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Edited Transcript of AYRa.CD earnings conference call or presentation 27-Feb-20 1:30pm GMT

Q4 2019 AYR Strategies Inc Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of AYR Strategies Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Asher

Ayr Strategies Inc. - CFO

* Jennifer Adele Drake

Ayr Strategies Inc. - COO

* Jonathan Everett Sandelman

Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary

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Conference Call Participants

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* Gregory Thomas Gibas

Northland Capital Markets, Research Division - VP & Senior Research Analyst

* Matthew Pallotta

Echelon Wealth Partners Inc., Research Division - Special Situations Analyst

* Robert Joseph Burleson

Canaccord Genuity Corp., Research Division - MD & Analyst

* Russell Stanley

Beacon Securities Limited, Research Division - MD & Research Analyst

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

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Presentation

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Operator [1]

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Welcome to the Ayr Strategies Fourth Quarter and 2019 Earnings Conference Call. Joining us today are Ayr's CEO, Jonathan Sandelman; the company's CFO, Brad Asher; and the company's COO, Jennifer Drake.

The company will discuss forward-looking matters on this call, including targets for 2020 revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended September 30, 2019. As well, we remind you that adjusted EBITDA is a non-IFRS measure. We'll refer you to the reconciliation to IFRS measures and other disclosure concerning non-IFRS measures contained in Ayr's management discussion and analysis for the quarter ended September 30, 2019.

I will now turn this call over to Ayr's CEO, Jonathan Sandelman.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [2]

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Thank you and good morning, everyone. Today, we'll discuss our fourth quarter and full year results, provide updates on our business as well as our strong outlook for 2020.

Our 2019 results reflect the first 7 months of our combined operation of our companies, and we're extremely pleased to continue delivering on the strong financial and business execution we have promised to our shareholders. We have delivered what we projected across many areas. We achieved the ambitious annual guidance that we set last year despite the regulatory challenges we subsequently faced with the vape ban in Massachusetts. We pivoted quickly to replace the lost revenue and margin from vape products. And when the ban was lifted in late December, we were the first cannabis company with products back to market. All of this underscores the flexibility of our operations and the exceptional teams we have on the ground level.

We have successfully expanded capacity to meet heightened demand with our now completed construction expansions in both Nevada and Massachusetts. We are continuing to build operational strength for the future. Our expanded capacity will drive our strong organic growth through 2020. The Nevada and Massachusetts cultivation expansion projects are fully funded and complete. Plants are growing in the facilities, and the first sales from both of these expansion projects are expected in Q2.

Even ahead of these expansions, our top line continues to be robust. Retail is stronger than ever in Nevada, with our 5 stores averaging $17 million each in annual sales, and up to $26 million for our highest-performing store, accounting for 12% of the total retail revenue in the state, all from our stores which average 4,000 square feet in size. In Mass., our wholesale business is growing every month, and we continue to sell our capacity each month. In fact, we could easily sell twice that with additional supply. We continue to sell more product into the wholesale market than any other producer in the state and currently sell to more than 2/3 of the recreational dispensaries in the state. It's also worth noting that wholesale pricing remains strong given that there are 36 recreational dispensaries in operation today, with only 1 in Greater Boston.

Also in Massachusetts, I'm very pleased to announce that we have a binding agreement in place to open our first recreational dispensary in Greater Boston, inside the 128 loop. This location already has a host community agreement in place in a municipality that is limiting the number of dispensaries. We have an excellent location with fantastic parking and accessibility from major thoroughfares. We are finalizing renovation plans, and we anticipate moving 1 of our 3 grandfathered registered marijuana dispensaries to this location to maximize the speed of rec conversion. We are enormously excited to have a clear line of sight to the opening of our first recreational dispensary in Greater Boston, and we will have timing updates on expected opening dates as we move through the process.

Overall, we are extremely proud of the strong performance from our teams in Nevada and Massachusetts, producing top-tier revenue and EBITDA for the cannabis industry from our 2 initial states. Over 500 team members on the ground have produced excellent results in the first 7 months of combined operations, and we expect more of the same in 2020.

I'll now pass the call to Brad Asher, our CFO.

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Brad Asher, Ayr Strategies Inc. - CFO [3]

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Thanks, Jon.

As Jon mentioned, we are pleased to deliver on our annual guidance issued last year despite the regulatory headwinds in Q4. Revenue for the quarter was $32.3 million, with adjusted gross profit of $15.1 million and adjusted EBITDA of $9.2 million with adjusted EBITDA margins of 28%. This brings our annualized revenue and adjusted EBITDA to $124.2 million and $34.5 million, respectively.

In just 7 months of combined operations, we have increased adjusted EBITDA 47% on an annualized basis over 2018 levels even after absorbing $8 million of annualized corporate and public company costs. When we strip out those costs, adjusted EBITDA increased by nearly 80% over last year's levels. In Q4, we continued to generate consistent growth from our existing asset base, and we were able to drive a 6% increase to adjusted EBITDA quarter-over-quarter by executing on our operational goals and generating stronger-than-expected results from a cost perspective in Massachusetts. We also increased vertical integration in Nevada from 22% in Q3 to 27% of sales in Q4 and increased our average dollar per ticket from prior quarter at every dispensary in both states.

We have built Ayr to be in a strong financial position. The business generates positive cash flow even after taxes, and we are able to fund organic growth with no reliance on capital markets to fulfill our growth plans. On the tax side, we are fully provisioned, and our provisions are funded and prepared to appropriately balance cash flow optimization in the context of the scrutiny of the current tax environment. Our tax approach is yet another indication of the institutional approach we bring to the sector, differentiating us from our peers.

During the fourth quarter, we generated $3.9 million of cash from operations, initiated a share buyback program and funded $8 million of our cultivation expansion plans to more than double our square feet under canopy in both Massachusetts and Nevada.

As I mentioned earlier, our Q4 and full year numbers are in line with our annualized 2019 forecast. And we are achieving this organic growth thanks to the strong performance, hard work and collaboration from our teams on the ground.

I'll now pass the call over to our COO, Jennifer Drake.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [4]

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Thanks, Brad.

We're extremely pleased with our results today. Our Nevada businesses continued to be market and industry leaders in terms of productivity. CDS ranks our dispensaries as the highest-revenue-generating stores across all MSOs, and our wholesale businesses performed extremely well despite regulatory challenges over the quarter.

As those who listened to our Q3 earnings call will remember, we anticipated regulatory headwinds in Q4 from the unexpected ban on vape products in Massachusetts. These headwinds delayed approval of our 19,000-square-foot cultivation expansion in the state, and they could have directly decreased our revenue and adjusted EBITDA for the quarter. Our guidance in November was that we believe we could replace most of the revenue we lost to the vape ban but with lower-EBITDA-margin products. Instead, we were extremely pleased that we could deliver both the revenue and the adjusted EBITDA in Q4 that allowed us to essentially meet the guidance we raised in September to more than $120 million of annualized revenue for 2019 and to $35 million of annualized adjusted EBITDA.

Our major Nevada and Massachusetts cultivation expansions are now both complete. We expect the first sales of products from these projects in Q2 of this year following our first grow cycle. As a reminder, these 2 expansions more than double our capacity from canopy of 27,000 square feet to canopy of 63,000 square feet.

We also want to take this opportunity to reaffirm the 2020 expectations we put forth in our Q3 earnings call, which calls for 2020 revenue of $207 million to $227 million and 2020 adjusted EBITDA of $93 million to $103 million. We also want to provide some additional operational details in our 2019 to 2020 revenue and EBITDA bridges. These bridges are laid out in our investor presentation, which is posted in the IR section of our website at www.ayrstrategies.com.

There are 4 key drivers to the organic growth from 2019 to 2020, and they're as follows: first, modest low double-digit top line growth from the assets we have in place as of 2019. These contribute roughly 20% of the revenue growth and roughly 10% of the adjusted EBITDA growth from 2019 to 2020. Second, higher margins in Nevada as substantial vertical integration is achieved from the completed cultivation expansion, which contributes roughly 15% of the adjusted EBITDA growth from 2019 to 2020 but obviously has no revenue impact. Thirdly, recreational sales from Massachusetts dispensaries represent -- for a portion of the year, representing 1 store beginning to sell at recreation in May of 2020 and 2 additional stores selling at recreation in September for a total of 16 months out of a possible 36 months, so that's 3 dispensaries with 12 months in the year, for a total possible rec store months of 36. So 16 out of 36 possible rec store months contribute roughly 30% of the revenue growth and roughly 25% of the adjusted EBITDA growth from 2019 to 2020. And then finally, the increased wholesale capacity from the completed Massachusetts cultivation expansion, which more than doubles our biomass production in that state, contributes roughly half of both the revenue and adjusted EBITDA year-over-year growth. All of these are detailed clearly in the appendix of our presentation on the IR section of our website.

We began communicating last quarter in terms of building blocks so that we could be as transparent as possible with investors and analysts and we said we know clarity on timing can be difficult. We will continue that in 2020, with the goal of making it easier for investors and analysts to fine-tune their models. As we previously said, we expect every month of sales from our expanded Massachusetts cultivation to add $6 million of revenue and $4 million of EBITDA to our 2020 forecasts. And as of today, we anticipate sales from that facility to contribute for 8 months of 2020.

In Nevada, we see products from our cultivation expansion coming into our stores in Q2, for an estimated 7 months of approximately 40% EBITDA margins, which is a roughly 1,500 basis point increase from our 2019 levels in Nevada, due to that greater percentage of sales coming from our in-house products. In terms of Massachusetts recreational sales, as I mentioned, we expect to have 16 store months of rec sales in Massachusetts, with each store month adding just over $1.5 million of revenue and roughly $1 million of EBITDA to our 2020 forecasts.

As we look ahead, areas of potential upside to our forecast include the opportunity to secure additional dispensaries in Nevada as part of settlements around the contested 2018 license rounds. We also see potential upside from further business improvements such as expanding capacity at our Nevada dispensaries. For example, we currently see upwards of 1,100 transactions a day at our highest-producing Nevada dispensaries, peaking at 1,500 transactions on our busiest days. And on those busiest days, we simply can't fit any more people into our stores, so we're increasing our points of sale by roughly 1/3 in those most productive stores, which should increase revenues beyond the already exceptional levels that we're seeing in the state. We have similar business improvement initiatives in process in branding and manufacturing areas in both Nevada and Massachusetts where we're looking to increase margins and drive revenue by streamlining production and expanding our product lines.

And with that, I'll hand it back to Jon for some final words.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [5]

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Thanks, Jen.

We believe 2020 will be a year of inflection for the cannabis sector. This year will make or break for many in the industry. On the one hand, business on the ground remains robust. There are very positive dynamics at the consumer level. Consumer demand for cannabis continues to grow. Acceptance from the cultural mainstream continues to grow. For Ayr, our business continues to grow, and our team continues to demonstrate its operational strength, as evidenced by our exceptional fourth quarter and full year results.

On the other hand, capital markets remain extremely challenged for the cannabis sector. We expect 2020 to shake out the winners and the losers in the cannabis space. We see distress on the horizon for many companies who are not sufficiently prudent, who fell short either as fiduciaries or allocators of capital or operators. Given our financial and operational strength, our real cash flow generation every month and fully funded growth strategy, this landscape is positive for Ayr, as we've repeated over the last few quarters. We have built our company so that times like this would be opportunities, and we plan to capitalize on this opportunity in 2020.

Our lawyers have told us that we are in a quiet period with respect to the corporate M&A activity, but rest assured that we will share information on this front when appropriate.

I'd like to close with a message that we repeat to ourselves internally. In the cannabis sector, we have a "once in a lifetime" opportunity to define an industry. Discipline and thoughtful strategy will allow us to benefit from the inflection period in the sector. In the end, continued strong execution will speak for itself, and the strongest firms will rise to the top. Most importantly, our interaction with consumers every day reinforce the solid support from deep and growing customer demand.

With that, I'd like to open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bobby Burleson from Canaccord.

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Robert Joseph Burleson, Canaccord Genuity Corp., Research Division - MD & Analyst [2]

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Yes. I was wondering. As we look at 2020 in Massachusetts, it sounds like the supply-demand imbalance is still favorable for you guys, not a lot of recs cultivation coming online from a wholesale perspective. I was curious. What kind of pricing assumptions, wholesale flower pricing assumptions, kind of for baseline you guys are using throughout the year implied in your guidance?

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Brad Asher, Ayr Strategies Inc. - CFO [3]

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Yes. So that's outlined in our deck, right? And we're assuming that those prices stay strong for 2020. We're looking at about $4,000 a pound in the wholesale market.

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Robert Joseph Burleson, Canaccord Genuity Corp., Research Division - MD & Analyst [4]

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Okay, great. And you've got recs coming online in the model, also I guess 16 store months in the year in Massachusetts. How do you contrast those stores in terms of expected performance versus what you've seen in Nevada? I'm assuming there are some big differences in terms of maybe profitability and/or capacity per store that might play out.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [5]

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Bobby, it's Jen Drake here. In terms of the rec stores in Massachusetts, as we model those out, we're -- we think we're being fairly conservative in terms of transactions at around 500-ish a day. And we're already at, in our medical stores, at ticket transactions per store upwards of $125 per transaction. So we're just continuing that over into rec and assuming we have some higher throughput in terms of volume once we get to recreational sales. So we feel like we'll be able to fine-tune those when we do open, but for now we're just keeping those kind of consistent assumptions that we've had for some time in terms of volumes and in terms of average ticket prices.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [6]

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Bobby, I would say this. You could look at the -- a handful of stores, rec stores, that are open today in Massachusetts, and it would give you a good idea how powerful these rec retail stores could be.

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Robert Joseph Burleson, Canaccord Genuity Corp., Research Division - MD & Analyst [7]

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Great. And just one last one for me. In terms of the settlements in Nevada, does that open up -- obviously, it opens up opportunities for stores, but is it a build or a buy approach in terms of capitalizing on what -- the outcomes of that settlement?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [8]

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I think it's -- what we would say is the -- what we would say is we can't really talk about kind of settlement activity in process. There is -- there are -- there is potential to expand our retail base in Nevada, but beyond that I think we need to be respectful of the legal process. And when there is something definitive to talk about, we'll absolutely make sure that people are well in the loop on that.

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Operator [9]

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Our next question comes from Russell Stanley from Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [10]

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Congrats on the quarter. First question, with respect to Massachusetts and a question around wholesale pricing. Understanding your assumptions for 2020, I guess, given your view of that market, I'm just wondering how long you expect to see that pricing strength obviously through 2020. But at what point are you expecting to see additional wholesale supply come onto the market that might pressure pricing there?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [11]

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Well, I think it's important to note that the assumptions we have in kind of our forward guidance at $4,000 a pound, that's actually a lower price than we're getting currently, so we do -- we think that market is really robust, Russ. And as we do -- as we see more capacity come online and see the market changing there, we'll be able to fine-tune, but I think we're trying to be a little bit thoughtful about the forward expectations in our models and as indicated by the fact that we're actually getting better -- we're getting prices today than we're even pushing -- than we're forecasting. So for us, we see the supply-demand dynamic extending for a fairly decent amount of time certainly through 2020 and through 2021 because even as some supply comes online, a lot of demand will come online in 2021 also. We all know there's the one big store in Boston, but there will be a lot more stores throughout this year and into next year.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [12]

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Russ, it's Jon. I would say it slightly differently. So we closely monitor the capacity that's being built. I would say, in our view, the majority of the capacity that's being built is -- that's capitalized and being built is by vertically integrated businesses. So in our view, the majority of that new capacity will end up going into their own stores, absorbed by their own stores. And so we don't see the supply and demand imbalance shifting at this point.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [13]

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Great. And just to follow up on Massachusetts wholesale. You're already in 2/3-plus of the adult stores. With the additional capacity you have coming on, what is your latest in terms of priority for marketing that? Is the focus on going after the remaining 1/3 that you're not yet selling into? Or is it on expanding share of wallet with the existing wholesale customer base?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [14]

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So there are several factors, right? We'll have our owned stores that will absorb a lot of that and start selling at $7,000 a pound, as opposed to $4,000 a pound. Two is, as we get more stores, we won't get them in isolation. Other people will get other rec stores, so there'll be additional demand. As the EE candidates come online, who we've talked about previously on these calls, those licenses are not vertically integrated licenses, so there will be a need for supply agreements, okay? And many of those stores will come on faster than rec -- medical-to-rec conversion. So between new stores opening up, selling to more of the 1/3 we're not selling to and EE stores that are not vertically integrated coming on the market and supply agreements, that will absorb what we have and more.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [15]

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Just that's great. Just one final question for me with respect to Jen's comments around adding point-of-sale terminals in Nevada. Just wondering how many stores do you plan to do that with. And what's the anticipated time line on that?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [16]

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So right now, we're expanding our 2 busiest stores by 1/3. And simply, we talk about our business as just a linear equation, more product, more biomass, more sales. We have the customers. We just can't supply them. We've often talked about when we acquired these businesses that we had 9% of the combined businesses' products on our shelves. Currently, we have about 23% of our product, 20% to 23% -- higher...

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Brad Asher, Ayr Strategies Inc. - CFO [17]

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27%.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [18]

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27%.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [19]

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Sorry, 27%. And when in the second quarter, we'll start moving to around 40%. And then added production could take that to 50%. So the issue has been in these 2 very high-volume stores. We talk about our average of $17 million in that state per store, with the best stores doing $26 million. It's just throughput. We can't get the customers in and out of our stores, so by increasing the POS, the registers by 1/3, we think we'll be able to increase revenue.

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Operator [20]

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Our next question comes from Scott Fortune from Roth Capital.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [21]

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Real quick. Do you break down kind of the growth from your West and East portfolio as far as the sales from that standpoint, the growth numbers on that?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [22]

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Scott, thanks for the question. We have not historically broken out our Nevada versus Massachusetts sales growth. And so I don't think -- we're not going to change our approach on that now, but I think what I would say is we feel very, very good about the growth numbers out of Nevada in terms of kind of the -- just the top line growth that we've seen there. I think we said that you do -- we have good line of sight to continued low double-digit growth at the top line. And with respect to our Massachusetts businesses, we replaced all of the revenue that was lost from potential vape sales, which were about 30% of our business there, with other products. And so we're very excited, as we go into 2020, to build on what we think was a pretty strong showing in Q4 to keep flat in Massachusetts. And as we go into 2020, we'll be able to build on that kind of, I think, with more strength now that vapes are back.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [23]

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Okay. That's perfect. And then regarding kind of synergies of the brand and product portfolios, I think you began selling some of the Nevada brands into the Massachusetts markets. Can you just step me through or kind of a little more color on the brands and kind of who's selling into each of those markets with your national brands now?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [24]

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I mean one of the great synergies between the West and East side of our portfolio has been the ability to bring established brands and products from the Nevada business into Massachusetts just as that state transitions to recreational sales. That's made a huge impact on our wholesale business, but also Massachusetts has developed a lot of excellent brands in and of themselves. And we'll be pushing those brands into Nevada as we go into 2020. So there's a lot of synergy on both sides and we'll continue to push those sales through. But it has given us a head start in a way that's been quite beneficial and, I think, quite beneficial in terms of replacing that revenue and EBITDA in Massachusetts quite quickly, pivoting very quickly on the ground to essentially deal with the headwind of the vape ban by adding products, new product adding and making sure we push our brands out strongly from Nevada to Massachusetts.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [25]

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Okay. And then -- and last question, just kind of big picture, probably for Jon. I'm kind of looking due diligence on potential acquisition market. But looking at -- there's over $1 billion in SPAC cash out there, plus a lot more, obviously. We're getting a time line on a lot of these SPACs for being funding here. The sense is there is a lot of distressed assets that people probably aren't looking at, but there is also a fair amount of good operators out there, obviously, that your model is to look at these good operators. But how do you see kind of all these SPAC money as good capital for the cannabis industry, kind of playing out here from the standpoint in operators or brands. Just kind of a little bit color on the whole market from the SPAC side and the deployment of capital.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [26]

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So I really don't want to talk about our strategy because we've been advised not to. I -- so I'm going to be as general as I can about the industry. I think the industry -- the assets that are for sale in the industry are divided into 2 buckets between the rich and the cheap. The cheap assets are distressed. And so for a SPAC to look at that group of assets, they're going to take on other people's problems, and that may be their strategy. We've always are -- we have a stated strategy that we adhere to: best-in-class operators, EBITDA positive, cash flow positive. So they may choose -- I don't have conversations with SPAC managers. They may choose to go that way and say they're inexpensive, then I can fix those assets.

The other class of assets that are for sale are exactly as I described. And they're not -- even with the market down, they're not inexpensive. But they're jewels and they're rare. And as I like to compare it to other markets, they're like Picasso paintings that have never come for sale before. And because of the state of the capital markets, you get a "once in a lifetime" opportunity to buy these jewels because the RTR -- RTO market is closed. These SPAC managers will have to decide what strategy fits their goals. I can't decide for them.

What I do know is, because we've done a very successful SPAC, it's very hard to do. It's very hard to close. And unless you're buying an outstanding asset, the number of redemptions, I think, that will occur in these SPACs will be very large and make it difficult to close.

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Operator [27]

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(Operator Instructions) Our next question comes from Matthew Pallotta from Echelon Wealth Partners.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [28]

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Just to circle back. Jen, I know when you were speaking to the guidance for 2020, you reiterated that in the expectations, Mass. rec sales at the first dispensary should begin in May. Is that still -- is that -- and -- but when you commented on signing the host community agreement for that location, there was no specific detail on that. And I know you said you'll provide it later. But is that still a fair assumption that sometime in Q2 that specific location will be open?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [29]

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So the new Mass. dispensary is a pretty new development for us, and that's why we are -- we wanted to let people know about it because I think -- we do think it's an important thing for people to keep in mind. But we're still finalizing, as Jon mentioned, the specifics around planning and the specifics around the location as a whole. So we -- in terms of additional info, we are -- we'd like to reserve the right to sort of give you guys more info as we have that developed in the next couple of weeks, which is what we hope.

But with respect to our timing, we don't have any reason to change our timing of rec store assumptions currently. And -- but when we do, we'll certainly communicate with people with those specifics that would be appropriate. We wanted to let people know because we do think it's a great development and we're very excited about it, but at this point we're sharpening the pencil now that we have the agreement in place.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [30]

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Okay. Just have a quick question on working capital. I noticed that the tax -- the current tax expense that was incurred basically all went to accruals for short-term payables. When do you guys expect to have to pay that tax bill? I think there's like $6 million accrued.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [31]

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Yes, go ahead, Brad.

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Brad Asher, Ayr Strategies Inc. - CFO [32]

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Yes. So it's closer to $5 million accrued, I believe. And we already did make a payment of around $3.5 million in '19. So the remaining payment will come either in Q1 or shortly thereafter.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [33]

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Okay. And then lastly, just on Nevada. I understand, obviously, that you're looking to continue expanding the share of shelf space of your own products. And is it a fair assumption that, that was largely responsible for the lift in gross margins at the consolidated level during the quarter?

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Brad Asher, Ayr Strategies Inc. - CFO [34]

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So yes, the -- so our internal sourcing increasing to 27% definitely did have a positive impact on our margins. When we referenced the expansions, we were talking about registers, parking, all things that drive volume. Those really have the larger impacts rather than the shelf space.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [35]

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Well, I -- sorry. I thought those were forward looking. So you've already completed those expansions at the stores.

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Brad Asher, Ayr Strategies Inc. - CFO [36]

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No. So those 2 stores we referenced that are being expanded for rec stores, those are in process now.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [37]

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Right, right -- no, I'm sorry. I was thinking in...

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Brad Asher, Ayr Strategies Inc. - CFO [38]

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(inaudible) outlet in 2020.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [39]

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Right. No, but in Q4, the increased vertical integration of your own products through your stores was -- I'm asking if that was largely responsible for the improved margins.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [40]

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So that made an -- that did make an impact, Matt, definitely. And in addition, as Brad mentioned, we had top line drivers as well, so more top line at higher vertical integration would -- yes.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [41]

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And so do -- yes. Do you expect that most of the product that's going to come from the expansion that comes with first product coming off of the -- out of the new cultivation in Q2 in Nevada, do you expect that most of that is going to be directed to your existing dispensaries ? Or do you think that will go out into the wholesale market?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [42]

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It's 100% retail.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [43]

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100% retail, okay, great.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [44]

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Our strategy in Nevada is to grow only enough weed that we can sell through our stores.

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Operator [45]

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Our next question comes from Greg Gibas from Northland Securities.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [46]

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It was really nice to hear that you're finalizing that rec location in Boston. Just wondering which dispensary license you're thinking about. Or I guess you're leaning towards transferring to that Boston location. How are you thinking about that process?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [47]

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So Greg, we anticipated someone asking this question. We want to be super respectful of the communities that we're in. We have 3 medical license now. The regs say we could have 3 medical and 3 recreational licenses. So I'd like to not talk about which license transfer we will use for the new rec store. And as we reveal more information, that will become very clear.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [48]

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Okay, fair enough. Secondly, do you expect to see any continued effect from the negative vaping sentiment even though that the ban has been lifted on 2020 vape sales or even margin impact from that?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [49]

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Vape -- there was -- we talked about this when the vape ban went in. And remember it's, for 75% of the quarter, we weren't able to sell our pens, but we also talked about consumer demand. And we never thought the demand for the product would go away. And we're actually starting to sell more pens than we did previously as we develop a broader product set. So I think we're very positive on our brands and our products in the vape category.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [50]

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Okay, good to know. And just the last one from me here. With respect to the in-house brands, it was nice to see them moving up to about 27% of revenue, I think it was, in the quarter. Can you just remind us what the long-term goal or, I guess, target for those in-house product sales are in those dispensaries? And I guess, to what degree that would positively impact margins?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [51]

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So I'll state the goal, and Brad can talk about the margins. So what we've said in the past is our goal is 50%, but what we've also said internally, when we get to 50%, we'll have to just see. And if revenue is continuing to grow with 50% of our products on the shelf, we may test further. If revenue starts to decline with 50% of our products, we would dial it back. But that is our near-term goal is to get it to 50%.

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Brad Asher, Ayr Strategies Inc. - CFO [52]

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Yes. In terms of margins, I'll keep it brief. We're north of 50% today. And we think with vertical integration being increased it will be certainly north of 60%, so I think there's a lot of upside there as that continues to ramp.

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Operator [53]

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Thank you. This concludes the Q&A session. Thank you, ladies and gentlemen, for participating. You may now disconnect.