, I mean and I can tag.
Deborah talk after I answer, but but what we what we have seen generally is the cost of capital is going down.
That directionally is what is going to happen and that will continue to happen because the cost of capital and that is this industry is unlike anything out. So you have seen and will continue to see other.
Find financing companies have some kind enter the space because the returns former.
Impossible to ignore.
Sure and I would I would add to that that we do have a planned recapitalized our balance sheet and I do think that you know.
Over the coming months that there's going to be more opportunities.
So I do think that that Arizona going back is absolutely going to help with our cost to capital and our ability to recapitalize our balance sheet.
Okay Thats it for me thanks.
Thanks Pat.
Our next question comes from Russell Stanley Securities. Your line is open.
Hello, Thanks for.
Taking my questions I guess first in the in Arizona.
I think the.
The the plan calls for a maximum of 166, I guess 36 of those are still to come how long and practice do you expect it to be before those new entrants are are up and running under understanding that that's a relatively small number of new entrants that how long and practice do you think that the incumbents will have.
I head start.
That's a that's a great question.
In one that.
Is unfortunately, a little bit difficult to answer with respect to the larger chunk.
Of those licenses the social equity licenses there is a lot of research and studying that needs to be done before that program actually launches.
And so the initiative requires two branches of Arizona government to get together and start putting together that program. So that's going to take a little time the reason.
Why that it was it was structured that way is because it's not an easy thing to get right and we've seen a number of states try to get it right and.
And then we have seen some some positives and some negatives from the efforts in other states and so we wanted to make sure that they're the right people and the right number of people at the table to make those determinations, but that might take a little bit of time to get it right.
With respect to the.
A few additional.
Limited to county areas the the way the initiative is structured.
Is some of those could come online with the early application period, and when I say come online I mean, the license could be issued simultaneous with the issuance of our recreational licenses.
And so you might see 10 get get licensed.
About the same time as our existing stores the challenge that.
Those licenses getters will have is they won't have existing stores from which to serve people. So they'll have to go through their zoning process.
Potentially in counties that are not friendly.
Two cannabis at all let alone recreational sales once they get those stores up and operating they will be able to sell recreationally.
It's important to note that when those are issued those will not be issued they won't be dual licenses. So they won't be able to sell medical it'll only be rack sales for those.
That's that's great color. Thank you and maybe I could just move on to.
Pennsylvania, Yes, we're aware you out with you Tom.
Socket assay EPS by working towards Quadrupling me.
Reading facilities capacity, how would you.
I guess rate your progress so far how far along.
To.
Expansionary at this point.
So the the increasing capacity in Pennsylvania has an ongoing project.
It's one that we expect to have some.
Some significant progress on in next year and.
And so we hope to be in a position to talk about it during our next conference call.
As you know we were when we acquired that facility. It was selling wholesale product and we are a buyer of that wholesale product.
But the progress of adding capacity of that facility is ongoing.
Thats It for me thank you.
Thank you Sir.
Ladies and gentlemen, we have reached formally allotted time for questions. This concludes today's conference call you may now disconnect.
Hi.
Yes.
[music].
Okay.
Yeah.
[noise] [noise].