Earnings Transcript for VEXTF - Q2 Fiscal Year 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to Vext Science's Second Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Jonathan Ross. Please go ahead.

Jonathan Ross: Thanks, operator. Good morning, everyone, and thanks for joining us today. Vext's second quarter 2023 financial results were released earlier this morning. The press release, financial statements and MD&A are available on SEDAR+ as well as on the Vext website at vextscience.com. I would like to remind listeners that portions of today's discussion include forward-looking statements, and the forward-looking statements are included in today's press release. There could be no assurance that these forward-looking statements will prove to be accurate or that management's expectations or estimates of future developments, circumstances or results contained therein will materialize. Risks and uncertainties that could affect future developments, circumstances or results are detailed in the MD&A and Vext other public filings that are made available on SEDAR+ and we encourage listeners to read those risk factors in conjunction with today's call. As a result of these risks and uncertainties, the developments, circumstances or results predicted in forward-looking statements may differ materially from actual developments, circumstances or results. This call also includes non-IFRS financial information, and such non-IFRS financial measures are subject to the disclosure and reconciliation included in our press release disseminated earlier today. Forward-looking statements made during this conference call are made as of the date of this call. Vext disclaims any intention or obligation to update or revise such information, except as required by applicable law. Vext financial statements are presented in US dollars and the results discussed during this call are in US dollars. I will now pass the call over to Eric Offenberger, Chief Executive Officer of Vext.

Eric Offenberger: Thanks, Jon. Good morning, everybody, and thank you for joining our second quarter 2023 financial results conference call. I am joined on the call today by Stephan Bankosz, outgoing CFO of Vext, as well as Trevor Smith, incoming CFO. I will start by providing a brief overview of our results before turning it over to Stephan for an update on our financial performance. Let's talk about the current environment. The market backdrop remains the same as we have discussed over the past several quarters. Challenges to consumer discretionary income remain and in Arizona, specifically, pricing pressure is further exasperated by oversupply in the market. Despite these challenges, our team's focus on delivering best-in-class execution led to growth and market share and a seasonally slow quarter for Arizona in the current environment. This means declining less than the market. Year-over-year retail in the Arizona market was down 10.75%, and we were down 5.4%. With our dispenser in Ohio starting to contribute to the top line, we generated revenue of $9.2 million in quarter two, a 4.8% increase over quarter two of 2022 and a slight increase from the previous quarter as well. We generated EBITDA of $2.3 million during the quarter and adjusted EBITDA of $1 million. Most importantly, as expected, cash flow from operations came in at a solid $3.4 million through the second quarter. Gross margins were significantly lower in quarter two as a result of our decision to liquidate inventory from our idle outdoor growth with pricing under continued pressure, both at retail and wholesale, we felt the prudent decision was to invest in price on this product to move it quickly and generate a return. Margins are expected to move back to more normalized levels as we move through quarter three and into quarter four. With our first harvest from the Eloy facility expected in quarter three, we are now better positioned in the market moving into the back half of the year with internal production match and internal demand. Our team continues to execute at the store level leveraging data back targeted promotional activities to grow traffic, which in turn contributed to the top line results we realized in the quarter despite average basket size moderating compared to last year. By growing traffic and creating more customer touch points, we drive results now and better position the company for a market turn. Contract manufacturing and wholesale remained particularly pressed as all retail operators focus on growing the mix of the in-house brands on their own shelves to maintain margin. We have also pulled back on the Contract Manufacturing segment. While we have seen cultivation facilities being scaled back and put on a hold and brands leading the market, we will need to see more of this pain before the market comes back into balance. Moving on to brand, late in the first quarter, we launched the new Vapen Black Liquid Diamonds product line, which has been well received with over 100,000 units sold. Vext is committed to developing innovative products, bringing the market at the right price point, targeting new customers and retaining our existing ones through return-focused marketing campaigns designed to drive revenue, maximize margin and expand the customer base. Turning to Ohio, our agreement to acquire our joint venture partner, Appalachian Pharm Processing and cultivation has progressed well. We have received regulatory approval and expect to close the transaction before the end of August 2023. This will enable us to become a larger diversified operator with fully vertically integrated footprint across two limited license states with significant potential in both. Ohio is a large growing medical market and with the potential to move to adult use and its highly regulated vertical market structure makes it very attractive from a long-term return on capital perspective. The Jackson dispensary, which completed its Second Quarter under Vext ownership in quarter two 2023 is continuing to perform well. Upon closing of the acquisition, we will be in a position to gain ownership of another cannabis dispensary based in Columbus, Ohio. We have applied to the regulators for an ownership transfer and expect to receive regulatory approval before the end of the year, thus strengthening our retail foothold in the state. Once vertical operations are consolidated in Ohio, we look forward to growing market share in the state by fine-tuning our existing operations and continue to be on the lookout for potential additions to better leverage our footprint on an accretive basis. While our current focus remains primarily on our Arizona and Ohio operations, we are monitoring market developments in other areas of our joint venture portfolio and remain well positioned to act on development aligned with our strategic plan. We are still awaiting further guidance on regulations and timing for clarity on Kentucky. Overall, I'm very pleased by our team's performance during a challenging first half of the year. We remain focused on bringing customers into our stores with a broad selection of value-based products and operating efficiently to drive profitability and cash flow. Before handing the call to Stephan, I wanted to express my personal and professional gratitude to Stephan. We have worked closely for the past 2.5 years, and Stephan has led the efforts to implement a robust infrastructure to efficiently support growth for the Vext. I wish him the best of walk for his future endeavors. With that, over to Stephan for a quick review of the financials. Stephan?

Stephan Bankosz : Thank you very much, Eric. It's been a pleasure to be part of the Vext team and safe part in the company's growth. I've enjoyed building a great accounting team during my time here, and I look forward to a smooth transition and handoff to Trevor and watching Vext continue to grow into a truly unique operator. Let's dive into the results. In the Second Quarter of 2023, Vext generated $9.2 million, a 4.8% increase from Q2 of 2022 and flat compared to $9.1 million in the previous quarter. The increase in revenue can be attributed to the continued strong performance of the Jackson, Ohio dispensary, which has now been fully consolidated for two quarters. Adjusted gross margin for quarter two 2023 was 30% down compared to the adjusted gross margin of 51% last quarter. As Eric mentioned, this was primarily due to our strategic decision regarding inventory and maintaining revenue in the second quarter. For the remainder of the year, we will continue to focus on driving margins through value products, rapid innovation and targeted promotions to generate traffic to our stores despite challenging market conditions and expect to see gross margin recovery throughout the remainder of the year. Upon closing of the Ohio acquisition and vertical integration of the cultivation and manufacturing operations, we expect to see a margin benefit for the duration of 2023. We recorded $1 million in adjusted EBITDA for quarter two, which was down compared to $2.9 million in the previous quarter due to previously mentioned decisions around inventory. During the second quarter, EBITDA came in at $2.3 million, marking our 13th consecutive quarter of reporting positive EBITDA and positive adjusted EBITDA, reinforcing our ability to generate profitability. During the quarter, we received a onetime ERC tax credit, resulting in a reduction of operating expenses compared to the first quarter. In addition, we saw labor expense reduction of 12.5% for the quarter. These reductions are aligned with our commitment to operate efficiently, and we expect to report further reductions in the third quarter. General expenses were flat for the quarter due to increased efficiency and continued cost reduction measures. However, these were offset by an increase in utilities due to the rising temperatures in Arizona and more cool needed in the cultivation centers. Cash flow from operations was $3.4 million in quarter two. Upon closing of the Ohio acquisition, we expect further improvement in cash flow moving forward. Vext has no material growth capital expenditures planned for 2023 as the expansion in Arizona and Ohio have already been completed. Vext ended the quarter with $4.3 million in cash at June 30th, 2023, which is adequate to execute our business plans. Thanks, everyone, for joining us for our quarter two 2023 financial results conference call. I'll now turn it over to the operator for your questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.

Matt Bottomley: Yeah, good morning, everyone. Thanks for taking the questions . Just wanted to start with Arizona, in particular, and ignoring for seasonality by looking at a sort of a year-over-year comparison, can you speak to the dynamic of pricing versus volume or just overall market TAM when it comes to the 10% year-over-year decline in the market?

Eric Offenberger: So, Matt, thanks. I read your analysis on other things in the market. And you're one of the few people that actually mentioned Arizona and what's going on. It's in an oversupply situation. So that's really what's driving it. The customer demand is still relatively strong but the price points are coming down significantly because it's moved more to a recreational versus a medical market, which we know is going to happen. But at the same token, you ended up with a lot of supply, so with that said, that's what's happened on that price point. It's moved it down. So you've had a lot of production that's happened on the cultivation side, and some of that is starting to come out of the marketplace. But that's really what's driving it. Does that answer your question or do you need further on that?

Matt Bottomley: Yes, just a follow-up on that question, in particular, just on the volume side. Are we seeing trending in the right direction in the post-COVID world with traveling coming back? I know you had a particularly hot summer this year as well. So anything outside of price that might be a nuance in the market versus prior years would be helpful, too.

Eric Offenberger: Yes. I think obviously, COVID was extraordinary because nobody could go anywhere or do anything. People travelled. We set records for over 100 degrees. We're anticipating good travel demand in the Valley starting in the October time frame like we normally see seasonally. That's one of the reasons we made the determination we did on the inventory to get ourselves in alignment to be able to take advantage of when the market just naturally comes back. That said, transactional volume was really good in the stores quarter-over-quarter, we did more revenue in the stores in the second quarter than we did in the First Quarter, and we were really happy to see that. But you gave up margin to do it. But I think we've positioned the inventory better to take advantage of what's happening. So demand is still solid, and we continue to see that.

Matt Bottomley: Got it. Just wanted to switch to Ohio now. I'm not asking for a crystal ball type of answer, but can you just give us an update on what exactly is happening with the adult use? I know there's been some positive headlines on it getting on the ballot for November and typically, once a cannabis measures on a ballot, there's a pretty high probability, at least in my view, that they get through. But if you could just give us maybe more procedurally where that's at right now?

Eric Offenberger: Yes. From our understanding, it's on the ballot in Ohio. I'm pretty optimistic that it should come out favorably and others, obviously, the lobbying campaigns going on and all that stuff and everybody's positioning. But Ohio just recently voted down that change their constitutional law and stuff like that. So I think Ohio is moving a lot more I'd say, to the middle of ground where most of the people are in the country. And I think it's got over 60% raining that they think it will pass. That said, the legislation looks pretty positive. They've still kept a cap on any expansion they'll do on cultivation. It looks like they'll do licensing similar to Arizona where if you have an existing license you'll automatically be grandfathered in so that your store can sell recreational and medical. Any new licensing will be strictly recreational. So we think that's favorable. The cultivation, as I said, would be TAP, the Tier 1s will stay where they are and you can grow into it. So it still looks to be very favorable, very positive. Not really getting a lot from the communities yet on what the zoning is going to look like. The current state looks like if you have a Tier 1, you'll end up with three additional licenses for dispensaries with that legislation unless it changes. So we see it as nothing but favorable and positive going forward with Ohio.

Matt Bottomley: Okay. And then just one last one for me on Ohio is as you had mentioned, including -- I think you mentioned Arizona in this commentary too, that growth cap -- capital has already been outlaid. So nothing material expected in the back half of the year. On the closing of Ohio more specifically, is there anything working capital, cash flow, any sort of cash flow impact just to keep in mind or maybe just what would happen to the margin profile? I know it might be somewhere in Q3, Q4 in sort of an unknown time period when things close, but any sort of housekeeping or nuances in what might happen in your financial results on the margins upon closing would be helpful as well.

Eric Offenberger: Yes. I think the margins should go up upon closing. We're obviously getting more push on the sales side out there and stuff along those lines. We've been funding internally, most of the payroll expense and the working capital needs for the Ohio operation. It moved to more of a neutral position, probably July time frame. So we anticipate that it's going to become a cash contributor in a relatively short time. The people in Ohio know that's our focus. And they're aligned with that, so we have to start -- we have to generate the cash out of there. So that's really -- I think that that's completed. More candidly, Matt, we're about 6 weeks behind where we wanted to be at this point in time, but I'm happy with that, given all the other conditions within the marketplace on the consumer pressure. And that store out in Ohio has performed very well, and I think we can align it more as we move more of our product through the chain.

Matt Bottomley: Got it. Okay. Thanks for all that Eric.

Eric Offenberger: Thank you.

Operator: The next question comes from Russell Stanley of Beacon Securities. Please go ahead.

Russell Stanley: Good morning and thanks for my questions. Maybe first on Arizona. I just wanted to get some additional color on what you're seeing in terms of cultivation coming off the market, you idled your outdoor? Are you seeing similar decisions being made and perhaps not seeing stability now, but are seeing signs of stabilization and pricing bottoming at some point? Would you add sort of guess as to when that might be?

Eric Offenberger: Yes, Russ, that's a good question. I mean it's hard for site to be honest on what other people are doing and stuff like that completely. We do know of a couple of people that have scaled back on their cultivation or taking some of their existing out. We know one person that had done a large outdoor grow that ran through probably $25 million, $30 million, and that's pretty much been idled. So that's out, but some other people brought on some new cultivation capacity in that and I've made the comment over the last 1.5 years about the agriculture and kind of flippantly -- you can always tell the crop that's going to take a ship -- go bad because everybody's overgrown it, and that's what happens in cannabis. But we think it's going to take a couple more quarters. So once we get through that, you'll be in the best shape. So we made the decision here because of my background of commodities and stuff like that, I've always learned that the best loss is your first loss. So we really made a conscious decision to continue to push the inventory through and not give up market share, knowing that the seasonality of the second quarter and third quarter with the heat is going to keep people out of the store. So you got to make sure you're matching anything and being aggressive on your drive into the store. So that's really helped us. And we think that's going to continue to go. And we really focus on retail. That said, I'll also say, we've never really been a huge wholesale seller it's been a part of the portfolio, but not the majority of the portfolio, as we've talked over the years, I'm thankful that, that's the case because wholesale is for lack of a better term, non-existent in Arizona. It's really very challenging, and we don't see that changing for a while. You'll see in the MD&A, how many brands are in Arizona and stuff like that and we get into it a little bit more in the MD&A. But on the whole, we feel pretty good about where we're sitting right now.

Russell Stanley: That's great. Just and maybe just moving to Ohio. And I think you've alluded to this during your prepared remarks, Eric, but once you complete the transactions, you'll be at two stores, lots of room to the state cap of current state cap of five stores. And to date, you've stressed to focus on delevering over adding assets, but it sounds like you may be revisiting that. Is that fair to say you'd be looking at additional retail, especially with adult use on the ballot?

Eric Offenberger: I don't think it's necessarily because of adult use on the ballot. I think we're looking at where do you deploy your capital to get a better return, we think that better return on capital is in Ohio right now. So if we have $10 to spend on capital, we'd probably look to spend it in Ohio for another dispensary looking at that. And also with the adult use realizing that they might take the cap from $5 to $8 if we could get to $3, and we could get a couple more and be in that range where you have $5 out there, that probably is the best use of money for shareholder return. That's what we're all about is the shareholder return and not losing focus on Arizona. So it continues to generate cash and you protect your piggy bank. So that's kind of the philosophy. Let's protect the piggy bank and reinvest it where it makes the most sense in a tough capital market and protect cash.

Russell Stanley: That's great color. I'll get back into queue. Thanks.

Eric Offenberger: Thank you.

Operator: The next question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.

Andrew Semple: Hi, there. Good morning. First question would just be on the outlook for margin improvement expected in the second half of 2023. Just want to see what's behind that in your eyes. Are you expecting any sort of recovery in pricing? Or is that being driven from capacity that you'll be getting out of Eloy, or do you think you can manage the expenses better in the second half? What seems to be driving the outlook from improved margins going forward?

Eric Offenberger: Yes, Andrew, the margin going forward and stuff is really related a lot to trying to get the decision to get the outdoor grow behind us and get that moved through the Q. So it's not an adjustment necessarily in the pricing structure as much as what's happening on the cost within the overall market and the wholesale business. While the basket size was down like 5% quarter two, versus quarter one, I think we can absorb that with our internal cost structure and stuff like that, so we can get back with the ERC funds coming in, in the second quarter and that made the most logical sense, I felt part of the company to get that inventory position given what was happening in the market and given with Ohio coming on and the seasonal adjustments and stuff like that, it was the best long-term strategy. That said, nobody likes to have a lower margin. But I'll take it for a short term in order to be positioned long term and not deal with it. And again, going back to my philosophy is when you see the inventory getting adjusted in the overall marketplace, you're not going to set the market. You're going to participate in it, be first of getting back to where you need to be at level and let other people believe themselves dry.

Andrew Semple: Great. That's helpful. And maybe just an operational update on how the ramp-up of the Eloy cultivation facility is progressing. Are you beginning to see some of the first harvest from that facility, how the quality and the yields been in the initial kind of cycles there? What are you seeing on the ground with Eloy and how does that relate to your initial plans for that facility?

Eric Offenberger: It's still too early. We haven't done any harvesting down there. We've just basically been getting the plants in the ground with state approval to be able to put the plants in the ground and matching it. We're not going to go full bar and try to bring up every room at the same time. So we're sequencing it down, that it does it partially. So we do get some cuttings into the room, get that room going, make sure that room is behaving, go on to the next room. I don't want to hey, let's bring up a whole facility on time and see what's going to happen and make sure everything is working. So we're kind of in the break-in period right now, which was designed. That's kind of how we did it. It's a sister plant to Ohio, so we have a pretty good feel of how it's going to behave because Ohio has been producing since February with its first harvest and the cultivation director is the same for both areas. So he'll travel. I'm not too concerned about it. I'm more concerned about making sure that we absorb it internally what we produce. That's more of the focus is making sure we have that matching going on.

Andrew Semple: Yeah. Not Great. And maybe just a final quick one for me. Just on the comment of not having any significant growth capital expenditures for the remainder of the year. I guess if we see the adult use ballot pass in Ohio, would you re-evaluate that assessment? Do you think that there's any opportunity to make additional investments in Ohio to improve capacity or manufacturing capabilities in the state? Or do you think you're well versed there for the upcoming potential adult use market there?

Eric Offenberger: Well, without question, if we could pick up another retail or dispensary operation, we would do that. I think the comment on the capital is more from the standpoint of going as an ongoing concern with cash and that we're well situated. We don't have more capital to spend. It would be more of an accretive investment that you're going to acquire something else. So that's more of a comment of the day-to-day operations. But yes, we're always looking for opportunities that make the most sense. And that's why we sat with them in the MD&A and stuff, Andrew, that we're focused on Arizona. We're focused on Ohio. And if we look at spending the whole question, if you have $5 to spend, where you're going to spend it. Right now, we probably spend it in Ohio. But if something presented itself in Arizona that was more attractive than the $5 spend in Ohio, we spend it there. So that's really what we're saying is, yes, we're going to be smart and prudent about what we're doing and continue to run the business that we have and look for the business that makes sense to grow it. And that's really one of the comments we made about Stephan's departure in that, that we've put into place an infrastructure that's efficient and can support growth. So for us to support growth isn't going to require me to build a whole new infrastructure. I'm there or we're ready to go. We just have to see what presents itself in front of this first and get the cash going. We want to get the cash back to where it's going off consistently, not getting absorbed into the investment side move the data a little bit around and just good balance sheet management.

Andrew Semple: Great. That's helpful. Thanks for taking my questions and I'll back in queue.

Eric Offenberger: Thank you.

Operator: The next question comes from Pablo Zuanic of Zuanic & Associates. Please go ahead.

Pablo Zuanic: Good morning. Eric, can you talk about the Vapen brand in terms of the potential to license the brand in other states? I mean is that part of the strategy as you try to grow in other places in an asset-light manner? And then related to that, how should we think about California and the Nevada operation. I understand that it's a service agreement. Is there a potential to acquire that? Or that will make sense, in the case of a JV in California, do you double down? Do you divest? How should we think about that?

Eric Offenberger: Well, those are a lot of questions, Pablo, but -- okay. So on the brand Vapen, mine is probably not a popular opinion in the space. But I don't think there's a lot of brand play within the whole marketplace. I think that, that's a misnomer at this point in time and I think consumers are price sensitive and they buy by price. That said, I think Vapen's SOPs and those things lend very well to being able to be rolled out in scale and in a vertical market like Arizona and Ohio is moving to vertical, you want to have a good brand and everything like that. In Arizona, you don't want to rely on wholesale. It's tough. California, I'd say the same thing. California, we do a lot of manufacturing, and we're really doing more contract manufacturing in that California JV. We have some other opportunities there. Distribution, as everybody knows, is really tough in California, it's really challenging. So would we want to expand or grow in California? Off the top first answer is no. Not a very big interest in my part. I've never been a big California fan, whether it was in the steel business or land of lakes or anything. It's a tough operating environment. That said, we're isolated in San Diego, which is nice, and we have some good contract manufacturing business there. So we look to have the presence, grow the brand, do some things there. But ultimately, it's not going to be core. Long-term, it's not core. Nevada very limited. That was a license deal that goes in and out, depending on what the market is doing and stuff along those lines. Again, doesn't really do a lot for us. It doesn't really take up any bandwidth. So it's really a nonissue for us. And you notice we don't really talk about Nevada much anymore. Kentucky, we think that JV has the most potential as that state goes to medical. We think we're well positioned, and we like where it geographically in the state. So that's it. So we want to focus on Ohio, Arizona, and the other ones were kind of as we got into it, it was a capital-light structure, as you are all aware of, and we're starting to assess and then we talked a little bit about those as we assess the JV but those are the three that right now make the most sense. There is on Ohio and seeing what Kentucky is going to do.

Pablo Zuanic: Right. Thank you. And then just a quick follow-up. In the case of Arizona how much of a problem is it because the illicit market is getting worse, whether you have legal products from California crossing border or the illicit supply from California entering Arizona. I realize that's always been a problem in Nevada and Arizona, but is that getting worse in any way? And same question regarding Delta and those type of products, derivate from hemp that in some states are also causing pressure. Is that an issue or that's not really the bigger problem in Arizona?

Eric Offenberger: I mean that's always an issue. I think if you point to that, you're missing the overall problem. The problem in Arizona, I think, was the way they did the licensing structure. So everybody got a cannabis license, they got a vertical. So they ended up with a manufacturing and they ended up with a cultivation. There is no cap on canopy size or canopy type. So Arizona has various climates available to it. So within 1.5 hours of the Phoenix market, you can be at 6,000 feet elevation. So [indiscernible] supports relatively easy and everything along those lines. And when anything initially starts, it's like any commodity or any market, the supply is behind the demand. it starts to equalize and then the demand starts to get above it. Well, the fact that Arizona didn't have caps is the one issue that it created. Then the other thing that Arizona created is people were able to lease their cultivation license without necessarily somebody having a door. So somebody that thought that they had a brand or thought they could do something better than anybody else in the market. we lease these licenses. So they pay somebody $25,000, $50,000 a month, at least the license, they'd make a capital investment. And then they would feed the stores and they have a wholesale business. Well, when it started to go to us and the market starts to consolidate, the people that are consolidating it and buying it are no longer is cash strapped at the time. and they start to do their own cultivation because they want to improve their margins. So they came from markets such as Florida, where you had a better margin profile because you sold everything you produce through your store and that becomes the model. Some of those people that had made these leases and those capital investments that are growing this marijuana, they have less of an outlet to put it into. So they start to put more pressure on it because they don't have the door to control. So they start to do everything based upon price. That and then other people capacity that was way beyond the demand in the market, which happens normally. And their strategy is we're going to be a low-cost producer. So we're a low-cost producer, and we produce this flower product, and we're going to dump it into the market at a low price, and we're going to be able to chase everybody else. Well, if you don't control the store, it's hard to do. So that never works as a good strategy either. And that's where Arizona is at right now. It's going through that period of time, and you see it in every industry, and you see it happening in all the time. We like to think that while we are not going to set a market or anything we saw what the dynamics are going to be in the market and we make business decisions for the company based upon what those things are doing. We don't know how big it is compared to oversupply.

Pablo Zuanic: Look, one last one. So regarding Arizona, from a purely four quarters point of view, would you say that store gross margins remain pretty robust in Arizona because of this inflation on the wholesale side? It seems that retail pricing also down, but not as much as wholesale. And if that's true, will it make sense, hypothetically speaking for operators like yourselves or others to just exit cultivation and just focus on retail in that state.

Eric Offenberger: Well, it depends how you've done your cultivation, I'd say. If your cultivation is done that you're in the wholesale market and that's a majority of your business or 30% of your product lines going through your wholesale. Again, I don't try to tell people how to run their business. And as somebody said earlier, crystal ball and stuff like that, mine's not different than anybody else opinion. My opinion anybody that's got a that's wholesale cultivation and they think that they're going to participate in that market and that's the majority of their business is in for a lot of pain. That is why we only built out half of our Eloy cultivation, that's why I don't use the outdoor grow. We did those types of things and took the hits like your margin and stuff like that. to not be in that situation where we were dependent on trying to feed something. So we've got very low fixed costs. We've always watched the cost structure, watch the assets to match them up better. So yes, I agree with you. I think if you have one retail door or you have five retail doors and your cultivation capacity model is, is that you're going to sell 25% of what your cultivation turns out into the wholesale market. And I think you're in deep trouble. It's just a matter of how bad it's going to be before you can pull back and what the cost of pulling back is going to be.

Pablo Zuanic: Thank you.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.