Earnings Call: Q2 2021

Aug 10, 2021

Good day and thank you for standing by. Welcome to the Ascend Wellness Holdings Second Quarter 2021 Investors Call. I'd now like to hand the conference over to your first speaker, Rebecca Koehr, Vice President of Investor Relations. Please go ahead. Good evening, and welcome to AWH's 2nd quarter 2021 investor call. The presentation that accompanies this call can be found on our website, www.awholdings.com/investors. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC and SEDAR filings, including our 10 Q, which we expect to file in the next week. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward looking statements. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward looking statements reflect management's current view only, and we undertake no obligation to revise or update such statements or to make additional forward looking statements in the future. During the Operator? My apologies. Did we lose sound? I'm not hearing anything. Yes, we did just lose sound. I'm sorry, I am hearing you now. Can you go ahead? Did Rebecca finish her remarks? I did not hear. Ms. Kaur, do we still view on the line? It seems we may have lost Ms. Kaur. Okay. Well, I'm just going to go ahead and If she has more to add, we'll get to it. All right. Thanks, everyone, for joining the call this evening. The picture you see on the right here is of our Paramus Area, New Jersey store, which opened in the quarter. This store is on heavily trafficked Route 17 by the Garden State Plaza Mall in Paramus and should be one of the highest volume stores in an adult use New Jersey. The store is built To support the transition to adult use, we expect to see in New Jersey in early 2022. As always, we appreciate the support from our loyal and committed investors who have helped us grow this business from 3 employees in 2018 to nearly 12 90 employees and operations in 6 limited license states across the country. This is an exciting time in the industry and particularly at Ascend. The momentum towards federal legalization is building, the market is in hyper growth Our customers are becoming more and more loyal and passionate about Ascend. 1 by 1, the domino effect is benefiting the states As almost monthly, another state legalizes either medical or adult use cannabis consumption. Today, 19 states have fully legalized adult use and 38 states have legalized medical use consumption. The most recent Gallup poll shows that 67% of Americans support cannabis legalization. This support is almost up over 3 times since the 1970s. For the most part, history has proven that for every major social issue in America, After 2 thirds of the country supports it, it eventually becomes federally legal and importantly mainstream. Estimates show That the U. S. Cannabis industry sales in 2020 were over $17,000,000,000 a 40% increase over 2019. Some analyst projections predict industry legal sales will reach as much as $100,000,000,000 by 2,030. The market is exploding and we believe we are well positioned in leading states to capitalize on this exciting opportunity. We are proud to share with you the highlights from Q2, Our first full quarter as a public company. We remain committed to providing best in class disclosure. I will remind you that we are the 1st U. S. Cannabis SEC registered IPO with Delaware governance and audited GAAP financials. We remain committed to good governance and transparency. With that, let's discuss the highlights from the quarter. Since the end of Q1, we have opened 3 dispensaries bringing our total to 18. In addition to New Jersey, the 2nd dispensary license we acquired through the Midway transaction became operational in Chicago Ridge, Illinois, Increasing our total number of dispensaries in the Chicago area to 4 and our total in Illinois to 8. We are in process of rebranding all to the Ascend name by the end of August. On April 29, we opened our Boston flagship location, which is the 1st retail location in the downtown of a major city on the East Coast. Our location is steps away from TD Garden and Faneuil Hall. Sales in this location continue to build despite downtown foot traffic being limited. On the cultivation front, We added approximately 17,000 feet of Canopy this quarter, bringing our total Canopy to just under 100,000 square feet. We expect to bring online an additional 145,000 square feet by the end of the year, including expansions of our cultivation facilities as well as the addition of our new 120,000 foot greenhouse facility in Illinois. In the quarter, we engaged Seaport Global Advisors as our bankers to refinancing our existing debt to lower the firm's cost of capital and provide additional cash to support investment. We expect to have an announcement soon. We currently have over $100,000,000 of cash on the balance sheet and with this incremental debt raise, we will be fully funded to build out our current pipeline. We also have significant updates on the product front. Last week, we launched our partnership with Lowell Smokes And now you can find Lowell pre rolls on the shelf of our stores in Illinois. We're excited about this partnership as Lowell Smokes is the number one selling pre roll in California And this is their first foray out of state. Also in Illinois, this month we launched flower from our Ozone Reserve in house top shelf brand in all of our Illinois stores. This represents the culmination of the improvement of our cultivation team to produce best in class flower in the state. On the M and A front, we are pleased to announce Substantial progress in Ohio. We closed on our cultivation facility in Monroe, Ohio to add to our existing processing facility under construction. We also received approval for the acquisition of a dispensary in Carroll, Ohio and are moving close to the new future. We are excited about Ohio as it is one of the top medical markets with high potential to return to turn recreational in 2023. We expect to have more announcements about Ohio in the near future. Lastly, before moving on to financial highlights, I want to comment on our continued commitment to social justice. During the quarter, Ascend doubled down on our commitment to last prisoner project. Following the early completion of our initial pledge made to the last prisoner project, Ascend committed to a second pledge. Ascend retail locations currently ask customers to voluntarily donate $1 to LPP at checkout With a corporate match for each dollar donated up to $250,000 for a total of $500,000 This project is important to me personally. Social justice remains a top priority of Ascend as we continue to commit our time and resources as opportunities rise. Let's discuss the financial highlights of the quarter. Total system revenue for the quarter was 97,500,000 Net revenue, which excludes intercompany sales, was $83,400,000 On the top of the slide, you can see year over year net revenue, which increased by $58,000,000 or 2 28 percent. Quarter over quarter net revenue increased by $17,200,000 or 26 percent. Revenue growth was driven by increases in cultivation and production activity, new store openings and heightened traffic at open stores. Just to remind you, this quarter represents the peak quarter over quarter growth for the year as the bulk of our 2020 openings have occurred at the end of this quarter. Due to the strong performance in the quarter and improvements in both our retail and wholesale operations, we are raising revenue guidance for the full year 2021 from $320,000,000 to $340,000,000 to $330,000,000 to $350,000,000 We are pleased that we continue to execute in this hyper growth environment. Later in the presentation, I will turn it over to Dan Neville, our CFO, and he will dive deeper into the financials. Let's talk about our footprint. As I've mentioned in the past, we are primarily focused on flagship assets in limited license states east of the Rockies. We aim to have the best retail locations and have carefully curated our selection of assets. We continue our strong growth and currently have 18 dispensaries open and 90,000 square feet of canopy and a robust pipeline. Including the dispensaries set to open, we expect to have 26 dispensaries And 285,000 square feet of Canopy by the end of next year. This just represents our fully licensed, fully financed and in development pipeline. It does not include any additional assets or asset expansion and we fully expect to do more in the future. We are pleased to develop Such a robust portfolio of assets in just 3 short years of operations. So far this year, we brought 5 dispensaries online. We plan to open 4 more early next year. We anticipate closing the transaction with MedMen New York by year end, which will provide us entry into the New York market. MedMen has 4 operating retail locations across the Strait, which are currently in New York's medical program, including the flagship Manhattan location, which is located on Fifth Avenue, just steps from Bryant Park. I will also note that most of the Canopy we need to bring online is at existing cultivation sites. We believe Canopy expansions have significantly less execution than greenfield projects. Let's talk a little bit about more of the construction. Got a few pictures for you here. We have canopy expansions underway in Illinois, Mass, New Jersey and Michigan. The first picture on the upper left is a drone image of our Marquis Illinois cultivation facility. It provides a significant scale for our vertical operations in Illinois and we are one of the top wholesalers in the We currently have 55,000 feet of canopy in Illinois today and we will add 58,000 by the end of the year through the addition of our fully sealed greenhouse. I like this picture because it really illustrates the scale of the operations. When we first took over, we inherited a 75,000 square foot building With a de minimis amount of Canopy. Now we have a fully built out Canopy, manufacturing and distribution center with another Canopy expansion underway. Our Illinois facility is the blueprint for our cultivation expansions across all of our other states. The next image on the top right Is a picture of seeds being planted in the first phase of our New Jersey cultivation facility. Around year end, we expect to have the 2nd phase of New Jersey expansion complete with additional Canopy and processing capabilities. Our first phase of expansion began in April and is planting already. This shows our ability to move at lightning speed take advantage of new adult use markets. This was the playbook we used in Illinois and we are doing it again in New Jersey. The image on the bottom left Is a new flower room that we recently added to our Massachusetts cultivation. While this project has been significantly delayed, we are finally in the final stages of construction. Tables and lights are being added and we expect to plant in October. And finally, the picture on the bottom right is one of the flower rooms just before our first harvest in July at our Michigan facility. Let's discuss our branding strategy. We continue to build our portfolio of brands. We have 2 in house Brands. 1 competes in the quality for value segment, Ozone, and the other is our higher end brand, Ozone Reserve. We look to partner with West Coast Brands to increase our product offering, particularly in the best category. In April, our Ozone Brands We're in the 2nd highest sales of any brand in the state of Illinois, above highly regarded brands like Rhythm Verano and High Supply among others. The brand is developing a strong reputation in the market. We're continuously working to diversify our Ozone offering and provide all form factors to our customers. It is our strategy to deliver to every dispensary in Illinois every week, and we believe this distribution strategy is a key part of our success. Our brand partnerships provide Ascend with a unique opportunity to expand in high end key product categories Consumer focused retail experience is paying off. Our stores are optimized at fast throughput, multiple points of sale and efficient layouts. We provide an exceptional digital experience with express pickup, curbside and delivery options. We have committed customers and we reward them through our loyalty program. Customer service is our priority. Let's talk about our revenue and our revenue mix goals. Our adjusted gross margin and adjusted EBITDA margins for the quarter were 48% 24%, respectively. While we are comfortable with these strong margins, We think we can do substantially better over time through vertical integration and scale. There are 4 main drivers which will help us achieve these desirable margins. Increasing production capacity as we bring Canopy online and we begin to harvest plants continuing to add retail locations to achieve the maximum cap in each of our markets, optimizing product mix and finally reaching a more balanced retail wholesale revenue breakdown as well as carrying an appropriate amount of in house and partner brands in our own stores. By achieving these objectives, we will gain scale, operating leverage and realize industry leading margins. We're moving towards the ambitious goal that 50% of our business come from wholesale, 50% of our business from retail And 50% of our products sold in our retail dispensaries across our network being our own in house ozone, ozone reserve and partner brands. Today, approximately 40% of our revenue is wholesale and approximately 35% of the products sold at Ascend Dispensaries are AWH brands. We want to give you some more insight into our M and A strategy. Both my CFO and I come from financial backgrounds. We were once on your side in your shoes on the buy side. As such, we are extremely judicious in how we allocate capital. We are acutely focused on return on invested capital I know that for every dollar we invest, we want to make sure it is worth diluting our ownership in our existing portfolio of superior assets. We have a disciplined 2 pronged M and A strategy. 1st, in keeping with our theme of going FIFA not wide, our priority is to continue to expand in the states we are in and optimize and scale our existing footprint. While we have reached the regulatory cap in most of our states, we have room to expand from our 8 retail licenses owned today in Illinois to the state cap. Our announcement today of Ohio acquisition shows our commitment to being a leader in that state. We would look to continue to expand in Ohio until we get for the 5 dispensary cap. We are committed to becoming a market leader in Massachusetts. And while we have a good start with our expansion of our cultivation facility, We are open to the possibility of expanding our cultivation, manufacturing and distribution capabilities through acquisition. The second prong of our M and A strategy is to into other limited license adult use or near adult use markets. While we would focus on contiguous states east of the Rockies, We are also open to opportunities in other limited license states. At Ascend, we are opportunistic buyers. And if nothing meets our criteria, we are comfortable with our current portfolio. On the topic of valuation, you have all noticed that the sector has traded lower over the quarter Many industry competitors trade significantly below target valuations and valuations of similarly growing companies in other industries. Even with that industry discount, AWH trades at a meaningfully lower valuation compared to some of the larger MSOs. AWH is trading at approximately 8.7 EBITDA estimates compared to the larger MSOs, which are trading closer to 13.5. Although these companies have much larger market share, AWH has premier assets in premier locations and we are positioned to operate and become leading players. Before I turn it over to Dan, let me just reiterate the company's investment thesis, which we've discussed with you in the past. We call ourselves MSO 2 Because we are a company that didn't pursue a strategy of state applications, but rather went out and actively bought what we believe to be the best portfolio of any MSO. We are now focused on building and scaling these attractive assets with intent to achieve scale before expanding to new opportunities. Within these markets, we are focused on premier asset flagship locations. As competition enters this business and states with limited caps, We strongly believe in the value in superior retail locations to create barriers to entry and long term value creation. We have a very disciplined capital allocation program and the bulk of our expansion has been fully funded through sale leasebacks and capital raised. We are not biting off more than we can chew and are very diligent with where we spend our money. We have successfully grown our portfolio through M and A and we see this as the fastest path to growth given the barriers to entry and regulatory environment. We have the team to succeed. Our management group is focused on executing and has already done so in Illinois. The team brings expertise from several areas spanning capital markets, cannabis industry, regulation and permitting, retail and more. The company has room for continued margin expansion with only about 30% of our cultivation assets generating revenue today. These are just a handful of the reasons why we are confident that Ascend is positioned to exceed. Now, let me turn it over to my CFO, Dan Neville, to provide a detailed update on the financials this quarter. Thanks, Avner. Good evening, everyone. Avner covered the revenue drivers earlier in the presentation. So for this slide, I'll focus on adjusted gross profit and adjusted EBITDA. Adjusted gross profit dollars increased $7,000,000 to $39,600,000 or 22% sequentially, driven by Illinois wholesale production efficiency and retail stores coming online. This was partially offset by declines in Massachusetts wholesale. Gross profit margin was 47.5 percent in the quarter, down approximately 170 basis points sequentially. This decline was driven by lower realized pricing in mass wholesale due to the bulk sale of lower testing product, partially offset by increased margins in Illinois. Unfortunately, we had some sick genetics that were brought into the building in mass. We have since introduced new healthy strains that are achieving higher potencies, but the old genetics are not completely flushed through our inventory yet. Our adjusted EBITDA for Q2 was $20,300,000 which represents an increase of $4,500,000 were 28% sequentially. Our margin for Q2 was 24.4%, which represents a 43 basis point increased sequentially. Despite our gross margin headwinds, we levered SG and A by 150 basis points quarter on quarter, which allowed us to expand EBITDA margins. As a reminder, approximately $6,100,000 of rent expense is related to sale leasebacks that is accounted for above the line, the majority of which are in COGS. We've already built out the corporate infrastructure needed to run our assets and have centralized our overhead structure. This should allow us to continue to grow revenue faster than FD and A expenses. Let's move on to discuss some of the key operating metrics for this quarter on Slide 16. During the Q2, AWH opened 3 dispensaries, which brought the company's total to 18 open dispensaries. Retail transactions in the quarter totaled 573,000 which is up from $146,000 last year $411,000 last quarter. Average basket in the quarter was $101 which trended down quarter on quarter. We now have 5 cultivation sites online in 5 states with the closing of our Monroe, Ohio acquisition earlier in the quarter. In Q2, we sold approximately 11,000 pound equivalents of product at a very healthy average price per pound of approximately $3,600 Both of these metrics trended up for the company in aggregate. Let's move on to Slide 17 to dive deeper into the wholesale business. Gross wholesale revenue increased to $39,500,000 representing an increase of 30% sequentially. Net wholesale revenue, which excludes intercompany sales, increased to $25,400,000 representing an increase of 23% quarter on quarter. The increase was driven by increased output and pricing at the company's Illinois cultivation facility. Our pounds sold increased 28% quarter on quarter to £11,040 and our gross revenue per pound was $3,577 Pricing was up slightly quarter over quarter driven by an increase in pricing in Illinois, partially offset by declines in realized pricing in mass due to the bulk Let's move to Slide 18 to discuss the retail metrics for the quarter. Total retail revenue increased to $58,000,000 representing an increase of 28% sequentially. Retail transactions increased 39% quarter over quarter to 573,000. This was driven by an increase in transactions at our existing operations and the opening of 3 new stores within the quarter. Our revenue per transaction declined by 8.6% sequentially to approximately $101 This decline was driven by geographic and adult use patient mix. In the quarter, we added 2 recreational dispensaries in urban locations, which typically have a lower average ticket. Additionally, average tickets for medical customers are significantly higher than recreational. So as we serve more recreational customers over time, we expect our average ticket to tick down. Our annualized revenue per store was $13,900,000 which was down 3% sequentially. However, I'd like to point out that this is a very healthy number, especially considering that we opened 3 new stores So we're still ramping over the course of the quarter. Let's move on to Slide 19 to discuss the increase in guidance. We are proud that our Q2 revenue growth came in above expectations. And as a result, we are increasing our full year 2021 revenue guidance to a new range of $330,000,000 to $350,000,000 of net revenue. The new range represents a very healthy 130% to 144% growth over last year. We have line of sight to this new range as all of the assets required to achieve this revenue are already turned on. While our revenue growth is impressive and our adjusted EBITDA dollar growth for the remainder of the year will follow, we don't anticipate significant margin expansion in Q3 and Q4. Instead, we expect moderate increases in margin due to a lower rate of sequential revenue growth for the remainder of the year and a ramp in wholesale expenses in Q3 and Q4. These expenses will support the planting and subsequent harvests out of our expanded cultivation footprint in early 2022. As Avner mentioned, we have Canopy expansions underway in Illinois, Mass, New Jersey and Michigan and expect to have approximately 235,000 square feet of Canopy online by the end of 2021. These Canopy expansions combined with the additional stores we're bringing on around year end will drive the next step function change in revenue and margin expansion. Note that this guidance does not include the revenue associated with our pending transaction in New York. Let's move on to Slide 20 to discuss cash flow in the quarter and the state of the balance sheet. Before we dive in, I'd like to note that we are in the process of raising approximately $200,000,000 of senior debt, which will refinance our existing debt, fully fund our MedMen New York obligations and provide additional working capital to pursue M and A. We anticipate this will bring the average interest rate on our debt down significantly from our current rate. While there's no guarantee until we're closed, We're highly confident given where we are in the process. On the top of the slide, you'll see a waterfall bridging to cash at the end of Q2. During the quarter, we increased cash by $41,000,000 We used approximately $4,000,000 for operations and we invested $36,000,000 in CapEx, the majority of which was used for cultivation expansions. Cash CapEx was elevated during the quarter due to a timing delay of a $14,000,000 tenant improvement that came in, in early July. Finally, we received $86,000,000 of net proceeds from the IPO. We continue to anticipate CapEx use of approximately $90,000,000 for the full year as we build out our cultivation expansions and continue to bring online stores in Massachusetts, New Jersey and Michigan. We ended the quarter with $104,000,000 of cash and equivalents, $132,000,000 of debt and net debt of $27,000,000 In closing, This is a very exciting time at AWH and I'd like to personally thank all of the ascenders across the organization for helping us get to where we are today. We're not done yet and over the next 12 months we'll continue to be laser focused on executing on our plan, completing our cultivation expansions, opening the remaining dispensaries and taking the blueprint we've created in Illinois to our other markets. With that, I'll turn it over to the operator for questions. You will hear a 3 tone prompt acknowledging your request and your questions will be pulled in the order they are received. Your first question comes from Russell Stonelee from Beacon Securities. Please go ahead. Good afternoon and thanks for taking my question. First, with respect to the debt financing you're working towards, I understand you're looking for roughly $200,000,000 Just wondering if you can comment on what demand looks like and what the potential terms May come out of the matter what you're looking for there. Hey, Ross. Thanks for the question. Yes. We're looking to raise, as I think Dan said, about $200,000,000 The debt markets are very strong for cannabis related securities. Obviously, While the rates are significantly lower than they have been in the past, we probably have an average cost of debt now of close to 15%, And we're looking to bring that below 10% with this offering, and this offering will be basically represent all the debt of the company pro form a. We're in the closing process. And as Dan said, we got to get this done, but it's looking very strong now and we're very excited to work with this new group of debt investors. Great. Thanks for the color on that. And just a quick question around your cultivation expansions. Obviously, a lot on the go and we've heard More generally, just issues, supply chain disruptions and challenges faced by various Builders of anything really across U. S. Just wondering if you're seeing challenges on that front and if so, how you're managing them and how you feel about The schedule in that context? There's very little about cultivation bills that aren't challenging, to be honest. I think The industry, I think the industry has done a good job. I think we've done a good job, but this is hard. I think in this current environment, hard to build any industrial facility. Supply chains are challenged. We have trouble getting building materials. Things get delayed. We rely on electrical utilities to bring us additional power, zoning, permitting, jobs. It's hard to get people To show up to work in a very difficult kind of construction environment, and it's challenging. With all that said, we're moving forward pretty close To target, I mean, everything tends to get delayed in this industry by a little bit. But for the most part, when you look at our cultivation expansions as Illustrated by that picture, you can see that in New Jersey, our first expansion is planted. In Michigan, we're harvesting. In Mass, when you see fully built out rooms and you see they're putting in the tables and lights, that's You're really done. Until then, everyone can tell you that things are moving forward. But I want to see that interior picture of Fully built out room and plants and lights in there, and then I know we're ready for plants. So I think we're in good shape. We do have some we do have more our second expansion in New Jersey is coming online, additional expansions in Ohio and Michigan. But overall, what's nice about our portfolio is We're in the later innings of this cultivation build. And so the certainty on timing, I said, when we started in the very beginning, We were delayed years, then we were delayed months. Now we get delayed weeks. We're in the final process here and things are going well. That's great color. Thanks for that. And maybe if I could sneak in a quick final question just around New Jersey and reading the local press, See a number of local municipalities, some passing ordinances banning, at least temporarily anyway, Double use operations pending the final regs. Just wondering, how you're situated and what the what that environment looks like in the 3 municipalities, including Fort Lee, which you intend to open later this year, I believe. Just wondering how that environment looks for you now? Yes. Well, look, I think you have to understand a little bit about the New Jersey process. The way New Jersey did it was that if you don't ban it By a certain date, I think it's this month, you're automatically voted to opt in. What that did was that put pressure on the towns, which weren't ready to pass an adult use ordinance to ban. But that ban for most of these or not for most, but for some of the towns and certainly our towns really relates to giving those municipalities a chance to write a local ordinance the way they want. We feel very good about our prospects in all three locations. Montclair, we expect to basically is completed and we are looking forward to adult use there. We're moving forward very aggressively in Rochelle Park and we feel very good about Fort Lee. This is politics. This is local politics. Nothing is ever assured. But when we pick locations, particularly in a state that we only have 3 locations, we pick these locations with an eye towards adult use And with mayors and towns that we're excited about those tax revenues. So nothing is ever assured, but we feel very confident in all three towns. That's excellent. Thanks for the color. I'll get back in the queue. Your next question comes from Bobby Berson Canaccord. Please go ahead. Hi. Thanks for taking my questions. So I guess the first one Abner would be With the news out of New York, it's been frustrating kind of a slow process there with moving forward Some of the legalization progress and with the governor resigning, the incoming governor, What are your thoughts there in terms of the calculus on how things play out? Is this a net positive in terms of how quickly We move forward from here or just any take on that would be helpful. Thanks, Bobby. Was there news in New York today? I didn't notice. No, just kidding. Look, everyone knows that New York has been a very frustrating market. I think while everyone's excited about it long term and Excited about the prospects of a market with 20,000,000 people and very limited supply to be a really attractive market for the industry. It's been very slow going. And I think even before you get into the problems of Governor Suitsky Forum or Governor Cuomo, Even when he was kind of riding high, while he was pro cannabis, he wasn't moving quickly. And we all know that the cannabis board has yet to be seated and he didn't even move forward with whole flower As aggressive as we had hoped in the medical market. Then the state has gone into complete inaction as we've gone through this political drama. We do see today as a very strong net positive. We see the ability of Albany to get back to work as being really important for this industry and this process. We believe the new Lieutenant Governor is very supportive of cannabis and will move very quickly To see the Board and move forward. That said, that's political and my opinion is as good as anybody else's, but We definitely see this as a strong net positive. As someone going through the legal process to get our transaction approved, We're really excited about this move and our ability to work with the Department of Health and get this transaction closed. Great. Thanks for that. Obviously, 2022 has a lot of tailwinds from the cultivation you're bringing online The second half here, but in the second half on a revenue basis hitting the guidance, Just curious, now that all your assets relative to that guidance are turned on, if you had to kind of rank Your confidence level by geography or sales channel or what have you, how do you feel about tiering What's contributing to you guys hitting the guidance here in the second half? All right. Well, Dan and I aren't in the same room. So I'll give you my answer and then I'll let Dan give it to you. I mean, if you look at our guidance, if you look at what we did in the second quarter And you multiply that by 4. We're sitting here on the run rate of our guidance for the year. So we're not really banking on significant growth to hit This target. We have the highest confidence, I think, that we've ever had in the near term at AWH because these assets are on. And if you look back at Russ' question, the question is always when is it going to open? We played the when is it going to open game in Boston for about 9 months. We've been delayed over a year in our MAF facility previously on the cultivation and others. And like others in the industry, this is just this is Part of doing business. The fact that we have all our assets open right now is really gives us a high confidence into outlook Over the next 6 months, 9 months. And then we have if you look at the pipeline slide, we've another wave of cultivation assets, Which and some dispensaries that will really drive the next wave of growth. We always use the growth in our company as stair steppy. We went through the stair steps in 2021 and now we're going to kind of yield those results for the rest of the year. And now we've got to bring on the next set of assets, which are going to drive growth in 2022. So I think that's kind of where we are. And I'd also say to remind you that when we look at our pipeline and our growth, we're not building in anything for M and A, no additional cultivation builds That we need. And also, New York is really not figuring in, in most people's estimates. We view New York as a 2023 event. Therefore, 2022 has de minimis contribution from New York. So for all those reasons, You never want to be overconfident in a very difficult industry, but we feel pretty good at where we are. Dan, what are your thoughts on this here? Yes. I'd just echo what Avner said. The assets are on. We're at a pretty healthy run rate today. We obviously do have a few minor openings in the balance of the year. The Newton Dispensary and some harvest out of Michigan and New Jersey that would hit before the end of the year, but we've kind of battle tested and put very unheraldic assumptions around Those assets. So we're pretty confident we're very confident on the current performance of our assets today and I think Illinois is obviously the biggest driver here, right? But you continue to see robust growth Out of that market, we're not banking on that for the remainder of the year, but That tailwind continues to help us quarter on quarter month on month. Yes. I mean, I would just add, Illinois Has been a monster for us. We're so proud of that team out there. We were sitting here if you were sitting here 6 or 9 months ago on our call, We were looking to scale up that operation. We were looking to improve cultivation yields. We were looking to bring our kitchen online. And all those things have happened. We're achieving cultivation success. We're achieving manufacturing success. We're achieving distribution success. All of that indicates what we kind of I have always thought that this industry is hard. You have to dial it in. But when you dial it in, it is really it can be really successful. And I think you're seeing that with a lot of our competitors. Everyone has states that they're struggling with in getting up to speed, but the better companies in the industry all have states that they're really killing it in. And for us, that's Illinois. Great. Thanks. I'll let somebody else ask some questions. Thanks for those answers. Your next question comes from Matt McGinley with Needham. Please go ahead. Thank you. My first question is on the bulk sale revenue in Massachusetts. How much revenue was that was related to that lower testing flower in Massachusetts This quarter and how much of a gross margin impact did it have? And I think Dan said in his prepared remarks that you weren't completely through that inventory. So I'm curious how much of an impact that could actually have into the Q3? I'll let Dan answer that, but let me just say On the macro question, this is when you bring cultivation facilities online, your initial set of genetics and your initial harvest are a bit of a crapshoot as you dial it in. In every one of our facilities, and I would say for every company in the industry, No one is ever thrilled. Most people are not thrilled with their first harvest. So, we got unlucky with a set of genetics They came in with some illness and because of the timing, it takes 3 or 4 months to work through that. But what's nice is that we're pretty much through the last harvest Really troubled product and everything that we see now is starting to test better, act better, and we're rebuilding it. And we went through this in Illinois. So, while we're never thrilled with something like this, we consider it kind of part of the business. I'll let Dan answer the specific numbers of it. Yes. So Matt, it was a little over $1,000,000 of product. To answer the second part of your question, we what we have still in the vault and on the balance sheet Today is about $350,000 worth of product. So while there's a little bit still that we have to Flushed through here. There's a lot lower a lot less that we have left on the other side of this thing. So that kind of dimensionalizes where we're at. The overall impact On the margin side of things, it was about 200 bps for the issues in Massachusetts. Okay. That's helpful. And then taking through the taking in the refi opportunity you discussed, but also thinking about your cash flow from ops. In this quarter, you were fairly close to crossing over to positive. And based on the revenue guide, it looks like you would probably be positive in the back half of the year know working capital would be lumpy, but I mean do you think that you could be cash flow positive in the back half of the year? Well, Lody, I'll turn it over to the participants. But once again, I mean, I think what's important is we are after tax free cash flow positive Significantly, before expansion CapEx. And I think for any company, we've all been doing this for a long time, that's a good position to be in because every Dollar that we're investing that puts us at negative overall cash flow is high return capital to grow the business. So we like where we are and we like that the core business is essentially free cash flow positive. Dan, you want to go through the timing? Yes. So we should be in late Q3, early Q4, we should be after tax Cash flow positive, not accounting for the CapEx ramp the CapEx spend that we have for these cultivation build outs for the remainder of the year. Okay. All right. That's great. Thank you very much. Your next question comes from Graeme Kreiner with 8 Capital. Please go ahead. Hi, good afternoon. Thank you for taking my question. I wanted to ask Follow-up regarding the comments made regarding M and A targets, particularly within New States. Looking at some of the targets that you laid out there, I'm just wondering, do you have any sort of internal hurdle rates? Or do you look for businesses at a certain stage or life cycle, in terms of how that might fit in with the existing core business, what that might do to the financials? Just wondering if you get a bit more selective when you're looking at various greenfield opportunities? Thanks. Thanks for the question. It's Hard to it's such a three-dimensional kind of matrix in terms of decision making. It's hard to just give you a quick answer to that. Certainly, when we bought our New Jersey asset, it was not profitable, didn't have a ton of revenue, And we're really buying assets. And we were also taking a risk that Adult use didn't ever happen in New Jersey. So very high discount rate, but really high upside in the asset. When you get into a later stage existing adult use market, if we were to do something additional In Massachusetts, for instance, or if we were in a late stage medical market, those are the things where we're looking to be really accretive Pretty much immediately or in 2022. So we're always looking for accretive acquisitions, but I think you can get caught up in something Being accretive on a multiple basis, but not accretive on a value basis. So we need to it's great to do accretive acquisitions. We're looking to do some. We're talking to people that fall in that category, but that isn't the only metric, right? We're looking at an industry that's going from $17,000,000,000 to $100,000,000,000 There's plenty of upside for growth. There's plenty of assets that are underperforming and those can be tremendous buys opportunistically. Also, you have to admit that We're not the only other the only people out there looking for M and A, right? So, the market has is definitely more competitive now, And we feel that we have a real competitive advantage in our existing states. And if you look at by going deep in that wide, when you look at what we've done in Illinois and Certainly, what somebody like Kim has done in Florida and Curaleaf in New Jersey, by getting significant market share, you Drive huge profits in this industry and that is something we would like to do in all our core markets. And so in a lot of cases, our most accretive acquisition could be in our existing markets. Understood. Appreciate the color there. And just as a quick follow-up, in terms of what you're seeing in the private markets right now, Are the valuations reflecting what we've seen in the public markets coming off the highs in February? Or is there a bit of a dislocation there as you're having these discussions? Thanks. There's a bit of a dislocation. I mean, look, the private market, there's always an arbitrage between the private and public markets. So but unfortunately, When the public markets come down like they've had, you don't get that 20% or 30% reduction in private market values right away. And it's also case by case basis. Forever in this industry, you have a lot of SSOs and smaller operators with stars in their eyes about either becoming MSOs or the high valuation of their And that has really slowed down consolidation for us and a lot of other players, and that hasn't changed. But at the same time, This industry is hard. People reach the level that they're capable of as operators and they see it's time that they can maybe create more value for themselves And their investors by partnering with somebody like us. We think that we have a very attractive stock. We're a company that kind of does what it says it's going to do, Good people to work with, executed. So we hope we're a good partner. There's a lot of memories in this industry on the private side of people who did deals with companies that had stock implosions. And so it's not just valuation, people want confidence in the Stock that they're getting in the case that they're getting stock as well as the people involved. So those are all areas where we compete To get good deals and get attractive valuations. Okay. Thank you very much for that. Your next question comes from Kendrick Tai from ATB Capital. Please go ahead. Kendrick, your line is now open. So apologies for technical difficulties. Good evening and thank you for taking my questions. Avna, just on Illinois and the capacity expansion there, can you speak to or even just directionally provide any Can you speak to or even just directionally provide any insights on how much more attractive either the yields will look Through that expanded footprint? And or perhaps just speak to sort of what your expected margin profile could be that you would generate relative to what you do now on that Smaller footprint. And then a follow-up question on Illinois and the capacity expansion there. As it relates to new retail licenses, is it Reasonable to assume that part of what you've been building into here at your sort of target of 113,000 exiting the year Is with a view to having room to support those additional new licenses as they come on through the lottery process in the second half of next year? Yes. Let me take the macro point and turn it over to Dan on some of the specifics of The return on the greenhouse. Yes, look, Illinois has what just under 110 stores now With 14,000,000 people, that's significantly under stored, right? We think the industry is really excited about having additional stores. We're not worried about the competition. We're excited that customers are going to have more access to product And creates a great opportunity for our wholesale market. That's clearly part of the thought process. Secondly, We do see these licenses as potentially people we can partner with, to get our additional 2 licenses and get to 10. And we're having active discussions with People who have won the lottery are talking about it to partner with them in a way to become part of the Ascend family. When we look at the greenhouse, we think the greenhouse can do similar results to the indoor. But as you know, greenhouse, we're looking we're going to be a little bit more conservative. We're going to be we're going to look for a little lower turn, and look for less flower and more product that's going to go Into manufactured products and distillate, but we have a real shortage in our current facility in distillate. We've been very successful. And as a result, we need more biomass and we need more distillate. So this is product that's desperately needed for Our existing business and has a home right away. Dan, you want to talk about a little bit about the margin profile or give them a little? Yes, sure. Yes, so we don't really dive into margins on a state by state basis, but directionally I can kind of give a little bit Color. We do have a pretty substantial footprint today in Illinois. We have 55,000 Square feet of Canopy, and we're adding 58,000 square feet with the greenhouse. So it's Well, it's a significant expansion. We're not tripling our Canopy or quintupling our Canopy like we are in Massachusetts or New Jersey And leveraging that overhead. With that being said, greenhouse at AwaVie is the lower cost biomass. You don't have as much electricity related to that. But that will kind of be offset by the fact that we assume more of our product will go towards Distillate products, due to it being greenhouse product, although it will be fully conditioned and a sealed greenhouse. I would say that we will be able to leverage our infrastructure that we have in place today At the Berry Cultivation, so think the lab, we don't have to add any additional capacity at our lab. We don't have to add any or kitchen or with any of the automated equipment we use related to pre rolls or flower batching. So we can leverage that and leverage the capacity utilization there and that should be accretive to margins. And then the last point I would make directionally is that we are carrying the costs, not just in Illinois, but across these expansions of the tenant improvements that we spent for these expansions within our sale leaseback today. So we're paying full freight on the rent side of things to Fund these build outs, and that's included in the $6,100,000 of rent that we paid in the quarter. Once we get production out of these facilities in Q1, that fixed cost along with the other fixed Cost I talked about with the lab kitchen and just overall management overhead should provide a nice bump in margins Once we're productive out of that facility. And just to be clear, that's a huge headwind to our business, right, because we only have 30% of our cultivation Assets online. I mean, if you were to look at most other industries, you'd be capitalizing the cost of additional projects until they started generating revenue. We're eating that full freight on rent. So that's why scale just immediately is so accretive to our bottom line Thanks, Adam. I hear you and that's such great color from you and Dan. If I'm just to quick On brand and related, you interesting little exhibit there on your Ozone sort of Positioning and particularly within the context of April. I'm just wondering recognizing those sort of ratings and rankings can be pretty noisy. Is it safe to say that Over time, you're typically sort of puts and takes within that top five sort of grouping in Illinois. You provide any insight there as to how that sort of trended directionally and perhaps how you exited the quarter? And then just one further follow-up for me, please. Look, we're doing well. That was obviously a very favorable stat in April, so we're happy to share it with I would say there's a number of great brands in Illinois and we're all kind of Cresco is the biggest player, Not surprisingly, both the Cresco brand, the High Supply and others. After that on the wholesale side, GTI, while we're ahead of Rhythm has other brands, but there's a bunch of us. Verano, ourselves and GTI are in that next group. Other players have great products, but they don't have the canopy or the depth of market yet. They're building, they'll get There I assume, but for right now, it's a small group that a dispensary can say, look, I need you to fill my shelves every week. And That's what we're trying to do for our dispensaries and for every dispensary. And that's been the contributor of our success. Knowing If you as a customer can know that there's going to be a flower pre roll and a vape and a gummy delivered to your dispensary every Weak, then you can be a great partner of that dispensary and we can do that in Illinois and we want to do that in all our states. Thanks. And then just a quick final one, speaking of filling shelves. Does the cachet of Lal Farms create sort of demand sort of Natural demand pull for want of a better way to put it, of that product or do you know will you need to be doing a big marketing push around Lal? Any sort of color on How are you going to get from here to there on Lal? I mean, yes, we're familiar with the cache, obviously. But how does that cache translate into Shelf space in Illinois and how do you plan on driving that shelf space allocation for Lal Farms? Yes. Well, I mean, if you look at earlier states like Illinois and newly addled new stores, customers are clamoring for new products. I mean, you see it when Incredibles and Mindy's launches new flavors, you see it when GTI entered with Beboe, You saw it when we came to market with some cookies product. The market responds really well to new products. It's just a matter of them then Liking that product and holding on to it. We're very bullish on the pre roll segment. It is our biggest focus. When you look at The cannabis industry, only 20% of the people are buying pre rolls. But when you look at the cigarette industry, 2% of the people roll their own Cigarettes. So we see pre rolls as the fastest growing segment in the market for flower. We're very focused on it. And in order to do that, we want to bring in additional brands. Because we're not as focused on the best segment in the market, it makes us a natural player and partner for someone like Lowell Because our Ozone and Ozone Reserve will play below that brand. And so we can use the cache of low to help build their brand at the top, And we can basically show the quality for value segment on the Ozone and Ozone Reserve. That's why we think we're such a great partner. Look, we love to develop best brands. We are working But we also know there's some great brands out west and we'd love to partner with them. We think it goes great with the Ozone strategy. Thanks so much and congrats on the quarter. Your final question I would also say I would just also add that I think Lowell's category, which is multipack pre rolls, is an undersupplied category. They do a good job with it. But in general, the market does clamor for multipack pre rolls. And so that is a Your final question comes from Jesse Fedlak with Cormark Securities. Please go ahead. Hey, good evening. Just on retail transactions, you had some very nice sequential growth. And I'm just wondering if you could maybe elaborate a little bit on how much of that Came from the new store openings versus the higher throughput. Thanks, Jesse. I'll turn that one over to Dan to give you the financial metrics. Yes. Well, It's really hard to break that down, I would say. I mean, the vast majority of that would have come from New store openings. We did despite only having 3 openings in the quarter, we did open Our Fairview Heights dispensary, which is in Southern Illinois Near St. Louis, that store came out of the gate very strong. That was not in the compare in that was Technically, not a new opening, but it opened March 27. So that was a big contributor. So We have seen additional throughput through dispensaries. Our Chicago acquisitions, the Boston Dispenser has been ramping nicely as well, But the vast majority is through the new openings. Okay, understood. And then just switching to New Jersey. I'm just hearing kind of anecdotally Are you still there, Jesse? It looks like we've lost Jesse. There are no further questions at this time. Please proceed. Yes. Look, thank you everybody for joining the call. We're very excited about what's going on. We continue to scale this business. It's hard, but we're doing it and we're growing quickly and we look forward Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.