Q3 2021 Goodness Growth Holdings Inc Earnings Call

November 10, 2021

John: Loss from operations in Q3 was $4.1 million compared to a loss of $2.3 million in Q3 of last year, with the variance primarily driven by the increase in selling, general, and administrative expenses. Total other expenses were $1.5 million in Q3 compared to other income of $11.2 million in Q3 of last year. The decrease was primarily attributable to the one-time gain of $16.9 million on the disposition of assets during the prior year quarter, partially offset by a derivative gain and higher interest expense.

John A. Heller: Loss from operations in Q3 was $4.1 million compared to a loss of $2.3 million in Q3 of last year, with the variance primarily driven by the increase in selling, general, and administrative expenses. Total other expenses were $1.5 million in Q3 compared to other income of $11.2 million in Q3 of last year. The decrease was primarily attributable to the one-time gain of $16.9 million on the disposition of assets during the prior year quarter, partially offset by a derivative gain and higher interest expense.

Speaker 1: loss of operations in Q3 was 4.1 million compared to a loss of 2.3 million in the third quarter of last year with the variance primarily driven by the increase in selling general and administrative.

Speaker 1: Total other expenses were $1.5 million in the third quarter compared to other income of $11.2 million in Q3 last year. The decrease was primarily attributable to the one-time gain of $16.9 million on the disposition of assets in the prior year quarter, partially offset by derivative gain and higher interest.

John: Net loss in Q3 was $6.2 million compared to net income of $3.0 million in Q3 of last year, with the variance driven by the non-recurrence on the gain on disposition of assets in the prior year quarter, increased operating and other expenses, and higher interest expenses. EBITDA, as described in our accompanying disclosures and footnotes, was a loss of $2.4 million during Q3 of 2021. Compared to a gain of $11.1 million in Q3 of 2020, with the variance primarily attributable to the one-time gain on the disposition of assets during the prior year quarter. Adjusted EBITDA was a loss of $1.9 million in Q3 as compared to a loss of roughly $600,000 in Q3 of 2020.

John A. Heller: Net loss in Q3 was $6.2 million compared to net income of $3.0 million in Q3 of last year, with the variance driven by the non-recurrence on the gain on disposition of assets in the prior year quarter, increased operating and other expenses, and higher interest expenses. EBITDA, as described in our accompanying disclosures and footnotes, was a loss of $2.4 million during Q3 of 2021. Compared to a gain of $11.1 million in Q3 of 2020, with the variance primarily attributable to the one-time gain on the disposition of assets during the prior year quarter. Adjusted EBITDA was a loss of $1.9 million in Q3 as compared to a loss of roughly $600,000 in Q3 of 2020.

Speaker 1: Net loss in Q3 was $6.2 million compared to net income of $3.0 million in the third quarter of last year, with a variance driven by the non-recurrence on the gain on disposition of assets in the prior year quarter. Increased operating and other expenses and higher interest rates have increased.

Speaker 1: EBITDA, as described in our accompanying disclosures and footnotes, was a loss of $2.4 million during Q3 of 2021, compared to a gain of $11.1 million in Q3 of 2020, with the variance primarily attributable to the one-time gain on the disposition of assets during the Friday quarter. Adjusted EBITDA was a loss of $1.9 million in Q3, as compared to a loss of roughly $600,000 in Q3 of 2020.

Speaker 1: As of September 30th, 2021, there were 126,351,477 equity shares issued in outstanding on an as-converted basis, and 154,358,312 shares outstanding on an as-converted, fully diluted basis.

John: As of 30 September 2021, there were 126,351,477 equity shares issued and outstanding on an as converted basis, and 154,358,312 shares outstanding on an as converted, fully diluted basis. Total current liabilities at the end of the quarter were $15.2 million, with $1.1 million in debt due within twelve months. We ended the quarter with total current assets of $44.8 million, including cash on hand of $11.8 million, which does not include the $15 million in expected cash proceeds from the divestiture of our Phoenix dispensary, which we announced last week and expect to close later this month.

John A. Heller: As of 30 September 2021, there were 126,351,477 equity shares issued and outstanding on an as converted basis, and 154,358,312 shares outstanding on an as converted, fully diluted basis. Total current liabilities at the end of the quarter were $15.2 million, with $1.1 million in debt due within twelve months. We ended the quarter with total current assets of $44.8 million, including cash on hand of $11.8 million, which does not include the $15 million in expected cash proceeds from the divestiture of our Phoenix dispensary, which we announced last week and expect to close later this month.

Speaker 1: Total current liabilities at the end of the quarter were $15.2 million with $1.1 million in debt due within 12.

Speaker 1: Rendered the total current assets of 44.8 million, including cash on hand of 11.8 million, which does not include the 15 million in expected cash proceeds from the divest to share the Barthienic Suspensary, which we announced last week and expect the coolest way to do.

Speaker 1: as discussed in conjunction with that announcement, given our President, President says a predominantly wholesale supplier of biomass in the Arizona market. Our management team and the board of directors felt that this transaction simplified our business during the period in which we're prioritizing resources for the attractive opportunities we see in other markets, especially in New York, where we're focused on supporting the development of our scale cultivation and manufacturing facility.

John: As discussed in conjunction with that announcement, given our presence as a predominantly wholesale supplier of biomass in the Arizona market, our management team and the board of directors felt that this transaction simplified our business during a period in which we're prioritizing resources for the attractive opportunities we see in other markets, especially in New York, where we're focused on supporting the development of our scaled cultivation and manufacturing facility and optimizing our retail footprint ahead of the commencement of adult use sales. In terms of other development projects, the second 9-acre shade house in Arizona is now complete, but the weather-related impacts we experienced in Q3 prevented us from optimizing the full 18 acres for this recent Croptober harvest.

John A. Heller: As discussed in conjunction with that announcement, given our presence as a predominantly wholesale supplier of biomass in the Arizona market, our management team and the board of directors felt that this transaction simplified our business during a period in which we're prioritizing resources for the attractive opportunities we see in other markets, especially in New York, where we're focused on supporting the development of our scaled cultivation and manufacturing facility and optimizing our retail footprint ahead of the commencement of adult use sales. In terms of other development projects, the second 9-acre shade house in Arizona is now complete, but the weather-related impacts we experienced in Q3 prevented us from optimizing the full 18 acres for this recent Croptober harvest.

Speaker 1: and optimizing our retail footprint ahead of the commencement of adult use sales.

Speaker 1: In terms of other development projects, the second nine acre shade house in Arizona is now complete. But the weather-related impacts we experienced in the third quarter prevented us from optimizing the whole 18 acres for this recent crop to over-part.

Speaker 1: That crop is being processed now and we anticipate that total yield from this year's crop-tober harvest will represent roughly half of the optimal output under ideal weather conditions at elephant head farming areas.

John: That crop is being processed now, and we anticipate that total yield from this year's Croptober harvest will represent roughly half of the optimal output under ideal weather conditions at Elephant Head Farm in Arizona. Given the changes we've discussed today, as well as revised timelines for the commencement of recreational use in New York compared to our prior expectations, we've revised our outlook ranges for fiscal year 2022. We now expect fiscal year 2022 revenues to be in the range of $100 to $120 million, and Adjusted EBITDA in the range of $20 to $30 million.

John A. Heller: That crop is being processed now, and we anticipate that total yield from this year's Croptober harvest will represent roughly half of the optimal output under ideal weather conditions at Elephant Head Farm in Arizona. Given the changes we've discussed today, as well as revised timelines for the commencement of recreational use in New York compared to our prior expectations, we've revised our outlook ranges for fiscal year 2022. We now expect fiscal year 2022 revenues to be in the range of $100 to $120 million, and Adjusted EBITDA in the range of $20 to $30 million.

Speaker 1: Given the changes we've discussed today, as well as revised timelines for the commencement of recreational use in New York compared to our prior expectations, we've revised our outlook ranges for fiscal year 2022. We now expect fiscal year 2022 revenues to be in the range of $100 to $120 million and adjusting EDA in the range of $20 to $30 million.

Speaker 1: The achievement of these ranges will depend on several factors, including the company's ability to achieve expected cultivation yields and quality, the timing and completion of various development projects, regulatory timeline, the timing of the commencement and performance of adult youth sales in New Mexico and New York, and the timing of the commencement and magnitude of flower sales in the Minnesota medical market.

John: The achievement of these ranges will depend upon several factors, including the company's ability to achieve expected cultivation yields and quality, the timing and completion of various development projects, regulatory timeline, the timing of the commencement and performance of adult use sales in New Mexico and New York, and the timing of the commencement and magnitude of flower sales in the Minnesota medical market. Importantly, we remain enthusiastic and focused on the opportunities in front of us. While Q3 was frustrating, we are positioned with a combination of productive assets and expansion opportunities in a few of the most exciting markets in the United States. That concludes our prepared remarks. Operator will now open the line to analyst questions.

John A. Heller: The achievement of these ranges will depend upon several factors, including the company's ability to achieve expected cultivation yields and quality, the timing and completion of various development projects, regulatory timeline, the timing of the commencement and performance of adult use sales in New Mexico and New York, and the timing of the commencement and magnitude of flower sales in the Minnesota medical market. Importantly, we remain enthusiastic and focused on the opportunities in front of us. While Q3 was frustrating, we are positioned with a combination of productive assets and expansion opportunities in a few of the most exciting markets in the United States. That concludes our prepared remarks. Operator will now open the line to analyst questions.

Speaker 1: Importantly, we remain enthusiastic and focused on the opportunities in front of us. While the third quarter was frustrating, we are positioned with a combination of productive assets and expansion opportunities in a few of the most exciting markets in the United States.

Speaker 1: That includes our prepared remarks. Concludes our prepared remarks. Offerier will now open the line to animals.

Speaker 2: At this time, I would like to remind analysts if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause you just a moment to compile the Q&A roster.

Operator: At this time, I would like to remind analysts, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause just a moment to compile the Q&A roster. Your first question comes from the line of Graeme Kreindler with Eight Capital.

Speaker 2: Your first question comes from a 9g gr. with 8kph.

Graeme Kreindler: Hi, good morning, and thank you for taking my questions here. I was wondering to start off, if we could get a bit more color in terms of expectations into Q4 and what you're seeing to date, given you know, potentially positive seasonality in Arizona with more tourism increasing in that market, as well as New York with the introduction of flower. How are those markets tracking relative to your expectations so far? Thank you.

Speaker 3: Hi, good morning and thank you for taking my questions here. I was wondering to start off if we could get a bit more color in terms of expectations into Q4 and what you're seeing to date given potentially positive seasonality in Arizona with more tourism increasing in that market as well as New York with the introduction of flower. How are those markets tracking relative to your expectations so far? Thank you.

John: Yeah, Graeme, very encouraging in New York to see sort of the non-ground, just standard flower hit the market. That's been very positive, and we've been, you know, struggling to keep it on the shelves. That's a major focus for us, sort of augmenting the number of strains that we have on the shelves there. I believe currently we have two strains, and that's gonna rapidly scale over the coming weeks. That's been a major focus for the last three to four quarters for us, sort of high-quality flower. We were, you know, very encouraged to see how quickly OCM moved to get flower approved, and we anticipate that's gonna be a very positive catalyst in New York for the foreseeable future.

Kyle Kingsley: Yeah, Graeme, very encouraging in New York to see sort of the non-ground, just standard flower hit the market. That's been very positive, and we've been, you know, struggling to keep it on the shelves. That's a major focus for us, sort of augmenting the number of strains that we have on the shelves there. I believe currently we have two strains, and that's gonna rapidly scale over the coming weeks. That's been a major focus for the last three to four quarters for us, sort of high-quality flower. We were, you know, very encouraged to see how quickly OCM moved to get flower approved, and we anticipate that's gonna be a very positive catalyst in New York for the foreseeable future.

Speaker 4: Yeah, Graham, very encouraging in New York to see sort of the non-ground, just standard flower hit the market.

Speaker 4: the number of strains that we have on the shelves there. I believe currently we have two strains and that's going to rapidly scale over the coming weeks. That's been a major focus for the last three to four quarters for us, sort of high quality flower. We were very encouraged to see how quickly OCM moved to get flower approved and we anticipate that's going to be a very positive catalyst in New York for the foreseeable future. Like you remind everybody that New York to date has really been nearly flowerless with the exception of this meat of ground flower, which has significantly less flavor. It's a much less desirable product than standard flower. I think this actually has the potential to make the New York medical market a real cannabis market.

John: You know, like to remind everybody that New York to date has really been nearly flowerless, with the exception of this meter ground flower, which has, you know, significantly less flavor. It's a much less desirable product than sort of standard flower. I think this actually has the potential to make a, you know, the New York medical market sort of a real cannabis market, independent of adult use, which is also forthcoming. We're very encouraged. We're seeing sort of, you know, substantial improvements to home delivery, and just, you know, kind of revenue across the dispensary portfolio in New York. It's a very encouraging development.

Kyle Kingsley: You know, like to remind everybody that New York to date has really been nearly flowerless, with the exception of this meter ground flower, which has, you know, significantly less flavor. It's a much less desirable product than sort of standard flower. I think this actually has the potential to make a, you know, the New York medical market sort of a real cannabis market, independent of adult use, which is also forthcoming. We're very encouraged. We're seeing sort of, you know, substantial improvements to home delivery, and just, you know, kind of revenue across the dispensary portfolio in New York. It's a very encouraging development.

Speaker 4: and uh... i think this actually has potential to to to make a you know the new york medical market sort of a real cannabis market independent of adults use which is also for coming so uh... we're very encouraged we're seeing sort of uh... you know substantial improvements to home delivery uh... and uh... just you can revenue across the the the the the the the the sensory portfolio in new york to bring encouraging development uh... on the air zone is

John: On the Arizona side, you know, we are transitioning out of the retail end there, but we still remain positive that there is a niche for scaled, low-cost outdoor biomass production. Again, the monsoon was unfortunate and definitely a detriment, and, you know, that will, as John mentioned, affect our fall crop. We're still optimistic that we can have a positive Q4 in Arizona with the biomass that we're bringing down via that outdoor field.

Kyle Kingsley: On the Arizona side, you know, we are transitioning out of the retail end there, but we still remain positive that there is a niche for scaled, low-cost outdoor biomass production. Again, the monsoon was unfortunate and definitely a detriment, and, you know, that will, as John mentioned, affect our fall crop. We're still optimistic that we can have a positive Q4 in Arizona with the biomass that we're bringing down via that outdoor field.

Speaker 4: You know, we are transitioning out of the retail end there, but we still remain positive that there is a niche for scaled low cost outdoor biomass production. And again, the monsoon was unfortunate and definitely a detriment and that will, as John mentioned, affect our fall crop. But we're still optimistic that we can have a positive fourth quarter in Arizona with the biomass that we're bringing down, give it outdoor field.

Speaker 3: Okay, understood. Thank you for that. Then just turning to the 2022 guidance and appreciate the comments earlier with respect to the moving parts on the revisions. I'm wondering in terms of the New Mexico market there and the expected commencement of adult youth sales in the first quarter of 2022, just given the delay that we've seen in New York. Do you think there's any risk there in terms of how that guidance was comprised with the potential delayed start in New Mexico or what are the signals you're getting for that market for the potential start date there? Thank you.

Graeme Kreindler: Okay. Understood. Thank you for that. Just turning to the 2022 guidance, and appreciate the comments earlier with respect to the moving parts on the revisions. I'm wondering, in terms of the New Mexico market there and the expected commencement of adult use sales in the Q1 of 2022, just given the delay that we've seen in New York, do you think there's any risk there in terms of how that guidance was comprised with the potential delayed start in New Mexico? Or what are the signals you're getting for that market for the potential start date there? Thank you.

Speaker 4: All signals are that there won't be any delays. Again, there's no guarantees when it comes to this sort of thing, but we're pretty optimistic here that we're looking at, early second quarter for commencement of New Mexico. Remember, it is a more mature medical market with a substantial flower production apparatus and a larger number of dispensaries. So I think based on our experience that we're cautiously optimistic on the timeline for New Mexico.

Kyle Kingsley: Yeah, all signals are that there won't be any delays. Again, there's no guarantees when it comes to this sort of thing, but we're, you know, pretty optimistic here that we're looking at, you know, early Q2 for commencement of New Mexico. Remember, it is, you know, a more mature medical market with a substantial flower production apparatus and, you know, a larger number of dispensaries. So I think, you know, based on our experience that we're, you know, cautiously optimistic on the timeline for New Mexico.

Speaker 3: Okay, God, if that's my last question here, just with respect to CAPEX budgeting over the next 12 months, do you have any specific budget you could share with us at an then potential sources of capital, whether that comes from Balanced, you didn't comment on from sale, these facts, or otherwise, appreciate it.

Graeme Kreindler: Okay. Got it. My last question here, just with respect to CapEx budgeting over the next 12 months, do you have any specific budget you could share with us, and then potential sources of capital, whether that comes from balance sheet, incremental from sale, lease backs or otherwise? Appreciate it.

Speaker 4: Yes, still formulating some aspects of CAPEX here for the next 12 months, but you did see the substantial IIPR arrangement in New York, which is going to be kind of our major CAPEX undertaking. I don't know if you have anything you want to add, John . Yeah, we talked previously about roughly 15 to 20 million of CAPEX to execute our plans through, you know,

Kyle Kingsley: Yes. Still formulating some aspects of CapEx here for the next 12 months, but you did see the substantial IIPR arrangement in New York, which is gonna be kind of our major CapEx undertaking. I don't know if you have anything you wanna add, John.

John: Yeah. We talked previously about, you know, roughly $15 to 20 million of CapEx to execute our plans, through, you know, the anticipation of going live with adult use in New York. You know, the timing of that is gonna depend on, you know, what's basically the timing of go live in New York. That's kind of what we're thinking there.

John A. Heller: Yeah. We talked previously about, you know, roughly $15 to 20 million of CapEx to execute our plans, through, you know, the anticipation of going live with adult use in New York. You know, the timing of that is gonna depend on, you know, what's basically the timing of go live in New York. That's kind of what we're thinking there.

Instrument of recreational sales as well as opportunities to adjust and optimize operating procedures before ramping potentially to full approved capacity. Following the onset of the states' adult use program and.

Speaker 1: the anticipation of going live with the dollars used in New York. The timing of that is going to depend on what's basically the timing of go live in New York.

In addition to the expansion of cultivation and processing capacity in New York, Patrick Peter's retail team has been busy working to identify and secure locations for new dispensaries as well as candidates for relocations for some of our existing medical dispensaries, we're still awaiting clarity from the states regulatory body regarding the classification of economically underserved areas.

Graeme Kreindler: Okay, understood. That's it for me. Thank you very much.

<unk> will require before.

Before.

Kyle Kingsley: Thanks, Ryan.

Which will require before deciding where to open the first two of our four additional retail dispensaries this year.

Operator: Your next question comes from the line of Matt Bottomley with Canaccord Genuity.

Speaker 2: Your next question comes from the line of Matt Bottomley with Canaccord Genuity.

Pardon me next year.

Matt Bottomley: Morning, everyone. Thanks for all the color so far. Very helpful. Just wondering if we can focus a little bit more on the state of New York and your thoughts on, you know, how to manage, I guess, the overall margin profile of your company and CapEx as we wait for that market to launch. Clearly, many markets can take longer than initially indicated by some of the regulators or some of the legislators. You know, early on in the earnings season here, but we've had some commentary, and I'm just curious on what you've experienced from your business on just medical patients with respect to that potentially tapering off a little bit, and then how to manage your overall, I guess, acceleration of CapEx in that market.

We're confident that our recent and ongoing efforts to improve operations and scale production across our markets as well as our expanding retail dispensary footprint will help drive stronger financial performance in fiscal year 2022 and beyond.

Speaker 5: Morning everyone, thanks for all the colors so far, very helpful. Just wondering if we can focus a little bit more on the state of New York and your thoughts on, how to manage, I guess, the overall margin profile of your company and CAPEX as we wait that market to launch. Clearly, many markets can take longer than initially indicated by some of the regulators or some of the legislators. So, early on in the earnings season here, but we've had some commentary, and I'm just curious on what you've experienced from your business on, just medical patients with respect to that potentially tapering off a little bit, and then how to manage your overall, I guess, acceleration of CAPEX in that market.

I'd also remind investors that we believe there is still potential for the state of Maryland to past adult use legislation in 2022, which could result in strong growth and profitability.

And that market is compared to our current expectations of course, we believe New York and Minnesota represent remarkable growth opportunities and we're highly focused on ensuring we drive success as these markets ramp.

That concludes my prepared remarks, I'll now hand, the call over to John for more detailed review of the financials and outlook.

Thank you Kyle and thanks to everyone for joining us this morning.

Matt Bottomley: You know, should delays continue in New York, or should it just be uncertain as to the ultimate start date?

Please turn to slide seven where I'll begin with a review of highlights from the quarter. Please keep in mind that all numbers stated referring to U S dollar amounts unless otherwise noted.

Total revenue increased 7% to $13 4 million as compared to Q3 of 2020, including our former Pennsylvania and Ohio subsidiaries.

Speaker 1: So yeah, I'm gonna be trying to send your question. So in New Florida for New York, right, that that project is fully funded with a lease from I IP. So that capex is the you know, that that cash will is

John: Yeah, I wanna make sure I understand your question. In New York, right, that project is fully funded with a lease from IIP. That CapEx funding is coming directly from IIP to construct that facility. All right? The timing of that will just be dispersed fully as we construct that project. Again, it's fully funded.

John A. Heller: Yeah, I wanna make sure I understand your question. In New York, right, that project is fully funded with a lease from IIP. That CapEx funding is coming directly from IIP to construct that facility. All right? The timing of that will just be dispersed fully as we construct that project. Again, it's fully funded.

Excluding contributions from Pennsylvania, and Ohio here in Q3 of 2020 revenue increased approximately 28% and declined about 6% sequentially compared to Q2 of this year as Kyle mentioned the sequential decline in revenue was driven by the adverse weather related impacts at our outdoor farm in Arizona as well as the unexpected non recurrence of <unk>.

Speaker 1: That cap-ex funding is coming directly from IIT to construct that facility. So the timing of that will just be dispersed fully as we construct that project.

Large bulk large bulk oil wholesale order in the state of New York during the second quarter, we estimate that the lost biomass to whether in Arizona resulted in loss revenue of approximately $1 million during the third quarter retail revenue in the third quarter was $11 $6 million, an increase of 35% compared to Q3 last year when you exclude that.

Speaker 1: So again, it's fully funded. Yeah, and yeah, just kind of macroscopically, very encouraged by the flower in the medical program. And if hypothetically this gets pushed into early 2023 as far as go live for adult use, that, that, that,

Kyle Kingsley: Yeah. Matt, just kinda macroscopically very encouraged by the flower in the medical program. If, you know, hypothetically this gets pushed into early 2023 as far as go live for adult use, that is pretty helpful when you're talking about scaled indoor production on that facility. Being able to do several turns is really gonna sort of optimize, and it's not like there isn't a destination for those products with what we expect will be a burgeoning medical market in the state that's very flower focused. We're really ready for kinda any set of reasonable outcomes on the timing. We're also, as I mentioned, focusing on optimizing the retail footprint, and that's been ongoing for 3 or 4 quarters.

One of the Pennsylvania operations.

Speaker 4: that is pretty helpful when you're talking about scaled in portland or production on that facility being able to do several turns is really going to sort of optimize and it's not like there isn't a destination for those products with what we expect to be a virgining medical market in the state that's very flower focus

Wholesale revenue excluding discontinued operations declined by approximately 5% year over year with the decline primarily attributable to the loss biomass and the weather impacts, which we've discussed in Arizona.

It's also worth noting that the ramp up of wholesale sales in Maryland. Following our recent capacity expansion initiatives. In this market has been slower than we anticipated, which also contributed to lower revenue as compared to our expectations in the third quarter.

Speaker 4: So, we're really ready for any set of reasonable outcomes on the timing. We're also, as I mentioned, focusing on optimizing the retail footprint. That's been ongoing for three or four quarters.

Speaker 4: Yeah, the question is timing of that CAPX for goal-life and adult use. And that's something that, you know, we're working with the regulators to find you in that. And...

For this reason we temporarily paused the construction of the additional 75000 square feet of cultivation that was underway and massey to better align capacity and demand in this market gross profit in the second quarter was $5 1 million or 38, 3% of sales as compared to $5 million or <unk> 39, 8% of sales in the third quarter of last.

Kyle Kingsley: Yeah, the question is timing of that CapEx for go live and adult use, and that's something that, you know, we're working with the regulators to fine-tune that. But, you know, very encouraged that we're bringing scale to bear sort of across the full vertical integration, cultivation, processing, and retail. We have some flexibility there. There are worse things than having an extra turn of cultivation prior to go live with adult use through that facility.

Speaker 4: But very encouraged that we're bringing scale to there, sort of across the full vertical integration, cultivation processing and retail. And we have some flexibility there.

As discussed in Kyle's prepared remarks gross margin performance in Q3 was negatively impacted by the unseasonal weather in Arizona and also sequentially as a result of the non recurrence of a large wholesale orders in New York in Q2 of this year.

Speaker 4: There are worse things than having an extra turn of cultivation prior to go alive with adult use through that facility.

Speaker 5: I still understood that's helpful. And yeah, part of the question I get, particularly for states like New York and New Jersey, is how various MSOs are going to deploy that capital. I'm understanding that you guys are funded for it. Given that the risk of underutilized infrastructure should there be delays, and that's good to see that it can be a little more dynamic with working with the regulators. And then just my other question is, would be if we could get a little more color on, and maybe this is just a lack of knowledge on my part, but just in the New Mexico market, how that market looks with respect to the products that are allowed. Obviously, Arizona is a market that when it was medical only looked very much like recreational. So not looking for particular guidance or numbers of what the spend trees could do, but maybe just.

Matt Bottomley: No, understood. That's helpful. Yeah, you know, part of the questions I get, particularly for states like New York and New Jersey, is how, you know, various MSOs are going to deploy that capital, understanding that you guys are funded for it. You know, given that there could be the risk of underutilized infrastructure should there be delays. That's good to see that it can be a little more dynamic with, you know, working with the regulators. Then just my other question just would be if we could get a little more color on, and I'm just maybe this is just a lack of knowledge on my part, but just in the New Mexico market, you know, how that market looks with respect to the products that are allowed.

If you adjust last quarters gross margin performance to exclude the large wholesale or gross margin performance in Q2 of this year would have been approximately 45% of revenue. Additionally, if we assume we had realized similar margins compared to actual performance on the estimated level of lost revenue to whether in Arizona. During Q3 gross margin in the quarter with Alt.

<unk> had been around for 45% level, we feel that this helps demonstrate a fairly consistent gross margin profile of approximately 45% over the last five quarters.

Matt Bottomley: Obviously, Arizona is a market that when it was medical only, looked very much like recreational. Not looking for particular guidance or numbers of what dispensaries could do, but maybe just if you could use another state as a proxy as to kind of what New Mexico looks like should, you know, once it goes live on the rec side.

Which should be helpful information for investors and analysts.

Speaker 5: if you could use another state of the proxy as to kind of what New Mexico looks like, once it goes live on the rec site.

Total operating expenses in the third quarter were $9 2 million, an increase of $2 1 million compared to $7 2 million in the third quarter of last year. The increase in total expenses was attributable to increased general and administrative expenses driven by operational build outs in Arizona, Maryland, Minnesota, and New Mexico, where the company has opened new retail dispensaries.

Kyle Kingsley: Yeah, it's very similar to Arizona. It's very flower focused. This is a very adult use like medical state right now. So we anticipate it'll again not a huge lift of a transition for that state to go to adult use.

Speaker 4: Yeah, it's very similar to Arizona. It's very flower focused. This is a very adult use like medical state right now. So we anticipated, again, not a huge lift of a transition for that state to go to adult use.

Whereas completed cultivation and manufacturing expansion projects.

Matt Bottomley: Okay. Thanks, guys.

Kyle Kingsley: Thank you.

For additional color.

Speaker 2: Once again, analysts may ask questions by pressing star one on their telephone keypad.

Operator: Once again, analysts may ask questions by pressing star one on their telephone keypad. Your next question comes from the line of Eric Des Lauriers with Craig-Hallum.

Point out that we were operating 707 additional dispensaries in Q3 of this year compared to Q3 of last year and we've had other G&A increases to support our expanded manufacturing operations in Arizona, Maryland, and New Mexico.

Speaker 2: Your next question comes in online of Eric Delorans with Craig Hallam.

Speaker 6: Great, thanks for taking my question, guys. Let's focus on Maryland a bit. So I understood that you guys are kind of pausing expansion on that 75,000.

Eric Des Lauriers: Great. Thanks for taking my question, guys.

Finally, we've increased marketing expenses as we prepare to introduce new recreational use products and brands across our portfolio on a GAAP basis SG&A expenses of $8 1 million increased 24% compared to Q3 of last year and reflected 60% of sales compared to 52% of sales in Q3 last year as we meant.

John: Morning, Eric.

John A. Heller: Morning, Eric.

Eric Des Lauriers: Let's focus in on Maryland a bit. I understood that you guys are kind of pausing expansion on that 75,000 expansion project. Can you remind us, I think you're at 110,000 sq ft now. Can you kind of remind us whether that's indoor or greenhouse and sort of how the demand or reception is for your wholesale products in that market so far. Then maybe just remind us, I think you were mentioning HiColor and Kings and Queens are kind of live in that market now. Any kind of anecdotes there on the demand for that would be great. Thanks.

Speaker 6: expansion projects. Can you remind us, I think you're at 110,000 square feet now. Can you kind of remind us whether that's indoor or greenhouse and sort of how the demand or reception is for your wholesale products in that market so far? Maybe just remind us, I think you're mentioning high power and things and queens are kind of alive in that market now. Any kind of anecdotes there on the demand for that would be great. Thanks.

And previously we do anticipate seeing improvements in SG&A as a percent of revenue and as sales ramp across our footprint.

Lots of operations in Q3 was $4 1 million compared to a loss of $2 3 million third quarter of last year with the variance primarily driven by the increase in selling general and administrative expense.

Speaker 4: Yeah, we currently have 110,000 square feet and that is greenhouse with, you know,

Kyle Kingsley: Yeah, we currently have 110,000 sq ft, and that is greenhouse with, you know, I would say fairly substantial HVAC dehumidification capabilities. You know, generally speaking, in full transparency, the ramp up in Maryland has been a bit slower than we expected. That's mainly us getting our full array of SKUs out to the market, and that's just an interface with the regulators. The two primary new SKU categories that we're bringing to bear are concentrates, so kind of our first foray into hydrocarbon extraction in Maryland. Kings and Queens has been very well received, essentially, selling it as quickly as we can make it. Love that brand. It's very high-quality product.

Total other expenses were $1 5 million in the third quarter compared to other income of $11 2 million in Q3 of last year. The decrease was primarily attributable to one time through the one time gain of $16 9 million on the disposition of assets during the prior year quarter, partially offset by derivative gains and higher interest.

Speaker 4: who would say fairly substantial HVAC, dehumidification capabilities.

Speaker 4: the generally speaking in full transparency, the rev up in Maryland has a bit slower than we expected. You know, just that's mainly us getting our full array of skews out to the market. And that's just an interface with the regular.

Net loss in Q3 was $6 2 million compared to net income of $3 <unk> million in the third quarter of last year with the variance driven by the non recurrence on the gain on disposition of assets in the prior year quarter increased operating and other expenses and higher interest expense.

Speaker 4: The two primary new skew categories that we're bringing to bear are concentrates. So kind of our first foray into hydrocarbon extraction in Maryland. Kings and Queens has been very well received, essentially, you know, selling it as quickly as we can make it.

EBITDA as described in our accompanying disclosures in footnotes with a loss of $2 4 million during Q3 of 2021 compared to a gain of $11 1 million in Q3 of 2020 with the variance primarily attributable to the onetime gain on the disposition of assets during the prior year quarter adjusted EBIT loss of $1 9 million in Q.

Speaker 4: Love that brand. It's a very high quality product. A lot of our biomass is being directed at that direction given the demand that we're seeing.

Kyle Kingsley: A lot of our biomass is being directed that direction given the demand that we're seeing. Then the other edibles are just entering the market now. Very excited about the HiColor brand of edibles. As you may recall, that we retrofit the previous cultivation and processing facility to just pure manufacturing now. We actually produce all SKU categories out of our Hurlock facility. A little bit slower rev up than expected, but we're very encouraged by what we're seeing with these new SKU categories and optimistic that we can move biomass through the existing 110,000 sq ft. I do anticipate over time we will complete the facility, the incremental 75,000 sq ft.

Speaker 4: And then the other edibles are just entering the market now, very excited about the high color brand of edibles.

Speaker 4: And you may recall that we retrofit the previous cultivation and processing facility to just peer manufacturing now. And so we actually produce all skew categories out of our herlock facility. So a little bit slower, rather than expected, but we're very encouraged by what we're seeing with these new skew categories. And, you know,

Three as compared to a loss of roughly 600000 in Q3 of 2020.

As of September 32021, there were $126 million 351477 equity shares issued and outstanding on an as converted basis and 154 million 358312 shares outstanding on an as converted fully diluted basis.

Speaker 4: optimistic that we can move biomass through the existing 110,000 square feet. I do anticipate over time we will complete the facility the incremental 75,000 square feet. It's just important that we match dollars out the door for capex very precisely to demand and we're getting increased visibility now that we know we're fully participating in the wholesale market.

Current liabilities at the end of the quarter were $15 2 million with $1 1 million in debt due within 12 months we.

Kyle Kingsley: It's just important that we match you know, dollars out the door for CapEx very precisely to demand. We're getting increased visibility now that we you know, we're fully participating in the wholesale market.

We ended the quarter with total current assets of $44 $8 million, including cash on hand of $11 8 million, which does not include the $15 million in expected cash proceeds from the divestiture of our Phoenix Dispensary, which we announced last week and expect to close later this month.

Speaker 6: Okay, great. So as we kind of look forward, I guess, you know, maybe just for the next 12 months or so, should we think of Maryland as mostly mostly this king's and queens brand mostly kind of concentrate focus for you guys given that given the greenhouse infrastructure there.

Eric Des Lauriers: Okay, great. As we kind of look forward, I guess, you know, maybe just, for the next 12 months or so, should we think of Maryland as mostly this Kings and Queens brand, mostly kind of concentrate focus for you guys, given that, given the greenhouse infrastructure there? Or are you guys kind of working towards flower in that market as well?

As discussed in conjunction with that announcement, given our present presence as a predominantly wholesale supplier of biomass in the Arizona market.

Our management team and the board of directors felt that this trend this transaction simplified our business during the period in which we are prioritizing resources toward the attractive opportunities we see in other markets, especially in New York, where we're focused on supporting the development of our scale cultivation and manufacturing facility in.

Speaker 6: Are you guys trying to work towards our market as well? Yeah, still working on flour and biomass sales at scale. And that just takes a little bit more time. But again, cautiously optimistic that that'll be a big part of what we do. But these other spews are pretty exciting.

Kyle Kingsley: Yeah, still working on flower and biomass sales at scale, and that just takes a little bit more time. You know, again, cautiously optimistic that that'll be a big part of what we do. These other SKUs are pretty exciting.

In optimizing our retail footprint ahead of the commencement of adult use sales.

Eric Des Lauriers: Okay. Just on Arizona here, I think in your guys' analyst day this summer, you guys had kind of touched on the potential for greenhouse expansion in that market. Is that anything that we should consider sort of in the CapEx budget right now, you know, maybe for 2022 or 2023? Or is this similar to the Maryland expansion here, just kind of gonna be a function of demand?

Speaker 6: And then just on Arizona here, I think in the, in your guys, at the analyst day, the summer, you guys had kind of touched on the potential for greenhouse expansion in that market. Is that anything that we should consider, sort of in the CapEx budget right now, maybe for 22 or 23, or is this similar to the Maryland expansion here just kind of?

Terms of other development projects. The second nine acre shade housing in Arizona is now complete but the weather related impacts we experienced in the third quarter prevented us from optimizing the whole 18 acres for this recent crop tober harvest.

That crop has been process now and we anticipate that total yield from this year's crop harvest will represent roughly half of optimal output under ideal weather conditions and elephants head farm in Arizona.

Given the changes we've discussed today as well as revised timelines for the commencement of recreational use in New York compared to our prior expectations. We've revised our outlook ranges for fiscal year 2022, we now expect fiscal year 2022 revenues to be in the range of $100 million to $120 million and adjusted EBIT in the range of $20 million to $30 million.

Kyle Kingsley: Yeah. Right now, we're focused on existing infrastructure and capacity down at the Amado facility, and no additional expansions here are forthcoming. But the Amado facility, the incremental 9 acres of shade house was completed, and that's the primary focus right now.

Speaker 4: Right now we're focusing on existing infrastructure and capacity down at the Amato facility, and no additional expansions here are forthcoming, but...

Speaker 4: the modifacility of the incremental 9 acres of shade house was completed. And that's the primary focus right now. Okay. All right. Great. Thanks, sigma.

The achievement of these range will spend upon several factors, including the companys ability to achieve expected cultivation yield and quality the timing and completion of various development projects regulatory timeline, the timing of the commencement and performance of adult use sales in new Mexico, and New York and the timing of the commencement and magnitude of flower sales.

Eric Des Lauriers: Okay. All right, great. Thanks for taking my questions.

Kyle Kingsley: Thank you, Art.

Kyle Kingsley: Thank you, Eric.

Operator: At this time, there are no further questions. I would like to turn the call back over to Dr. Kingsley for closing remarks.

Speaker 2: At this time, there are no further questions. I would like to turn the call back over to Dr. Keensley for closing remarks.

Speaker 4: Thanks again for joining us this morning. We wish everybody a happy and safe holiday season, and we'll look forward to connecting with you all again in the new year.

Kyle Kingsley: Thanks again for joining us this morning. We wish everybody a happy and safe holiday season, and we'll look forward to connecting with you all again in the new year.

Minnesota medical market.

Importantly, we remain enthusiastic and focused on the opportunities in front of us while the third quarter was frustrating we are positioned with a combination of productive assets and expansion opportunities in a few of the most exciting markets in the United States.

Operator: This concludes today's conference. You may now disconnect.

Speaker 7: Is St.

That includes our prepared remarks concludes our prepared remarks, operator, we'll now open the line to analyst questions.

At this time I would like to remind analysts if you would like to ask a question. Please press Star then the number one on your telephone keypad.

So just a moment to compile the Q&A roster.

Your first question comes from the line of Graeme Kreindler with eight capital.

Hey, good morning, and thank you for taking my questions here.

I was wondering to start off.

We can get a bit more color in terms of expectations into into Q4, and what you are seeing to date, given potentially positive seasonality in Arizona with more tourism, increasing in that market as.

As well as New York with the introduction of flower how are those are those markets tracking relative to your expectations. So far thank you.

Yes, Graham very encouraging in New York to see sort of the non ground just standard flower hit the market.

That's been very positive and we've been struggling to keep it on the shelves. That's a major focus for us sort of augmenting the number of streams that we have on the shelves there I believe.

Currently we have two two streams and that's going to rapidly scale over the coming weeks that's been a major focus for the last three to four quarters for us sort of high quality <unk>.

Lower.

We were <unk>.

Very encouraged to see how quickly OCM move to get flower approved and we anticipate that's going be a very positive catalyst in new York for the foreseeable future.

I would like to remind everybody that New York to date has really been nearly flower less with the exception of this meter crown flower, which has significantly less flavor.

Much less desirable product than sort of standard flower.

And I think this actually has the potential to make the.

The New York medical market sort of a real cannabis market independent of adult use which is also forthcoming. So we're very encouraged we're seeing sort of substantial.

Improvements to your home delivery.

And just you've kind of revenue across the dispensary portfolio in New York, It's a very encouraging development.

On the Arizona side.

We are transitioning out of the retail in there, but we still remain positive that there is a niche for scaled low cost outdoor biomass production and again, the monsoon was unfortunate and definitely a detriment to them, but we will as John mentioned affect our fall crop. Although we're still optimistic that we can have a positive.

Fourth quarter in Arizona with the biomass that were bringing down given outdoor field.

Okay understood. Thank you for that and then just turning to the 2022 guidance and I. Appreciate the comments earlier with respect to the moving parts on the revisions I am wondering in terms of the new Mexico market, there and the expected commencement of adult use sales in the first quarter of 2022.

Given the delay that we've seen in New York do you think there's any risk there in terms of how that guidance was comprised with the potential delayed starting new Mexico or what are the signals are you getting for that market for the potential start date there. Thank you.

Yes, all signals are that there wont be any delays again, there's no guarantees when it comes to this sort of thing but.

Pretty optimistic here that we're looking at.

Early second quarter for commencement of new Mexico remember it is.

Our more mature medical market with a substantial flower production apparatus in larger number of dispensaries.

So I think based on our experience that we're cautiously optimistic on the timeline for new Mexico.

Okay got it and then my last question here, just with respect to Capex budgeting over the next 12 months do you have any specific budget you can share with us and then potential sources of capital whether that comes from balance sheet incremental from sale leasebacks or otherwise I appreciate it.

Yes, still formula formulating some aspects of Capex here for the next 12 months, but EBIT the substantial IPR arrangement in New York, which is going to be kind of our major capex undertaking I don't know if you have anything you want to add John.

Yes, we've talked previously about.

Roughly $15 million to $20 million of Capex to execute our plans.

Through.

The anticipation of <unk>.

Going live with <unk> in New York.

The timing of that is going to depend on.

But.

The timing of go live in New York.

<unk>.

So.

Yes.

That's kind of what we're thinking there.

Okay understood Thats. It for me Thank you very much.

Thanks, Rob.

Your next question comes from the line of Matt Bottomley with Canaccord Genuity.

Good morning, everyone. Thanks for all the color. So far very helpful. Just wondering if we can focus a little bit more on the state of New York and your thoughts on.

How to manage I guess, the overall margin profile of your company and Capex as we wait that market to launch clearly many markets can take longer than initially indicated by some of the regulators or some of the legislators. So.

Early on in the earnings season here, but we've had some commentary and I'm just curious on what you've experienced stem from your business on.

Medical patients so with respect to that potentially tapering off a little bit and then how to manage your overall I guess acceleration of capex in that market shift.

<unk> delays continue in New York or should it just be uncertain as to the ultimate start date.

Yeah.

I want to make sure I understand your question. So in new FERC for New York right that that project is fully funded with a lease from IP.

So.

That capex is.

That cash flow is that Capex funding is coming directly from IP to construct that facility alright. So.

The timing of that will just be dispersed.

Fully ads as we construct that project.

And so again, it's fully funded.

Yes.

Kind of macro <unk> very encouraged by the flower in the medical program and if hypothetically. This gets pushed into early 2023 as far as Golar for adult use.

That is pretty helpful. When youre talking about scaled important production on that facility being able to do several turns is really going to sort of optimize and it's not like there isn't a destination for those products with what we expect will be a burgeoning medical market in the state Thats very flower focus so we're.

So we're really ready for kind of any set of reasonable outcomes on the timing.

We're also as I mentioned, focusing on optimizing the retail footprint, that's been ongoing for three or four quarters.

Yes. The question of timing of that Capex for go live in adult use and Thats something that working with the regulators to fine tune that.

But very encouraged that we'll bringing scale to bear sort of across the full vertical integration cultivation processing and retail and we have some flexibility. There there are worse things than having an extra turn of cultivation. Prior to go live with adult use through that facility.

Understood that's helpful.

Part of the.

<unk>, particularly for states like New York, and New Jersey is how various msos are going to deploy that capital and understanding that you guys are funded for it.

Given that there could be the risk of underutilized infrastructure should there would be delays and that's good to see that it can be a little more dynamic with working with the regulators and then just my other question would be if we could get a little more color on and maybe this is just the lack of Belgium on my part, but just in the new Mexico market, how that market looks with respect to the products that are allowed.

<unk>, obviously, Arizona is a market that when it was medical only look very much like recreational so not looking for particular guidance or numbers of what dispensaries could do but maybe just.

You could use another state of the proxy as to kind of what new Mexico. It looks like once it goes last time on the rec side.

Yes, it's very similar to Arizona, it's very flower focused this is a very adult use like medical state right now so we anticipate it will.

Again, not a huge lift of a transition for that state to go to adult use.

Okay. Thanks, guys.

Thank you.

Once again analysts may ask questions by pressing star one on net telephone keypad.

Our next question comes from the line of Eric <unk> with Craig Hallum.

Great. Thanks for taking my questions guys.

Good morning, guys focused on Maryland, a bit.

So I understood that you guys are kind of pausing expansion on that 75000.

Expansion projects can you remind us I think you had 110000 square feet now can you kind of remind us.

Whether thats <unk> or greenhouse in.

So that's how the.

Demand a reception is for your wholesale products in that market so far.

And then maybe just remind us.

I think youre mentioning high power and Kings and Queens are kind of live in that market now any any kind of anecdotes there.

On the demand for that would be great. Thanks.

Yes, we currently have 110000 square feet and that is greenhouse with.

I would say fairly substantial HVAC dehumidification capabilities.

The generally speaking in full transparency the Rev up in Maryland has been a bit slower than we expected.

That's mainly us getting our full array of skus out to the market and Thats just an interface with the regulators. The two primary new SKU categories that we're bringing to bear our concentrates so kind of our first foray into the hydrocarbon extraction in Maryland Kings and Queens has been very well received.

Essentially selling it as quickly as we can make it.

That brand, it's very high quality product a lot of our biomass is being directed that direction given the demand that we're seeing and then the other edibles are just entering the market now very excited about the high color brand of edibles.

As you may recall that we retrofit the <unk>.

<unk> cultivation and processing facility to just pure manufacturing now and so we actually produce all skew categories out of our <unk> facility, so a little bit slower ramp up than expected, but we're very encouraged by what we're seeing with these new SKU categories and.

Optimistic that we can move biomass through the existing 110000 square feet I do anticipate over time, we will complete the facility the incremental 75000 square feet. It's just important that we match.

Dollars out the door for Capex very precisely to demand and we're getting increased visibility now.

Were fully participating in the wholesale market.

Okay great.

As we kind of look forward I guess, maybe just.

For the next 12 months or so should we think of of Maryland is mostly mostly this kings and Queens brand, mostly kind of concentrated focus for you guys given that.

Given the greenhouse infrastructure there.

Or are you guys kind of work.

We're in that market as well.

Yes, they are working on flower and biomass sales at scale and that just takes a little bit more time, but again cautiously optimistic that that'll be a big part of what we do.

But these other skus are pretty exciting.

Okay.

And then.

Just on Arizona here.

I think in the <unk> and.

And you guys at analyst day.

You guys had kind of touched on.

Potential for greenhouse expansion in that market.

Is there anything that we should consider.

Sort of in the Capex budget right now maybe for 'twenty two 'twenty three areas.

Similar to the Maryland.

Expansion here just kind of.

Going to be a function of demand.

Yeah, right now, we're focusing on existing infrastructure and capacity down with Yamato facility and no additional expansions here are forthcoming.

But.

The amount of facility the incremental nine acres of shade House was completed.

That's the primary focus right now.

Okay, Alright, great. Thanks, taking my questions.

Thank you Eric.

At this time there are no further questions I would now like to turn the call back over to Dr. Kane for closing remarks.

Thanks again for joining us this morning, we wish everybody, a happy and safe holiday season, and we'll look forward to connecting with you all again in the new year.

This concludes today's conference you may now disconnect.

Okay.

Alright.

Yes.

Okay.

Yes.

Okay.

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