The Cannabist Company Holdings Inc. (PNK:CBSTF) Q2 2024 Earnings Call Transcript

The Cannabist Company Holdings Inc. (PNK:CBSTF) Q2 2024 Earnings Call Transcript August 8, 2024

Operator: Good day and thank you for standing by. Welcome to the Cannabist Company Q2 2024 Earnings Call. At this time, all participants are listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Evans, Senior Vice President Capital Markets. Please go ahead.

Lee Evans: Thank you. Good morning and thank you for joining the Cannabist Company’s second quarter 2024 earnings conference call. With me today are Chief Executive Officer, David Hart; President, Jesse Channon; and Chief Financial Officer, Derek Watson. Earlier this morning we issued a press release reporting our second quarter 2024 results. A copy of this release is available on the Investors section of our corporate website, where you will also be able to access a replay of this call for up to 30-days. Certain remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more details in the Risk Factors section of our annual Form 10-K for the year ended December 31, 2023, which have been filed with applicable regulatory authorities.

Any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by applicable law. Also, please note that on today’s call, we will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Cannabist Company considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for our GAAP results.

A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to David Hart to get us started. David.

David Hart: Thank you, Lee, and thank you to everyone who has joined us on the call today. On the two previous earning calls, since Jesse and I were appointed to lead the Cannabist Company in mid-January, you have heard us clearly outline our objectives and the actions that we have taken to build a better business. To create a sustainable economic model and to drive value for all of our stakeholders overtime, we have made very clear that this company will look materially different by the end of 2024, and we have been running fast at the opportunities to make that happen. More specifically in 2024, we are fixated on driving increased profitability, rationalizing our geographic and corporate expense profile and proactively implementing all of the changes required to strengthen our balance sheet adequately meet our debt obligations and set the company up for sustained growth and profitability in 2025 and beyond.

To achieve these objectives, we have had to rapidly identify where opportunities lie and move aggressively to capture them. To that end, and in the first half of 2024, we have taken a number of critical steps. Paid 13.2 million to satisfy our May, 2024 debt maturity following on a convertible debt financing completed in March. We implemented an additional corporate restructuring in Q2, both labor and non-labor that would generate $10 million in cost savings on an annual basis restructured our regional operational leadership to align retail and wholesale commercialization opportunities. We initiated divestitures of non-core and underperforming assets, most notably Florida, which is expected to reduce loss making operations and increase efficiency.

We restructured our wholesale operation and go to market strategy with a shift towards finished goods and a higher mix of branded partner products, which has helped to reduce underutilized capacity in our cultivation and manufacturing portfolio. By any measure, the work that has been accomplished in the first six-months of 2024 by the entire Cannabist Company team has been transformative. As we announced in June, we are exiting the state of Florida where we have 14 dispensaries and three cultivation manufacturing facilities. As we disclosed when we announced the exit, Florida represented less than 5% of total revenue in Q1, which remained true in the second quarter. Given the imbalance of our operations in Florida, the market was also loss making with a loss of approximately 10 million in adjusted EBITDA expected in 2024, Florida was a priority on our list for rationalization.

To-date, we have made great progress on the Florida divestitures and look forward to signing definitive agreements and sharing additional details in the near future. As part of the rationalization initiative underway, we have also closed two medical dispensaries in New York, but continue to operate the Riverhead, New York cultivation and manufacturing facility, retaining the optionality of an improved wholesale market in New York, which is starting to show some signs of life. Jesse will add more detail in a moment. As we announced just last week, we are selling our operations in Arizona, as well as one of our two licenses and affiliated operations in Virginia to multi-state operator Toronto. This is a win-win transaction. For the Cannabist Company we are receiving total consideration of approximately 105 million, which strengthens our balance sheet and has already provided a boost to liquidity, a positive step towards de-risking the balance sheet so that we can focus on operations.

We expect both the Arizona and Virginia transactions to close in the coming weeks. While we have successfully implemented major structural changes in a very short period of time, we are not anywhere near done. We continue to evaluate underperforming assets. For example, we are in the process of exiting Washington DC and are completing our analysis of other locations in the portfolio. While we are rationalizing our geographic footprint and aligning corporate costs with a smaller operational portfolio, we are simultaneously positioning ourselves to win in our best markets. Ohio has just converted to adult use and we are perfectly positioned with a tier one license, full canopy in five stores, primed and ready with the right inventory and additional locations under development.

We have identified a location for our sixth dispensary, which is an exciting next step after the launch of adult use on August 6th. Notably, we saw a strong sequential increase in revenue in Ohio in Q2, an indicator of the excellent momentum we had in that market. Thanks to our growing wholesale program. We have increased capacity in New Jersey and expect to have another dispensary open around the end of the year, which will bring us to the state maximum of three. We are also very excited about the pending transition to adult use in both Delaware and Virginia, two other markets where we remain very well positioned. In summary, our team is proactively attacking what has challenged our company in the past. We are simplifying our business, rationalizing our footprint, investing the best markets and systems, implementing material changes in our wholesale and retail operations, improving margins, strengthening our balance sheet, and to put it simply building a better business.

We look forward to keeping you apprised of our continued progress. With that, I will now turn the call over to Derek to discuss our financial results. Derek.

Derek Watson: Thank you, David, and good morning, everyone. I will provide a summary of the key financial results for the second quarter, discuss trends in our markets and comment on our continuing initiatives to strengthen the company. For the second quarter, we achieved 125.2 million in revenue, up 2% from the first quarter. We had a slight decline in gross margin, largely attributable to discounting around the [420] (Ph) holiday, and also due to the increasing revenue mix from our lower margin wholesale business. Wholesale revenue increased 24% over the first quarter and now represents 15% of total revenue up from 12.5% in Q1. Wholesale continues to demonstrate better gross margin discipline with a 300 basis point improvement over the first quarter.

Adjusted gross profit in the first quarter was 48.2 million up slightly over the prior quarter and down year-over-year. The adjusted gross margin of 38.5% in Q2 was down slightly compared to the 39.1% in the first quarter. As we have previously described, we continue to experience an overhang from the unabsorbed overhead in underutilized production facilities, which remained flat compared to Q1 and represented a 4.2 percentage point impact on gross margin. This has already come down from the five percentage point impact experience during 2023, and we anticipate further improvement as we turn on additional capacity in markets such as Ohio and New Jersey. In mid-June, we announced an incremental corporate restructuring targeting a further $10 million in annualized cost savings.

Due to the timing, this had only limited impact on our Q2 results, but will be seen more fully starting in Q3. Adjusted EBITDA in Q2 was 17.5 million, an increase from the 15.3 million in Q1 with adjusted EBITDA margin improving to 14% compared to 12.5% in the first quarter. Cash from operations was negative three million and improvement over the first quarter’s negative 6.2 million and included some upfront costs associated with our restructuring. CapEx in the quarter was 1.7 million with one new retail location in Richmond, Virginia having opened. We continue to expect CapEx over the longer term at an average of around $2 million to $3 million per quarter, primarily supporting new store openings and enhancements to our manufacturing capabilities.

We had 82 active retail locations at the end of the second quarter with the one store opening in Virginia and closures in New York, Colorado and Washington DC. We have more retail locations in development, one in New Jersey, one in Maryland, one in Virginia, and now three in Ohio post-conversion to adult use in order to reach our maximum license caps in each of these states. We ended the second quarter with 22 million of cash on hand. During the quarter, we paid off the remaining 13.2 million of our 13% senior notes that matured in May using net proceeds of 14.8 million from the private placement of 2027 convertible notes that closed during Q1. We continue to target initiatives to improve cash flow, further deliver the balance sheet and reduce interest expense.

To this end, we have recently announced the pending to divestitures in Florida, Arizona, and Virginia. To support operating cash flow improvements, we have also reduced operations in New York through the temporary closure of two stores, are exiting our loss making DC market and are already seeing the benefits of increased revenue from adult use in Ohio. Incremental cash flow will be generated from all of these as well as other pending activities. Lastly, a comment on 280E and the related tax impact, although the timing of Federal rescheduling remains uncertain, we have previously stated that if 280E were to no longer apply, our current annual income tax expense would be expected to decrease by around $30 million. We continue to pursue potential tax return amendments and refund claims associated with 280E from prior tax years, starting with fiscal year 2020, and will provide more updates when they are available.

Our key financial priorities remain driving improvement in margin, EBITDA and cashflow while proactively managing our balance sheet. We continue to pursue adjusted EBITDA margins above 20% over the longer term, which will be with a smaller operating footprint after the closing of all pending divestitures. With that, let me turn the call over to Jesse to add more detail on our operations. Jesse.

Jesse Channon: Thanks Derek. Many of you recall that in Q1 we discussed the substantial improvements we achieved in our wholesale business, which is a necessary factor for reaching our stated goals as a company. Gross margin in our wholesale business in Q1 was 1000 basis points above the fourth quarter. In Q2, we continued to expand our gross margin in wholesale by an incremental 300 basis points, and that did not come at the expense of revenue growth. In fact, in Q2, our wholesale revenue rose 24% sequentially, now representing 15% of revenue in the quarter. We are not done, but we are getting better. The drivers of success in our wholesale business continue to be a mix shift to more finished goods, as well as powerful partnerships with third-party brands who leverage our retail platform and utilize our cultivation and manufacturing capacity, all of which improves our wholesale margin, which in turn improves the cost inputs for our retail inventory.

I could not be more pleased with the progress we are making on the brand partnership side. New brand launches in Q2 included Old Pal expansion into New Jersey and Virginia and Revelry expansion into Maryland. Overall revenue from brand partnerships more than doubled from Q1. Our commercial partnerships are now in seven markets, Delaware, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia, and West Virginia with additional launches in the pipeline. Stepping back, David and I challenged the team to think about utilization increasing throughput, increasing capacity prepping for adult use transition and building a more comprehensive approach to how we wholesale. We are building a business segment that is fundamentally different from where we were before, evidenced by an improving margin profile, thoughtful product assortment and growing customer base.

As the results in Q1 and Q2 show, we are making substantial progress with more opportunity ahead of us. On the cultivation side, we remain hyper-focused on driving down the cost of biomass and finished goods. This enables us to continue to be aggressive in winning new customers and deploying products into market. Importantly, we have a lot of verticality in our business. The success we are achieving in our wholesale business is a leading indicator of what that is going to mean overall to the costing model which will also positively affect our retail business. The increase in productivity and utilization driven by a better wholesale approach is lowering the costing and generating greater efficiency. In the first six-months of this year, we realigned our leadership structure to take full advantage of our opportunities in both retail and wholesale.

There are a number of initiatives underway, including SKU rationalization and bringing new analysis, rigor and discipline to discounting across the portfolio. We also have exciting catalysts on the horizon. We are ensuring that we are ready for adult use transitions in Ohio, Delaware, and Virginia from day one. On that note, I was just in Ohio for the launch of adult use in our five stores and use electric. We have great products on the shelves and a tremendous team on the ground. Really excited to see the Ohio market develop. Elsewhere as David mentioned, we are incredibly well positioned for expanding wholesale in New York and have created the runway for us to succeed in that market. It is a tough market for licensed operators, but enforcement against unlicensed retail stores is improving.

On an annualized basis, this is approaching an $850 million legal market on the adult use side, likely growing to over one billion next year. That presents a massive wholesale opportunity and we are positioned with cultivation capacity and riverhead that can be turned on quickly and efficiently. So in some, we are making the tough decisions when needed and capitalizing on the logical wins. By opening doors and adding capacity in the best markets, while closing doors and markets that underperform our targets. We are honing our operations, have the team focused on producing the best outcomes and remain intensively focused on rapid execution. With that, I will now turn the call back to David for final comments. Hart.

David Hart: Thanks, Jesse. As we look back on the last six-months, I want to be sure to thank the Cannabist Company team as we have been through some significant changes with even more to come as we announced transactions move toward closing. Importantly though, I want to reiterate, we are putting in this work and transforming this business to create a sustainable business model that will compete and win in a dynamic industry that is ripe with catalyst and on the brink of a transformation of its own. Operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] First question comes from Aaron Grey from Alliance Global Partners. Your line is now open. And our first question comes from Aaron Grey from Alliance Global Partners. Your line is now open.

Aaron Grey: First question for me. You guys have announced a number of divestitures Florida coming and then New Arizona as well as Virginia. So just wanted to know if you could give us a better picture of how the P&L is going to be looking on a pro-forma basis, because I know mixed in with all and that are some profit jag markets as well, some profitable markets. So if you could just help get some kind terms of the pro forma P&L, that would be helpful. Thank you.

David Hart: Derek, you want to take that one?

Derek Watson: Yes, happy to and morning Aaron. It is good question and something we are anticipating getting a lot of questions on as well. So because of the announced divestitures that is still working through timing of closing, we are not updating or providing guidance at this time. But once we have got a little more insight into the timing of those closings, we will provide an outlook probably as part of our Q3 earnings call, if not before.

Aaron Grey: That makes sense. Second question for me, just in-terms of Ohio, I understand it is very early days, just any color you could provide in-terms of the first few days of sales, how that is trended versus other markets, and then any potential read throughs in-terms of how well inventoried the market is in-terms of supply demand potential, supply shortages coming. So I know there was some limitations in-terms of the lead up time to adult use sales starting as well as capacity that folks were able to have there. Thank you.

David Hart: We launched with all five locations yesterday. We are not going to share revenue details, but it was a phenomenal day one for us. I think, it was the best opening day for us as a company. I have been with the company for every adult use transition, and this was the biggest by far number of stores, complexity and anticipation and preparation. But Jesse was in market. So want to, why don’t I pass it over to Jesse, who was there in real time.

Jesse Channon: Hey, good morning, Aaron. Yes. I had the opportunity to be there for Open. I was at two of our stores. It was amazing. The team was well prepared. The customers were incredibly excited. I think what we have already seen is a really strong start to adult use sales there. And obviously more to come right as the regs expand and we see the expansion of both the amount of product that consumers can buy and also the full assortment as we get into pre-rolls and combustibles and some other things that weren’t yet covered right in the Ohio launch was sort of the legacy medical. But the adult use customers coming in the door. I think we are incredibly excited for what we are seeing from a capacity and sort of availability and preparedness.

We were actually well prepared. I think we took the approach of getting out in front of this and ensuring that regardless of when that moving target or date was ultimately going to hit, we were going to be in a position to be able to fully service the stores. We participated in some of the wholesale rush that that took place over the last couple of months with some other providers making sure that they had, and brands making sure that they had what they needed. But we were well prepared in both our first party brands as well as in stocking up on our partner brands that we were going to be carrying at launch. So I think overall Ohio’s going to be a great indication of what we are capable of doing as an organization when it comes to a medical to adult use transition moving forward.

Aaron Grey: Okay. Great to hear. Thanks very much for the color. I will jump back in the queue.

Operator: And thank you. And one moment for our next question. And our next question comes from Ty Collin from Eight Capital. Your line is now open.

Ty Collin: Hey, morning guys. Thanks for the questions here and congrats on the quarter. Derek, you mentioned in your comments the unabsorbed overhead, again, something you guys have been talking about and working on for a little while here. I’m just wondering if you could maybe update us on which markets are the biggest culprits at this point and what’ going to drive improvement there?

Derek Watson: Sure. Good morning, Ty. What we have said previously is there is number of markets. It is not overweight in any single one, and we had turned capacity off last year, particularly after the transaction that didn’t complete, as Jesse mentioned in Ohio, we were prepared for adult use. That was one of the locations that we turned back on to a hundred percent capacity. It was around the end of the quarter, i.e. end of June, so didn’t really see much of that impact. But the other markets, not surprisingly, that we have talked about before, Pennsylvania, that is awaiting adult use as well. New York, because of the adult use transition, that hasn’t fully taken off, but as you have heard certainly increasing and then splattering of other markets as well.

Ty Collin: Okay, great. That is helpful. And then sticking on New York, I guess I’m curious to hear I suppose the rationale behind divesting those retail assets when it sounds like the market is kind of starting to come back to life with some of the illicit enforcement going on. And maybe you could also touch on what kind of wholesale penetration you have there among the legal retailers. And I just want to get a sense of the wholesale opportunity there as that market grows.

David Hart: Ty, this is David. I will take the first part and then I will hand the wholesale question over to Jesse. With respect to the two locations we closed, we had lease expirations for two of our locations. Those locations were not commercially viable in our opinion for adult use going forward. So we are looking for new locations for both of those. One is one was in Manhattan and the other was in Rochester. We still have two open, one out in Long Island in our Brooklyn location. Our Brooklyn location was the facility that was approved, authorized for us to convert to adult use. We have got, we have not elected to move forward with that yet, but we are, we do plan to be fully opened in all of our dispensaries overtime. But we had the opportunity to exit based on lease expiration, two locations that were just not commercially viable for adult use. Jesse, you want to cover the wholesale side?

Jesse Channon: Yes, thanks David. From a wholesale point of view, we have continued to expand significant, I don’t think we have released anything definitively with regards to what the penetration looks like in any individual market from an account sort of point of view. But we have continued to expand significantly in New York. I think that is an exciting opportunity for us moving forward. We are in the process of expanding our capacity to be able to better serve. We have a high inbound demand right now from a wholesale point of view in that market, and we have been very conservative and data driven with regards to expansion in the gardens in a number of states, New York being one of them. So we did want to see some of those health indicators before we started aggressively expanding for the wholesale business there.

I think, we have seen what we need to know that we can now grow into servicing that market from a less conservative point of view. I think you will see a continued expansion, both from a total account point of view as well as a total sort of biomass point of view coming from us into that market over the coming quarters. We are excited by what we see, right? I think to David’s point in the commentary to open the call, the June reported numbers, if I’m not mistaken, put it at over an $800 million run rate for the legal business in New York from an annualized. And we can see, we see that continuing to grow as enforcement continues to happen and as we see the opening of new stores. So we are well positioned. We have a team that is fully staffed there, both from a wholesale marketing and a wholesale sales rep point of view.

So they are in market engaged with these customers, and now it is a matter of ensuring that we have the proper amount of product to service those accounts, which is what we are growing into as we speak.

Operator: Our next question comes from Frederico Gomes from ATB Capital Markets.

Frederico Gomes: Just the first question on New Jersey, I guess wholesale, if you just comment on the pricing environment there and your penetration currently in that state.

David Hart: Jesse, you want to take that one?

Jesse Channon: Absolutely. Good morning, Fred. So, New Jersey continues to be a really impactful business for us from a wholesale point of view. We have spoken in the past about how if we could copy, paste what we are doing from an execution point of view in that market, I think we would be incredibly excited across the country. And it is acting as sort of the template from a pricing point of view. I think other operators, as they have reported, have spoken to how happy everyone is with where pricing currently sits in New Jersey and the lack of compression and the lack of sort of velocity in that compression that we have seen. As that market continues to mature, we are still seeing significant premiums on both bulk trades and finished good trades inside of the wholesale ecosystem.

New Jersey is one of the few markets for us portfolio wide, where we continue to have large enterprise supply agreements from a bulk point of view to provide biomass to both other operators and brands as a significant portion of that business. We have been very transparent about moving the mix into finished goods, which has led to the significant margin expansion over the past two quarters in that wholesale business. New Jersey is one of those stories though, where the pricing is still so advantageous, and we are very fortunate to have the scale in that market from a garden point of view, and the testing and quality of flower coming out of it that we do. So that continues to remain a piece of the business there and obviously we will adapt as there is a change in the environment with regards to the pricing there.

So I think, you know, long story short, it is one of our best markets with regards to total percentage of penetration, both on the retail side as well as the amount of collaborative work that we are doing with other operators and brands from a supply agreement point of view. And pricing has been favorable for the operators from a compression point of view versus other markets that we have seen at this point in their maturity and adult use.

Frederico Gomes: Thank you for that. And then just, thinking about I guess your footprint currently and potential for growth, I guess, I mean you mentioned Ohio, in terms of, you know, potentially adding stores there. Are there any other markets here where you are thinking about expanding or where you think there is an opportunity to expand from a retail perspective?

David Hart: I will take that one, Curtis this is David. We do have three more doors that we plan to open in Ohio through the lottery process between now and at some point in 2025, we have one remaining store to open in our Richmond HSA down in Virginia. We highlighted, I think in our opening statement that we plan to open our last remaining dispensary in New Jersey, our third location by the end of the year. And in New York, we have to find two new locations as we think about the improving environment for retail and adult use retail presence for us in the New York market. Outside of that, you know, we just had the Ohio conversion and now we are looking at the Delaware, Delaware market turning adult use here in short order. That is the next one on our list.

And then followed by Virginia, you know, later in, probably in early 2026. But from a CapEx perspective, we are basically fully built, in anticipation of this convergence, those converging adult use markets. And Derek mentioned earlier the adult use convergence opportunity in Pennsylvania where we are already built. So we are CapEx light between here and the conversions and the organic growth that we think is ahead of us in the portfolio, the remaining portfolio.

Frederico Gomes: Great. Thank you very much for the color.

Operator: And thank you. And one moment for our next question. And our next question comes from Matt Bottomley from Canaccord Genuity. Your line is now open.

Matt Bottomley: Good morning, everyone. Thanks for all the color so far. I just wanted to go back to some of the changes in the streamlining initiatives. I understand that you can’t give specifics, you know, given that there are some, you know, moving parts here and some of them haven’t closed. So I’m not looking for specific numbers, but there has been good, you know, information that is been put out there from you guys. And then just from some of the transaction details we have seen that are public. So I know Florida, I think you said was less than 5% of your revenues. We can look at Arizona for sort of an average, you know, store contribution based on publicly available information that comes from the state. So I think the missing piece that would be helpful for us is maybe if you don’t talk about the assets specifically, but maybe just the Virginia market as a whole, is there any indication you can give us as in terms of growth rates year over year or maybe what the overall TAM opportunity is in terms of medical, something that doesn’t talk about the assets specifically, but maybe a little more macro just to get some color on exactly what is going on in that space.

David Hart: Hey Matt, this is David. I think at this point we are going to just, we are going to probably wait for us to close the transaction, and we will either provide incremental data around the go forward P&L profile for us, either, you know, between now and the end of the quarter or, at our next quarterly earnings at this point.

Matt Bottomley: Can’t blame for trying and then second question for me is just one of the sort of top five markets that we haven’t talked about a lot on these earnings calls being Colorado. So given the fact that the strategy seems really to be shore up profitability and sort of get maybe narrower instead of increasing breadth. So that is a market that I know has normalized a little bit, but historically has been a drag on margins for some of the smaller operators. So given that you are fairly scaled up there with a couple dozen dispensaries, just wondering if you can give indication on how margins have trended in Colorado, whether it is this quarter or just over the last number of prints you have had.

David Hart: It is a good question, Matt. So Colorado has improved for us. I think I will let Jesse speak to some of the current market dynamics from the pricing and supply demand perspective, but we over the last 2.5 years, we have invested a lot of time and energy and capital into improving that business. And we have seen a pretty dramatic improvement from our perspective for the last two quarters from a retail perspective. And so, we feel much better today about Colorado than we did say a year ago, a year and a half ago. Part of that is the effort that we put into it. Part of it is just what is taking place in the marketplace with respect to consolidation and store closures. I think people have been waiting for this sort of consolidation wave in the marketplace to take place.

It is probably taken two years longer than people would anticipated, but it is a market that is very mature as everybody has a very mature adult use market. It is a big market still, even off the highs from the pandemic high that we had a number of years ago. So it still represents a big market for us and there is opportunity to which we continue to see to take market share. So we are cautiously optimistic about it, but I don’t think we would want to characterize it as something that would look and feel like a Virginia market or a limited licensed medical program. They just fundamentally look different. But Jesse, maybe you just give some incremental color on what you are seeing on the ground because there are some green shoots in terms of what we have expecting we have been expecting to see for the last few years and finally starting to take place.

Jesse Channon: Yes. Thanks David. I think, from a Colorado point of view, we know that there is probably a bit of another wave of change coming in that market. The early indicators are all there with regards to what is happened on stabilization in pricing from a wholesale point of view availability of product what we are seeing with regards to just chatter in the state of other operators and brands when it comes to conversations about closing locations or the typical early indicator of the online complaining about receivables and paying bills. And so, we believe there is probably another wave of sort of either consolidation or retraction on a number of areas of the state and Colorado coming, which I think will benefit scaled operators that continue to remain committed to staying open and staying present in the communities.

So, I think the other thing that we are not 100% sure of yet with Colorado, but we probably have a pretty good idea based on last year, is what the outdoor yield in crop over is going to look like this year, moving into the first quarter of next year. So we believe we will continue to see some green shoots and some opportunities for expansion on both the retail side, but also in building a healthier and more meaningful wholesale business in the state based on some of that retraction that we are seeing from a total availability point of view.

Operator: Our next question comes from Scott Fortune from ROTH Capital Partners.

Scott Fortune: One for me, you have covered a lot, but I just want, can you provide a little more color on the strength of wholesale? Obviously up 24%, you know, 15% of the revenue mix here and nice increasing of gross margins there. But just kind of put in place the initiatives and the third-party brands you have added to drive growth improvements there and margins in the seven markets. Just kind of step us through how you guys continue to see improvements into the second half and you, you know, basically utilization in regards to wholesale. Just kind of step us through kind of the continuing ongoing efforts there and the opportunity to kind of continue to expand their wholesale.

David Hart: Jesse, you want to take that one?

Jesse Channon: Yes, absolutely. So look, from a wholesale point of view, we are happy and we are excited about what we continue to see as far as the productivity of the team, what is taking place there to one of the first parts of your question. We are structured and organized significantly differently than we were coming into the year with dedicated wholesale marketing as not only an organization, but obviously efforts on a market to market basis. We have essentially a fully staffed, we have got a couple more potential ads coming, but a fully staffed sales organization that is servicing the country, that represents the individual states and regions and ultimately rolls up to sales leadership. We are generating more data and more insights than ever out of that organization to be able to better prepare for everything from expansion in the markets, from a garden and a manufacturing point of view.

Also through rationalizing and optimizing the SKUs that we are manufacturing and the things that we are making and putting into our first party brands based on those demand curves and based on what we are seeing from pricing, but also how we think about third-party brands. And third-party brands continue to be a really exciting opportunity for us and a structural decision that we are seeing a lot of early fruit from, and that is that it is increasing the throughput on both the manufactured side, but also giving our team more to talk about. It fills in gaps for the things where we were not historically strong from a first party brand. So it is not necessarily cannibalizing the success of the things that we do well across the country from a first party brand.

It is adding more reasons to work with us as a partner and to have larger orders and more accounts at a state level. So really like what we are seeing there, those brands contribute everything from marketing and sales assistance to in-state representation when it comes to pop-ups and events. Those things all add up and they ultimately create a, but a much better environment for us to thrive as a wholesale organization. So I think what you are seeing in both the top line growth and at the same time, the expansion on margin is the building of a real sales organization, real marketing organization for wholesale and a better business there. That as we continue to move through the next few quarters, I think starts to look and feel a lot more like what you would expect for an operator of our size in the markets that we serve.

So far, so good, you know, cautiously optimistic, still a lot of work to do, but I think we are very happy with the early signs that we are seeing out of the business.

Scott Fortune: I appreciate that color. Thanks. I will jump back in the queue.

Operator: And thank you. And one moment for our next question, and our next question comes from Pablo Zuanic from Zuanic and Associates. Your line is now open.

Unidentified Analyst: Hi, good morning. This is [Marcus Lamb] (Ph) on for Pablo. Alright, today we have two questions. The first one is regarding the sale of the Virginia license. Could you explain the criteria you use to determine which of the two licenses to sell?

David Hart: Yes, I will, this is David. I will take that question. You know, we have two licenses, as you just highlighted, that are geographically ring-fenced to an HSA, both of which are fantastic. Businesses both have great opportunities on a go forward basis. So the criteria was the interest level from the counterparty and the negotiated transaction.

Unidentified Analyst: My second question is, can you, sorry. In the case of your Pennsylvania business, can you add more stores or are you all at capacity?

Jesse Channon: So we have one right now in the medical program in Pennsylvania, we have one license, which is in the northeast section of Pennsylvania that allows us to operate three doors, which are all open and operational. That is what we are allowed to have with the current license portfolio we have in Pennsylvania.

Operator: And I’m showing no further questions. I would now like to pass the call back to David Hart for final comments.

David Hart: Thanks everybody. Look forward to chatting again in November. If there is any follow up questions, you know how to reach us. Thanks very much.

Operator: This concludes today’s call. Thank you for participating. You may now disconnect.