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Edited Transcript of AYRa.CD earnings conference call or presentation 15-Aug-19 12:30pm GMT

Q2 2019 AYR Strategies Inc Earnings Call

Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of AYR Strategies Inc earnings conference call or presentation Thursday, August 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sean Mansouri

Gateway Investor Rleations - IR

* Jonathan Sandelman

Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary

* Jennifer Drake

Ayr Strategies Inc. - COO & Interim CFO

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Conference Call Participants

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* Bobby Burleson

Canaccord Genuity - Analyst

* Greg Gibas

Northland Securities - Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for participating in today's conference call for Ayr Strategies. Delivering today's prepared remarks are Chairman and Chief Executive Officer, Jonathan Sandelman, and Chief Operating Officer and Interim CFO, Jennifer Drake. Following their prepared remarks will open the call for your questions.

Before we go further I would like to turn the call over to Ayr's IR Director, Sean Mansouri, as he reads the Company's Safe Harbor that provides important cautions regarding forward-looking statements. Sean, please go ahead.

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Sean Mansouri, Gateway Investor Rleations - IR [2]

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Thank you. Please be reminded that the remarks on this conference call may contain or refer to forward-looking statements within the meaning of Canadian and US security laws. Management may also make additional forward-looking statements in response to your questions. Although management believes these forward-looking statements are reasonable, such statements are not guarantees of future performance or action and are subject to important risks and uncertainties that are difficult to predict.

Certain material assumptions are applied in making forward-looking statements and may not prove to be correct. Important factors that could cause actual results to differ materially and the assumptions used in making such statements, were included in our press release issued prior to this call as well as other documents filed with the Canadian and US securities regulators.

Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. With that said, I will turn the call over to Ayr's Chairman and Chief Executive Officer, Jonathan Sandelman. Jon?

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [3]

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Thank you, Sean, and good morning, everyone. Today we'll summarize our partial Q2 results filed yesterday and provide additional color on how our businesses have been performing since the end of Q2. We will also provide an overview of market dynamics and the acquisition landscape.

Ayr is uniquely positioned in the cannabis market, producing some of the highest levels of profitability and adjusted EBITDA among our public MSO peers. This is a reflection of the strength of our strategy and financial acumen in assembling our portfolio, as well as the quality of our assets and the best-in-class operating team that we have brought together so far.

Importantly, as you will see shortly, in just five weeks we are squarely on track to meeting our 2019 guidance. We are also pleased to see our integration efforts yielding immediate impact as our revenues have accelerated from Q2 into the start of Q3 with even further opportunities for organic growth ahead.

We also see strong opportunities for consolidation as the market transitions to an environment that favors our strength, discipline and financial acumen, the ability to grow without capital markets being open and the operational savvy.

As we evaluate our opportunity in today's market, our goal first and foremost is to drive shareholder value in whatever form that takes for Ayr. We believe the market recognizes our management team as industry leaders in terms of financial and operational expertise, which is reflected in the strength of our current results and our forecast for strong organic growth. This expertise has value in the industry, as does our strong cash flow generation profile. And these give us the flexibility to strike deals that create value for our shareholders and for the business we combine with.

We are very pleased with the progress our business has shown in the short time since our acquisitions were finalized at the end of May. Starting with the top line, July revenue of USD10.5 million increased 57% over the average monthly revenue in the fourth quarter of 2018, increased 34% over the Q1 2019 monthly average, and increased 20% sequentially from the month of June.

To drive top-line growth we are focused on increasing both transactions per day and average spend per transaction, and both have already meaningfully improved since we took over the business. Daily transactions in our dispensaries for July were up 40% to 4,200 compared to Q1 monthly average of 3,000 per day. This is all organic traffic. And average ticket per transaction is also increasing, up 4% in July compared to Q1.

To push margin improvement in Nevada we are looking to optimize the percent of product sourced internally. Our highest producing stores in Nevada went from less than 3% in-house product in Q1 to 10% in July on their way to a goal of 50% or more. We have a strong portfolio of products which include some of the highest quality premium flower in the state. We are ramping up our cultivation and manufacturing capacity to meet the customer demand.

In Massachusetts we are also uniquely positioned to be a leader in the wholesale market as we are one of only three fully licensed providers to the recreational only market. Our progress in Massachusetts wholesale since we took over the business has been substantial. For the month of August contracted wholesale revenue are UDSD2.5 million, more than double Q1 average of USD1.1 million per month, and a 23% sequential increase even over July's USD2 million in wholesale revenue.

But true demand in August was even higher than the USD2.5 million. We received USD4.5 million of orders of which we were able to only fill USD2.5 million based on August production levels. The strong demand speaks to the incredible opportunity in front of us in Massachusetts' wholesale market.

We see wholesale revenue growing further both by increasing production to meet current demand and increasing penetration. We started 2019 selling into one of five open recreational dispensaries in Massachusetts. At the beginning of June, we were selling to eight of 20 open recreational dispensaries. We secured sales in 16 of 29 recreational dispensaries in the month of September. This is a very, very strong result for our wholesale sales team in Massachusetts.

In the coming months, to enhance shareholder value, we have three simple objectives motivating everything we do day to day. One, to deliver on our stated plan for strong organic growth. Two, to look at all forms of business combinations to expand on our excellent initial portfolio and footprint. Three, to increase corporate visibility, sharing the Ayr story more broadly both in the institutional and retail investor community. With that I turn it over to Jen to walk through the second quarter. Jen?

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Jennifer Drake, Ayr Strategies Inc. - COO & Interim CFO [4]

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Thanks, Jon. Our Q2 financial report reflects the five weeks ended June 30, 2019, the five weeks during which we owned our underlying Nevada and Massachusetts businesses after our qualifying transaction which closed on May 24. Revenue for this five-week period was USD10.8 million with gross profit before the impact of fair value of biological assets of USD6 million and adjusted EBITDA of USD3 million.

This includes corporate overhead of roughly USD0.5 million for that five-week period, which annualized is to roughly USD6 million of corporate overhead for the year and which is included in our annualized adjusted EBITDA guidance. Our goal for synergies between the businesses is to at least offset this corporate overhead over time.

We made great progress in our businesses in the first five weeks and into July and August, as Jon highlighted. But the benefits of synergies between our businesses will layer in over a period of the next few quarters. While corporate overhead, however, comes into the results day one. So, it will take a bit of time for the synergies between the businesses to be realized and to meet our goal of achieving synergies equal to or greater than our corporate overhead.

But we have made progress, we have begun to make centralized purchases buying cartridges at size for discounts across the Company; using our buying power to secure high-quality extraction inputs at lower prices in Nevada, for instance; integrating vertically in Nevada to lower the cost of production and to optimize labor spend; and sharing best practices between states, for example, to decrease production costs in Massachusetts by bringing in expertise from Nevada.

As a reminder, in our corporate update call last month, we forecasted annual pro forma 2019 revenue and adjusted EBITDA of CAD150 million to CAD170 million for revenue and CAD40 million to CAD50 million for adjusted EBITDA. Those numbers equate to USD110 million to USD130 million for revenue and USD30 million to USD40 million for adjusted EBITDA. And those adjusted EBITDA estimates include, again, the full impact of corporate overhead and public company costs.

Annualizing the five weeks of Q2 2019 during which we owned our businesses, absent any synergies or integration benefits, brings us above the bottom end of our forecasted revenue and adjusted EBITDA range for 2019, even before those impacts of synergies and vertical integration. This annualized 2019 adjusted EBITDA would be a 70% increase over our 2018 EBITDA when you strip away those public company and corporate costs and focus solely on the strong earnings power of our regional segments.

For 2020, we expect to generate between CAD305 million to CAD325 million of revenue with adjusted EBITDA ranging between CAD140 million and CAD150 million. In US dollars those estimates are USD225 million to USD245 million for revenue, USD105 million to USD115 million for adjusted EBITDA.

I want to stress that these expectations for 2020 growth are fully funded with no reliance on capital markets for external funding to meet these projections. The main drivers of these expectations are simply expanding our capacity to meet existing demand.

In Nevada the demand comes from our own five dispensaries where we have over 3,500 transactions every day. The largest dispensary group we acquired did not make anything on its own, it purchased everything at wholesale. And we bought cultivators and manufacturing and production facilities to supply vertical integration.

But today we don't make enough product in our existing 14,000 square feet of cultivation space to feed our internal demand for product. Our expansion in the Nevada facility, which just began this week, will allow us to provide roughly a third of our flower, for example, internally by the second quarter of 2020 and two-thirds of our flower internally by the third quarter of 2020.

And increasing vertical integration as we're planning and as we're executing on drives margin improvement on top of our continued but very reasonable revenue growth from the existing best-in-class dispensaries we operate in Nevada.

In Massachusetts our demand comes today from the wholesale market. Demand will transition to our stores when they receive local regulatory approvals to make recreational sales. Right now they are operational but only medical. But for now we are selling our product into the wholesale market.

As Jon mentioned, our August pre-demand for product in Massachusetts was USD4.5 million, but we can only fill USD2.5 million of that by selling everything that we currently make. So, to meet this increased demand we are currently constructing expansion facilities at our existing cultivation location in Massachusetts that will take us from 13,000 square feet of cultivation under canopy today to 32,000 square feet under canopy in the fourth quarter of 2019, so in just a few months.

And we are targeting to expand the capacity to a further 100,000 square feet, or the max capacity under capacity in Massachusetts in 2020. We're sprinting to make more product to meet the strong wholesale demand in Massachusetts, as well as to expand our penetration in the wholesale market amongst recreational stores.

In addition, we're bringing our Nevada infused and extracted product brands to Massachusetts to expand our product offering. And there also will be more recreational dispensaries coming online through the end of 2019 and into 2020 for us to supply.

This is a good time to draw everyone's attention to the expanded EBITDA bridge in our Q2 update call presentation available on our Investor site at www.AyrStrategies.com/investors. This expanded bridge walks through some of the specific inputs that take us from our 2019 to 2020 expectations.

Going through some of the highlights, our in-process cultivation expansion projects in Massachusetts and Nevada are set and on target to meet the demand that we see in those two markets. Massachusetts, as we described, is well underway with the building expected to be completed in the fourth quarter and our first sellable flower available for wholesale demand in Q1 2020.

The Massachusetts expansion takes square feet under canopy from the current 13,000 square feet to 32,000 square feet, which takes our pounds of flower produced from 5,000 pounds per year to 12,000 pounds per year and our pounds of oil produced from 500 pounds per year to 1,200 pounds per year.

Nevada construction actually began just this week, with our first sellable flower there expected in early Q2 2020. That expansion takes the square feet under canopy in Nevada from 14,000 square feet to 31,000 square feet, takes the pounds of flower produced from 7,000 pounds of capacity per year to 14,000 pounds of capacity, and takes the pounds of oil produced from current 500 pounds of capacity per year to 1,500 pounds of capacity per year, which is also helped a bit by some equipment improvements that we purchased over the last eight weeks of owning the businesses. We expect to sell this increased capacity at very attractive margins.

In Massachusetts, at wholesale we're selling flower at $4,200 per pound that we produce today for around [$1,450] per pound. We believe we can decrease that by bringing in our Nevada expertise, a synergy that we mentioned earlier. At retail, we're selling currently in the medical market at about $5,600 per pound while rec stores today are selling at about $7,000 per pound. That's a very attractive margin relative to the $1,450 cost at which we produce in Massachusetts.

Now in Nevada, since we introduced vertical integration at the end of May, we only sell our flower, which is top-shelf flower only, into our own retail stores. So, all sales are at that higher retail margin. In Nevada we sell our top-shelf flower at retail for $4,300 a pound and we're producing at $900 a pound.

In terms of top-line sales growth, our expectations are based off historical growth rates for Nevada, and for Massachusetts we build our recreational sales expectations based on volume and average ticket levels.

Starting with Nevada, we've seen substantial year-over-year growth in the last few years in our dispensaries with 130% growth from 2017 to 2018 and 50% growth at the top line projected from 2018 to 2019 and we're already squarely in line to meet this expectation. But for 2019 to 2020, we are projecting a more modest 10% to 12% top-line growth at our dispensaries.

For 2019 Nevada sales are based on volume and average ticket levels. Average volume of 600 transactions per day in each store and average ticket of $58. As of July, our Nevada dispensary average ticket is spot on model and our volumes, as Jon mentioned, are well above this, averaging over 900 transactions per dispensary per day in Nevada.

Now this detail on transactions is important because it informs how we forecast our recreational expectations for Massachusetts. For Massachusetts, once we start recreational sales we're expecting average tickets of $125 per transaction, this is versus $110 that we realize today, so not a particularly big jump. And we are projecting 500 transactions per day.

Comparing this 500 transactions per day to our experience in Nevada of over 900 transactions per day, and given the very high-traffic location of our stores in the Boston area plus the volumes that we're seeing in other rec stores that are open in Mass today, we feel very confident that our expectations for Massachusetts recreational store revenues are achievable.

We in general have crafted our assumptions with the goal of presenting reasonable, achievable forecasts for our investors -- not so conservative as to understate the growth profile of our business, but enough for us to feel comfort in executing. Our regional leaders have contributed heavily to the creation of our budgets and our bonus pool for the regional leadership is tied to achieving these target, ensuring that they have the right balance of stretch and achievability.

I want to take a step back for a moment regarding Massachusetts, which is the larger part of our year-over-year growth. When we look at states like Nevada, Colorado or California that have transitioned from medical sales to recreational cannabis sales, statewide revenues increased 3 to 4 times in the first 24 months post recreational legalization, according to New Frontier Data.

Nevada is the most comparable state to Massachusetts in our mind as Nevada also operates a limited licensing regime. And in Nevada, revenues in the first year of recreational sales were just under 3 times higher than revenues in the final year of medical sales. And in the second year of rec sales revenues were 4 times higher than they were in the final year of medical only.

In Massachusetts itself weekly recreational sales are currently at about 3 times the level where they started this year, $10 million per week versus less than $3 million a week in January, according to Cannabis Control Commission. And of course the dynamics of each state are different and in -- Massachusetts in particular we think will show greater growth in our business because of the substantial wholesale capability that we have.

But we wanted to go through some of these numbers in other states that moved from medical only to recreational sales because it helps put the growth we expect in Massachusetts in the context of the historical experience of other states.

Wholesale for us in our Massachusetts expectations currently represent 70% of our expected revenue for 2020. And we have our rec license in hand, it's 100% certain, and the expansion of our cultivation and production facilities is in process and in our control and the demand for wholesale is clearly increasing. And all of these things give us further confidence around our Massachusetts 2020 expectations.

But even if we removed any Massachusetts retail recreational sales from our 2020 estimates, the impact would be an expected revenue decline of only 5% and an adjusted EBITDA decline of only 10% relative to our forecast because of the conservative late-in-year timing of recreational dispensary sales in our model and the increased capacity that would leave for wholesale.

Equally important, and I want to stress this, we are not reliant on external financing to take our Company to the next chapter of its growth. We are cash flow positive, one of a very small number of companies in the industry to be cash flow positive. We are organically growing at a strong clip and we are operating in favorable limited license states.

The CapEx required to create this organic growth in Nevada and Massachusetts is a modest USD15 million, which we believe to be pretty solid use of capital that pays back within roughly the first year, as you can see from the expected growth from 2019 to 2020 in adjusted EBITDA.

Before handing it back over to Jon to discuss our external expansion opportunities, I want to take a quick moment to discuss our efforts on increasing visibility for our stock. As many of you know, in June we began trading on the OTCQX, and this has made it materially easier to trade our stock for US investors.

We are going further and have applied for listing on the CSE versus the NEO. While we could not be happier with the corporate service that the NEO exchange has provided us, our investors have spoken regarding access and liquidity and we have heard you. We have already received approval from the listing committee of the CSE and expect to move our listing to the CSE next week.

In other areas for increasing visibility we've updated our website, which is now at www.AyrStrategies.com, with more corporate information. We've also increased our digital media presence. Many of the call participants today may have received notifications on Twitter or LinkedIn as well as from our IR distribution list. And we are pushing press releases through the channels -- through these channels, rather, with greater frequency.

We also continue to expand our engagement with the press, the analyst community and a broader set of investors, institutional, high net worth and retail, through conference participation and non-deal roadshows and an expanded retail investor engagement program.

We have some of the best revenue and EBITDA numbers in the industry with only two states in our current footprint. Plus, the market environment is very well suited to our strengths for expansion. Needless to say, this is a story that we want broadcast to a much wider audience. And with that I'll turn it back over to Jon.

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

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Thanks, Jen. Let's switch gears and talk about expansion opportunities. As I mentioned on the last corporate update, the market in which we operate today is very different than it was just one year ago. Last year there were record amounts of capital being raised by MSOs, so there were more dollars targeting fewer cannabis licenses, which made it more competitive to acquire quality operators at reasonable evaluations.

Today, last year's consolidation and more challenging external environment for equity financing means less dollars in play chasing larger numbers of cannabis licenses. This is a market environment that we believe to be very favorable to Ayr and its shareholders.

Our initial acquisition strategy was built to withstand these difficult environments. In fact, it was to use these more challenging environments as an opportunity to consolidate. We can now be even more competitive in our acquisition strategy of targeting EBITDA positive best-in-class cannabis operators in limited license states. I want to emphasize that all our acquisitions will be assessed through the lens of creating shareholder value in whatever form that takes for Ayr.

In private markets we have begun to see the balance of power shifting from sellers to buyers and we have seen pricing become more rational. In public markets stock prices are very different levels than just a quarter ago. Our strong fully funded EBITDA profile is an advantage for us, along with the financial acumen and operational expertise we bring to the table.

As a reminder, when we announced our acquisition targets last October, we issued equity at price levels that were more than double where our stock was then trading. So our stock price today is not as big of a setback for acquisition as many might believe. Our acquisition strategy has not changed since we started in 2017. Deal flow has actually increased over the last two months and prices have become more attractive.

We remain of the belief that combining positive EBITDA companies is the soundest strategy as these companies can be the winners in difficult markets and can withstand deal delays and still have strong positions. This is not the case for companies burning cash where time is not on their side. We have been waiting for this day to come as the market is now coming to us, and it's coming at a time when we have the most flexibility and patience as we focus on acquiring EBITDA and strong operating talent.

Briefly touching on our market profile, Ayr is currently trading at 3 times 2020 adjusted EBITDA and 1.5 times 2020 revenue, well below our peers. When you combine this with all the positive things going on in our business, the 2020 growth that we see is very achievable and the discounted valuation we see an extremely compelling value proposition for our shareholders.

Speaking to the value proposition and the opportunity set, Jen, along with other insiders, recently purchased shares in the open market, collectively over $500,000 worth. And although I'm personally restricted from buying more shares in the open market, given my current holdings relative to the limits in the Canadian takeover bid rules, I remain the largest shareholder of Ayr, both direct and indirect ownership of 15%. So our interests are demonstrably aligned with all of our investors.

In closing, we have a deep talent pool today made up of finance, cannabis and marketing executives, strong assets in both the Western and Eastern US with ample runway for growth, and we are one of the best positioned MSOs in the market in terms of profitability and organic strengthening balance sheet to deliver on our disciplined acquisitive strategy.

I can't stress enough how excited our team is about our position today and the growth opportunity ahead. With that I'll turn it back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Bobby Burleson, Canaccord.

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Bobby Burleson, Canaccord Genuity - Analyst [2]

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So, I guess high level, maybe just looking at Q2 on a pro forma basis beyond just the five weeks, can you give us the revenue split West and East if you haven't already done that? And any more detail on operations during the quarter?

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [3]

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Jen, do you want to take that one?

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Jennifer Drake, Ayr Strategies Inc. - COO & Interim CFO [4]

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Sure. Thanks, Bobby. In terms of the revenue split between our Eastern and Western portfolios, we do see stronger current revenue out of Nevada as we're ramping up the wholesale businesses in Massachusetts. As Jon mentioned, we received our wholesale license in June in Mass, so it was really in June and into July and into August that we saw the big pickups there from a revenue standpoint.

So, for the five weeks reported in our financials, you'll see -- just rough numbers let's call it two-thirds Nevada, one-third Massachusetts. And we expect those numbers to shift as wholesale really kicks into gear in Massachusetts in Q3 and beyond.

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Bobby Burleson, Canaccord Genuity - Analyst [5]

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Okay, great. And then since Massachusetts scaled -- going forward, obviously nice growth in Nevada next year, but Massachusetts is really driving a lot of the incremental opportunity in 2020. Can we just touch on what the customer landscape might look like there?

It seems like new license store rollouts are increasing, but there's also this investigation into folks that were trying to hold more than three licenses of one type. Do you see any kind of slowdown in the amount of approvals from the CCC or anything there to maybe impact the customer landscape that you are wholesaling into?

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

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So, I don't and we mentioned the number of retail stores we were selling into. We're selling into one of five, eight of 16. We're talking about 16 of 23 or 27 stores. So, we're seeing the acceleration of the recreational conversions and we're just participating to the maximum our capacity allows in terms of selling into them.

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Bobby Burleson, Canaccord Genuity - Analyst [7]

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And obviously when you expand your capacity (multiple speakers).

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [8]

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And think about it, Bobby. Since that's come out, that headline, the store counts -- the conversions have doubled.

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Bobby Burleson, Canaccord Genuity - Analyst [9]

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Okay, great. And then you did touch on maximizing shareholder value and you talked about a number of different ways that you're going to be focused on to do that. And just curious whether or not with the business combinations, mentioning of that, what that might entail.

How far reaching could the business combinations be? Are we talking about outright potential sale of the company, merger with someone of like size? Just anymore color on that part of your comments.

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [10]

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So, what we've been saying for the last nine months is that we built this Company when we made our acquisitions. And when we first did the spec, we stated we were going to be EBITDA positive, creating maximum optionality for us and our shareholders in terms of operating and creating shareholder value.

We've been talking over the last year about business plans that are overreaching potentially and with the assumption that the equity markets would always be open. And we talked recently about divestitures causing some of the larger MSOs to have to divest -- through consolidation would have to divest certain states. And so, we pause for the moment, as we talked the last time, waiting for this opportunity to happen.

The equity markets are now closed, divestitures are occurring as we speak, but we also mentioned, Bobby, that we thought there was some probability -- we didn't handicap this -- that because of the equity markets being closed and the access to funding, whether debt or equity, being very limited, there may be the potential that the MSOs would have to spin off or sell some of their crown jewels to fund their business plans because for the most part they are burning cash.

And so, I would say as recently as the last couple of days we have seen that opportunity. And so, as we look at the landscape today, our stated goal is just to create shareholder value. And that can take many different forms. And at this point I think it would be inappropriate if I talked further in the kind of discussions we're having. But we stand by that goal -- drive shareholder value.

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Bobby Burleson, Canaccord Genuity - Analyst [11]

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Okay, great. Thank you.

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Operator [12]

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Greg Gibas, Northland Securities.

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Greg Gibas, Northland Securities - Analyst [13]

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First one was just looking at that 40% increase in daily transactions this July over Q1. Can you talk about what some of the underlying drivers for this growth are and what types of levers you have to continue to increase daily transactions going forward?

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

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So, as we've always talked about, we bought five separate businesses in Nevada and immediately we created one synthetically vertically integrated business by bringing them together. Three of the stores that we bought in one package were high-performing stores with a great retail operator.

In another package we bought two other stores, which in the same cities were massively underperforming the LivFree assets. So by just reorganizing the management structure and putting the retail head of the LivFree assets over The Canopy assets, we're seeing some immediate impact in terms of customer traffic.

We're also being more promotional, more affinity programs, more loyalty programs and we're seeing those have an immediate impact. We're also putting better product and readjusting the products that the two underperforming stores had on their shelves and there's an immediate impact on that.

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Greg Gibas, Northland Securities - Analyst [15]

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Great, appreciate that color. And then secondly, as we think about the in-house products ramping from the 10% level today to the 50% I think by mid-2020 is what you said, what kind of gross margin improvement should we expect this to drive or accompany that shift?

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

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Jen, do you want to take that?

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Jennifer Drake, Ayr Strategies Inc. - COO & Interim CFO [17]

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Sure. Greg, what we see with vertical integration is we see gross margins going from let's call it the high 30%s to low 40%s up to the 50% to 60% plus levels in general. Now, of course you can't predict costs and prices into the future, but if you just look at businesses that aren't vertically integrated, they come in at that 30% to -- high 30%s, low 40%s level generally. And if you look at businesses that are vertically integrated, a great example is our Massachusetts operations, you see 60%-plus gross margins coming out of that business on a standalone basis.

So, we think there's a lot of leverage to be had by pushing more vertical integration through our Nevada businesses, particularly given that they're so good at driving top-line growth. We can drive top-line growth well at much better margins -- that can be very powerful from an EBITDA standpoint.

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [18]

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Greg, just think about this -- we're doing 4,200 transactions in Nevada today, if we just -- as we said, if we just increase the percentage of our products into the stores, gross margins will increase. We don't have to make big assumptions on the number of transactions, we just need to fill the stores with 50% of our product up from 10% in our largest stores today and previously 3%.

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Greg Gibas, Northland Securities - Analyst [19]

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Right, that makes sense and that's really good to hear too. Great. And then switching over to the Massachusetts side, given you are in 16 out of the 29 rec dispensaries today, as this market reaches a mature state what percentage of total dispensaries do you think you can sell into reasonably?

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Jonathan Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [20]

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Well, here's the way we think about this, and again, markets do change, but if the market is steady-state with access to capital being limited, what we're seeing in Massachusetts, and we're also seeing around the country, is that for a number of MSOs, their ability to build out capacity has been severely constrained, there just isn't the capital to do it.

And so, what we've been saying in our meetings and to other people we've been talking to, if you are fortunate to be in a position to have a fully funded business plan and your capacity is either in the process of being built on will be built in the very near future, this idea that your market share will continue to grow as more stores open up, we're predicting maybe 65 stores now in Massachusetts, but with very little ability in the state to add capacity to meet that need.

So, we think our market share grows, we think pricing stays healthy for longer than we may -- might have anticipated from the beginning.

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Greg Gibas, Northland Securities - Analyst [21]

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Awesome. Thank you, guys.

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Operator [22]

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Thank you. And that concludes our question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.