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Edited Transcript of AYRa.CD earnings conference call or presentation 27-Aug-20 12:30pm GMT

Q2 2020 AYR Strategies Inc Earnings Call

Aug 27, 2020 (Thomson StreetEvents) -- Edited Transcript of AYR Strategies Inc earnings conference call or presentation Thursday, August 27, 2020 at 12:30:00pm 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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* Andrew Semple

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

* Gregory Thomas Gibas

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

* Jason Zandberg

PI Financial Corp., Research Division - Special Situations Analyst

* Pablo Ernesto Zuanic

Cantor Fitzgerald & Co., Research Division - Research 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 Second Quarter 2020 Earnings 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 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 June 30, 2020.

As well, we remind you that adjusted EBITDA is a non-IFRS measure. We refer you to the reconciliation to IFRS measures and other disclosures concerning non-IFRS measures contained in Ayr's management discussion and analysis for the quarter ended June 30, 2020.

I will now turn the 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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Good morning, everyone. As you can see, the recent trends we've highlighted in our press release, our business is stronger than ever reflected by significant month-over-month improvements across our markets since the lows of the pandemic in April.

Although, we're detailing our operating results for Q2 today, which were in line with our July 6 preannouncement, we are also updating you on how well the business has been doing so far in Q3, simply continued exceptional performance.

In fact, we achieved record levels of revenue and adjusted EBITDA in June. Then proceeded to beat those records again in July. Our $181 million of revenue and $77 million of EBITDA respective annual run rates point to the resilience, tireless work and thoughtfulness and strength of our team, as well as the excellent momentum we have established as we enter the next phase of our corporate development in the second half of 2020.

Our ability to deliver these kinds of results, especially amid a challenging operating environment, speaks to the financial and operational foundations we have built. M&A, which is what I'm most excited to talk about, built on that foundation. Today, we are announcing the expansion of our footprint to include the extremely attractive Pennsylvania market as well as two additional markets that we will detail later this quarter.

We will get to the specifics on the expansion of our footprint shortly. But first, I'll pass the call over to our CFO, Brad Asher, to walk you through our financial results.

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

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Thanks, Jon, and good morning, everyone. Our business, coming out of Q2, is battle-tested and stronger than ever before. The response to COVID by our team, partners and community allowed us to ramp our revenue from 50% below pre-COVID levels to 10% above pre-COVID levels, all within the same quarter for the month of April and June, respectively.

Our ability to adjust our business plan was a key driver in hitting revenue of $28.3 million for the quarter, which represents a decrease of 15% from the prior quarter due to COVID-related closures.

Despite this sequential decrease in quarterly revenue, our adjusted EBITDA for the second quarter was $9.1 million, which represents an 8% increase from Q1 and an EBITDA margin of over 32%.

The increase in adjusted EBITDA was primarily driven by our increase in gross margin before fair value adjustments, which improved dramatically to 60% compared to 50% in Q1. This was driven by the successful cultivation expansions coming online in the second quarter in both Nevada and Massachusetts, resulting in more in-house product being sold at our retail stores in Nevada.

Our SG&A costs for Q2 of $9.4 million was consistent with prior quarter, and both June and July were aligned with the annual monthly average for SG&A costs, indicating revenue will continue to grow faster than expenses in the second half of the year.

Moving to July. We are excited to share our preliminary numbers of $15.1 million of revenue and $6.4 million of adjusted EBITDA. These are both monthly records and represent significant growth month-over-month. And when compared to pre-COVID numbers, adjusted EBITDA was up 127% over the Q1 monthly average.

July EBITDA margins of 43% also represent an 1,800 basis point increase from the Q1 average, clearly placing us among the top of the MSOs in terms of profitability, with August every bit as productive as July.

Moving on, our balance sheet continues to strengthen as we accumulate cash from operations, grow inventory, more expansions and continue to pay down our debt, which is among the lowest levels in the industry, with some of the most attractive terms.

As of July 31, we had $17 of cash on the books, with our Massachusetts and Nevada cultivation expansions completely paid off and a positive net working capital position on our balance sheet of $8 million.

We also continue to generate strong cash flow from operations during the quarter, which was up 16% quarter-over-quarter to $8.6 million.

I am incredibly proud of our team's performance and response to the adversity we faced during the quarter, and believe we are well positioned to drive growth in the back half of the year and into '21.

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. I'm going to keep the operational highlights brief today as the financial results we've generated month-over-month through the pandemic and into July really speak for themselves.

Across our business, we've benefited from the scalable systems and operational control framework that we've built over the last year and also from the completion of our recent cultivation expansions.

Specifically in Nevada, new product from our expanded cultivation facility arrived in stores in May, and that increased our internally-sourced product from 25% in Q1 to over 40% in Q2, delivering the significant improvement in gross margin that Brad mentioned.

We also recently gained 2 additional dispensary licenses in Nevada from the disputed 2018 round of license grants, one of those dispensaries in Clark County and one in Henderson. This was the most attractive settlement agreement secured by any operator in the state at 2 licenses granted, one in Clark County and one in the city of Henderson. The Clark County location is excellent, and we plan to open that location later this year.

Switching to Massachusetts. Our wholesale business continues to ramp there. Massachusetts has more recreational dispensaries coming online every month. And our newly expanded cultivation facility continues to produce excellent results, with some of the most potent flower we've ever grown at 30% THC levels, and those products are being extremely well received.

Our monthly wholesale revenues have ramped to over $3.4 million as of July. That's a 30% increase over our wholesale revenues at the start of this year. And in Massachusetts retail, our medical dispensaries are maintaining the revenue gains they made over Q2.

We also launched 2 new brands over the quarter, Entourage Concentrates and Wicked Sour Edibles. We started these in Massachusetts, and we've been really pleased with the response so far.

The success of our business to this point, including the large-scale expansion projects that we've successfully completed, demonstrates the strength of the systems and operational controls we've built over the last year. And we'll continue in the same vein as we take this show on the road to new markets onboarding new teams and new assets and beginning similar expansion projects to accelerate growth.

We have been working diligently with strong institutional financing partners to ensure that our expansion is fully financed, and the debt markets have been highly receptive to our strong credit profile.

Our teams on the ground have done incredible work to sustain our momentum, and we look forward to executing our growth initiatives on an even larger scale going forward.

On a final operational note, we want to welcome Megan Kulick to our team as our Head of Investor Relations. Many of you know Megan already as she's a seasoned Wall Street and cannabis industry veteran. We're excited to have Megan onboard, and I know she is excited to be in regular dialogue with Ayr investors.

With that, I'll hand it back to Jon to discuss our expanding footprint.

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

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Thanks, Jen. We have established a powerful foundation for our business and have turned Ayr into one of the most profitable MSOs in the country in terms of adjusted EBITDA and cash flow generation.

We are now in an excellent position to take our proven strategy and track record into new markets. So today, we're excited to discuss the first of a series of acquisitions that will expand Air's footprint from 2 states to an expected 5 states by the end of Q3.

As highlighted in our earnings press release, in Pennsylvania, we've reached an agreement to acquire and develop 6 retail dispensaries in excellent locations as well as a significant cultivation and production footprint.

The state of Pennsylvania has only 32 grower processor licenses and 198 dispensary permits despite having a population of 13 million people. For comparison, Nevada has permitted 130 dispensary licenses for a population of 3 million people. The cultivation and processing facility we are acquiring is 143,000 square feet, with the initial Phase I construction of 45,000 square feet nearly completed. The remaining 98,000 square feet of the facility is primed for further build-out. We plan to make full use of the additional capacity.

To be honest, the 13 acres of site provides ample room for further expansion, even beyond the existing 143,000 square foot facility.

As for the retail dispensaries, 4 of the 6 are in development at prime locations, predominantly clustered in Pittsburgh and Philadelphia regions, and we expect 3 to open by January of 2021. This geographic coverage provides us the opportunity to establish our market presence in the most highly populated regions of the state.

We have acquired these assets at very attractive levels of roughly $2.5 million estimated forwarded adjusted EBITDA for a combination of $27 million in cash, $15 million stock and $15 million in vendor notes.

In addition to great physical assets, we're also bring on exceptional teams with diverse backgrounds to add to our deep talent pool at both the ground and corporate levels as well as a strong research program affiliated with a local academic institution.

As we add this excellent team and assets to our thriving platform, I'd like to remind everyone of the criteria we have consistently applied to our M&A initiatives. We are targeting best-in-class assets in the most attractive and relevant markets with large addressable populations, limited licensed states that are either currently or soon expected to be approved for adult use, and strong operating talent that is motivated to help build one of the largest most profitable MSOs in the country.

All of this criteria applies to our Pennsylvania acquisitions as well as the target acquisition in 2 additional markets we plan to announce soon.

We've always thought ahead to where our capital will have the highest return, which is an approach that has enabled us to capitalize on attractive market opportunities and maintain our strong adjusted EBITDA profile, even in the face of challenging environments.

This high level of discipline will continue to characterize the next phase of our expansion strategy as we increase our total footprint to 5 states later this quarter.

We have patiently waited for over a year for the right time to acquire the right assets at the right price. This patience and discipline has allowed us to take advantage of the seed change in the capital availability for cannabis companies and to buy great assets accretively.

In 2018 and '19, cannabis businesses could go public. 6 or 9 months ago, all sorts of cannabis companies were raising debt. But today, money is only available for the top businesses in the sector: the best operators; the people who will be around; and winners in cannabis 2.0.

We are decidedly one of those winners, and this has allowed us to expand our footprint with excellent returns to our shareholders.

As a closing thought, I want to leave you with a few data points that reinforce just how far we've come since we formed Ayr in May of 2019.

We have established our strong revenue and adjusted EBITDA profile in 2 markets, while simultaneously building and integrating a 600-person team, culture, financial and operational framework. With these resources now in place, the new markets we add will integrate seamlessly into our firm foundation and scalable system.

We are simply repeating the stellar operational playbook and greenfield project development that has driven our success up to this point, but we can now do it with even greater infrastructure, support and valuable experience behind us.

I am proud of the robust platform and framework we have in place. We are poised to build in our expanded footprint and of our team's diligent efforts to make Ayr a premier MSO.

Our team's operational excellence, financial and strategic acumen, exceptional productive assets and expanded geographic footprint put us firmly in the ranks of the top multi-state operators. And even with the success we have realized thus far, I am confident Ayr's growth cycle is only getting started.

Operator, we'll now open up for 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 with Canaccord.

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

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Congratulations on the strong results and strong July. Just curious, as you look at closing on the Pennsylvania assets and another 2 markets beyond that in Q3, what type of cash balance or cash surplus would you guys like on the balance sheet once you are done financing this?

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

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Jen, you want to take that or would you like me to?

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

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I'll take it. Yes. No, thank. Thanks, John. Bobby, we are -- so as we embark on the next phase of our expansion, clearly, we have thought long and hard about doing it at the right price and at the right time, as Jon mentioned. And clearly, we are looking at the right financing options. And as we mentioned, I think we feel very extremely confident about the reception we've had from the debt market so far.

In terms of cash balances that we run on the books, I don't think we've ever explicitly said how -- what our cash balance needs to look like. But I think what you'll find, as we announce these transactions through Q3, when they'll be clear, they're not closing in Q3, we'll be announcing the 2 markets throughout Q3, what you'll find is given our financing plans, we'll have a cash surplus for some time throughout the rest of this year and into next as we engage in these further expansions, our financing activities and then some CapEx activities around Pennsylvania.

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Robert Joseph Burleson, Canaccord Genuity Corp., Research Division - MD & Analyst [5]

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Okay. Great. And then you guys had a really nice EBITDA, especially the EBITDA margin. I'm wondering what you think that normalized EBITDA margin is going forward. Is there a higher watermark that you expect -- this high watermark, do you expect it to sustain or would you see a decent amount of fluctuation around that?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [6]

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Look, we continue to see economies of scale come from our businesses in Massachusetts and Nevada as they grow. As we consider further growth in Nevada, we do -- especially with these new dispensaries, we do find ourselves in a position where we perhaps need even more capacity to feed our stores.

But the -- from an operational standpoint, the economies of scale continue to fall to the bottom line. And we don't see this seed change in gross margin, in particular, as a temporary thing. We see this as more persistent. And certainly, in Massachusetts were just getting started in terms of pushing our gross margins up, and those should expand further as rec comes in.

Brad, do you want to make any comments there?

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Brad Asher, Ayr Strategies Inc. - CFO [7]

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Okay. I want to just -- yes. I mean, I'll add that -- I think July is a good indicator for the run rate on the EBITDA margins. As our internal sourcing is going down because the revenue is improving, we're also recognizing operating leverage to kind of counteract that. So I think July is a good indicator and definitely some upside from there as well.

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Robert Joseph Burleson, Canaccord Genuity Corp., Research Division - MD & Analyst [8]

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Great. And then just one last quick one. Looking at Massachusetts, it seems like there's a nice supply demand imbalance, favoring your wholesale operation. And it sounds like your medical -- retail footprint continues to perform very well. What do you think in terms of licensing in the state going forward? Is there a backlog that's more acute for cultivation or for retail where you expect maybe supply demand imbalance to favor wholesale to continue for a while? Or just what's your visibility in terms of how licensing goes from here in the state?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [9]

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From a licensing standpoint, Bobby, what we've seen is since the CCC, the Cannabis Control Commission, has opened up post-COVID, we've seen them increase the pace of approving new licenses. We're seeing some of the municipalities moving faster to start their local approval processes.

So we're seeing people move. Maybe that has to do with tax revenue, it's hard to know. But we are seeing movement on the dispensary side. And so our expectation is that we might even have more demand over the next couple of quarters relative to what we saw for the first half of the year in terms of the supply-demand imbalance.

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

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And Bobby, I would say that in terms of supply and demand imbalance, while the CCC is moving as fast as they've ever moved, capital still remains constrained for the ability to buildout large-scale cultivation. So we see this supply and demand imbalance lasting for quite a while.

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Operator [11]

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Our next question comes from Andrew Semple with Echelon Wealth.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [12]

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Congrats on the post-quarter momentum and on the M&A agreements. I just wanted to ask here first on the first M&A agreement announced. It's a little bit different of an approach than some of the assets you've acquired previously. These assets are still in the buildout phase of their development rather than be proving operating businesses. So I just want to get your thoughts on how much CapEx remains for that Pennsylvania -- for the Pennsylvania operations.

And then secondly, when you're talking about an attractive 2.5x forward EBITDA multiple, does that include any potential investment that needs to be put into the Pennsylvania operations between now and next year? Or how are you thinking about that?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [13]

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Jon, you want to take...

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

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Jen, go ahead.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [15]

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No, I'm happy to do it. This is the problem of being COVID and not -- and working remotely, so apologies, guys. In terms of CapEx and in terms of our approach to this Pennsylvania business, first of all, taking a step back, we are incredibly pleased to be able to have such a sizable presence immediately in the state of Pennsylvania, with this size cultivation, with a 6 dispensary footprint in one go, we're extremely excited.

It more than -- it almost doubles our dispensary counts and more than doubles our addressable population just adding this state. So we are extremely, extremely pleased with the transaction.

We -- the transaction is -- the facility is almost complete for its first phase, which is very different than the situation we had, for instance, in Massachusetts, where we were building the Phase II from scratch. So we're putting the final touches on Phase I here, and then in '21, expect to be able to bear fruits from Phase I cultivation.

And as John mentioned on the call, we expect 3 of those 6 dispensaries to be open at the beginning of 2021. So we're really at the very end of the growth cycle here for this company, the initial phase of the growth cycle, and we're just pushing it over the line, which is really quite similar to the experience that we had in Massachusetts.

Again, I would also say, we are a little bit -- we're very pleased with the timing of making this acquisition because given what Jon had talked about on the call, the lack of availability of capital for some of these private operators that need these last bits of capital in order to finalize their growth, that's what's really making us able to buy at such a good price such a good asset that really doesn't require material CapEx to push it over the line to EBITDA profitability in 2021.

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Operator [16]

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Our next question comes from Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [17]

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Congrats on the July numbers and the announcement in Pennsylvania. I just wanted to ask a few questions on Pennsylvania particular. I guess, do you envision expanding into the wholesale market as well in that state? We understand that, that market is still supply-constrained as wholesale on the radar and as you begun -- assuming so if you begun on premarketing your expected capacity.

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

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Thanks, Russ. Yes, we -- with the size of just Phase I of this facility, which is about 45,000 square feet, we have ability to sell into our retail stores as well as address the wholesale market. So we absolutely are thinking about both markets and developing relationships.

Well, the company that we're acquiring, obviously, has been thinking about that up to this point, so they have established relationships. And like every time we make an acquisition, we're looking for a great asset and a great team. And part of the great team is the IP that comes in terms of their customer relationships.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [19]

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Great. And with respect to the other 2 states you expect to announce over the next, I guess, a little bit more than 1 month, can you elaborate, are those both acquisitions or are there de novo license applications involved?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [20]

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In this situation, they would both be -- they would be acquisitions.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [21]

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Okay. Great. And if I could just swab in one more. Coming back to Nevada, I apologize if I missed it. But can you, I guess, provide us with an update as to the current retail revenue breakdown? How it splits out between curbside delivering in store, given the gyrations you've seen since late March?

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

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Yes. I'll let Brad speak to that. I don't think we've given exact, exact specifics, but happy to give you kind of a high level of where things have trended since curbside opened at the beginning of May.

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Brad Asher, Ayr Strategies Inc. - CFO [23]

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Yes. No, happy to. And things have pretty much settled out at a roughly 50-50 split between curbside and store. And as we mentioned on the earnings release, the average ticket is now around $70. So we have seen that trend pretty consistent over the last 2 months.

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Operator [24]

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Our next question comes from Scott Fortune with ROTH Capital Partners.

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

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Really quick, just a follow-up on Nevada kind of the focus. Now you're back kind of around 4,400 transactions a day in that market and this, kind of, without tourism. You can expect what to grow the internal sourcing to about 50% of your product base kind of with the target. And can we expect that kind of just to stabilize at these levels right now without tourism or kind of expectation of Nevada moving forward and from a gross margin standpoint, too?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [26]

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Sure. So we've always had more of a locals business in Nevada, even when locals weren't as cool before COVID. No. But we've always had more of a locals focus than a tourism focus. And that's continued for us, and we're very pleased that our locals have been very loyal. And it also speaks to the strength of our dispensary operations in Nevada that we've been able to maintain share, even as a lot more people are coming and maintain or actually grow share, even as a lot more people are coming after the same customers that we have.

So we -- in terms of our expectations going forward, we will continue to focus on the local markets. In particular, with this new dispensary that we're opening in Clark County, again, we do expect that to be more of a local's store. And that location is a really, really great location. It's in unincorporated Clark County, but it's quite close to the western side of Henderson. Our Henderson store is on the eastern side of Henderson, so very far away from the new location. So we don't expect much in the way of -- if anything, in the way of business-ships there. But it's a great location because Henderson has a moratorium. So we are essentially just over the town line on the western side of town in unincorporated Clark County. So we're very excited about the prospects for that new store, and we expect that new store to drive lots of increase in transaction count per day.

So those numbers that you've seen are going to be -- we'll have a whole new store in a great area to add to those numbers starting hopefully in Q1 of '21.

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Scott Thomas Fortune, ROTH Capital Partners, LLC, Research Division - Director & Research Analyst [27]

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Got it. And then a real quick follow-up on that. So your gross margins went up pretty significantly as you have more internal source there. You have 40%. You see that continuing to kind of trend up from those levels as more internal in-house brands are in your retail stores in Nevada.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [28]

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The main constraints to getting that to 50% is our flower and production capacity. So that is the one thing that may keep us from getting to 50%. We will work diligently on our downstream infused products, edibles, chocolates, concentrates, et cetera, oils, to increase our internal sourcing. But in terms of flower, that's the -- that we -- the main thing we're looking to do is increase our yields, so we can increase the internal sourcing of our flower. And they're obviously in...

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [29]

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Jen, I would say that the constraint for us to get more of our product as a percentage of our sales on our store so far has been the enormous sales growth. And what we're actually seeing in the Nevada market is continued distress. And so we're seeing a deal that we are down the path of a situation where we can just step in and pay rent and increase our capacity for very, very minor Capex. And so I would think that the margins will increase. And I think the percentage of our own product as we develop more product and expand the cultivation should increase.

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Operator [30]

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Our next question comes from Greg Gibas with Northland Securities.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [31]

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Congrats on the strong results in July and upcoming market launches, too. Really nice to hear about the expansion in Pennsylvania. It sounds like the 3 dispensaries will begin contributing January of next year. When should we expect the remaining 3 to open?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [32]

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Well, 1 of those 3 is in development also currently. So that's going to open a couple of months later than the first 2. And we'll have, I think -- sorry, the first 3, rather. And we'll have a further update on the remaining 2 dispensaries, probably as we get closer to closing the transaction.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [33]

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Got it. And I guess with respect to updated CapEx expectations going forward, how would you break it down maybe by Nevada, Massachusetts, Pennsylvania? And anything may be allocated to the new markets that you have yet to announce?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [34]

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Well, our maintenance CapEx is pretty minimal. We generally -- I think we conservatively budget between $1 million and $2 million a year. We generally come in closer to the bottom of that range. Our major expansion projects in Massachusetts and Nevada are complete with the exception of, as Jon alluded to, should we do something regarding expanding our cultivation capacity in Nevada, which we're making strategic decisions on, and we'll let people know when we've made a strategic decision on that.

So I would say, in Massachusetts and Nevada, you're talking about a couple of million of CapEx requirement, nothing material. And with the one exception being, we may spend a few million, let's call it $4 million plus/minus, on building out rec stores in Massachusetts, either Q4, Q1, depending on when we get local municipal approvals to open in those areas.

So nothing material in terms of Capex. We're talking $5 million, $6 million total across everything I just spoke about in Massachusetts and Nevada. And then with respect to Pennsylvania, we're looking at, I'd say, spending between $15 million and $20 million over the next 2 to 3 quarters.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [35]

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Got it. Very helpful. Last one for me, if I could just follow-up on the previous question. Really nice to see the cultivation expansion boost internally sourced products this quarter. How should we think about maybe your targets for the optimal level of internally sourced in stores? And then maybe what gross margins might look like once that level is reached?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [36]

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Well, I think the optimal level -- look, there's the optimal level for us, and then there's the optimal level for the consumer. And ultimately, the consumer will determine what the optimal level is of in-store product. We've had real success in Nevada at 40% plus over Q2 during COVID. As Jon mentioned, we -- as our sales have grown we haven't been able to sustain the high-40s because we haven't -- because we need to make more product.

But ultimately, it will be about consumer choice. And we constantly evaluate whether we have the right products in the stores to keep these customers coming in because our dispensaries are the most productive in Nevada, and we want to keep them that way. We want to keep people coming in the door, having a high-volume, high-turnover approach to our retail. And that means you have to have what people want.

So we're constantly assessing that. And currently, we think that somewhere, getting up to that 50% level would be excellent and great, and that's our current target.

One thing I -- just coming back to your prior question, and I should have mentioned this when we were talking about kind of Capex, I also want to just highlight the cash flow generation of the stand-alone business.

So we're generating an actual free cash flow after tax provisions, et cetera, et cetera. So real cash added to the balance sheet over $3 million a month just right now. So I think it's really important for people to understand that cash-generative power of our stand-alone business in the context of CapEx spend that we may be planning going forward.

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Operator [37]

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[Operator Instruction]. Our next question comes from Jason Zandberg with PI Financial.

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Jason Zandberg, PI Financial Corp., Research Division - Special Situations Analyst [38]

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Just maybe if you can give some color on the Pennsylvania acquisition. By the way, great acquisition and a great state that looks like it could go out of use here in a reasonably short period of time. But my question is, it sounds like the motivation for a lot of these acquisitions is due to private businesses that are capital starved. Was that the situation in Pennsylvania? And secondly, do you have an expectation in terms of a closing date for that deal?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [39]

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So let me answer this question. The question earlier was asked, what is your strategy, and is this a new strategy in terms of the acquisitions. Ayr, as Jen said, generates $3 million of free cash flow a month. So when we identify a state we want to be in, and because of the capital constraint and the narrowing availability of funding, if we see an asset that we think is an enormous generator of EBITDA forward, and with a modest amount of our cash flow, we can turn that and finish it from something that's near completion to completion in relatively a short period of time, we're going to do those acquisitions.

And so this is one of those situations. And the other two that we have referenced are exactly the same. With a modest amount of Capex, we complete an asset that hasn't been able to be completed because of the current capital environment, and turn it into EBITDA cash flow generator. And we're going to do that kind of transaction because that's the environment where the funnel is continuing to get narrower and narrower for capital availability. As Cannabis, as I mentioned earlier, 2.0, the investment community is being more selective of where they want to place their capital.

And those transactions, while we talked about the 3 on the call, exist in the states that we've always identified. We've always talked about the 80:20 rule. That we never wanted to be in every state in the U.S. We're going to take a very focused approach on the states that we think would afford us 80% of the total cannabis wallet. And we're just staying in our discipline.

And that's what gets us so excited today that we've been disciplined. We waited for this moment. We built our business. We generate free cash flow. And to use that free cash flow to buy assets at 2.5x that we think when we finish them and operate them, they're worth 6x to 7x immediately.

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Jason Zandberg, PI Financial Corp., Research Division - Special Situations Analyst [40]

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No, that's great -- a very great approach. Any timing on the closing that you would expect on this deal?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [41]

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We're hopeful it can close in Q4. But we certainly -- we wouldn't want to commit to anything at this stage, but we're hopefully we can close in Q4, and we'll keep people updated as that -- as we sharpen the pencil on that.

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Jason Zandberg, PI Financial Corp., Research Division - Special Situations Analyst [42]

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Okay. That's all my questions. And congratulations on the great results and cash generation.

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Operator [43]

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Our next question comes from Andrew Semple with Echelon Wealth.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [44]

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Just on Pennsylvania, just wondering what kind of brands we can expect to see in that market. Are you going to use the existing company's branding or are you going to bring some of your brands from Massachusetts or Nevada? And would you bring your full portfolio of branded products to that state market as well?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [45]

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Yes. Well, we have always talked a lot about what Ayr does extremely well is share an IP. And whether it's the technology, the curbside, the in-store experience, but also the product sets. Products that have been developed in Massachusetts are now in Nevada, Nevada products are now being sold in Massachusetts. So we'll be able to enter the Pennsylvania market with a full suite of products.

And what we've said before and what we've observed in medical markets, there are very few brands. But when they convert from medical to recreational, the consumer is looking for a broader array of branded product. So what our plan has always been is in the medical market, and we don't necessarily think Pennsylvania is going to stay medical for very long. We start off immediately with branded product, develop those relationships with the consumer because we offer the biggest variety of choice, and then develop that loyalty and build our business.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [46]

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That's helpful. And just on the potential debt financing, I wonder what kind of terms you're seeing on debt these days. Is it in line with some of the previous debt financing pieces that have been announced by some of the peers? And I just want to clarify whether that debt piece would be straight or whether it would have the conversion feature?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [47]

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Thanks, Andrew. We'll have more information out when we're in a position to do so. I think right now, we just want to make it clear that the debt markets have been very receptive to us, which we think is excellent. And when we have more information, we'll disseminate it to everyone in all the detail that you would like to see.

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Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [48]

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Looking forward to. Congrats again.

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Operator [49]

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Our next question comes from Pablo Zuanic with Cantor Fitzgerald.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [50]

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I want to ask you a modeling question first, and then I'll follow-up on Pennsylvania. Can you talk about August? I mean, obviously, July was up almost 18% versus June. We are at the end of August. Just some color in terms of what's happening there. Especially, are the medical retail sales in Massachusetts holding up? And as part of the question, also just remind us, you had a capacity increase in wholesale in Nevada and Massachusetts, which I assume, did not come through in full in 2Q, so you have that benefit in 3Q. Just if you can expand on that first, please?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [51]

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So I think, Brad mentioned in the call that July was excellent and that we haven't missed a beat in August. And I think that, that's just would be like that.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [52]

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Does that mean that August was same as July or does that mean that August showed growth over July?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [53]

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I think that we've said what we feel comfortable saying about August, given that the month isn't over, but -- and perhaps we can talk offline. But I think that's what we feel comfortable saying, Pablo.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [54]

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Okay. And the wholesale question?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [55]

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Would you mind repeating that? I wasn't sure I got it.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [56]

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Yes, I remember in the past, you said that your wholesale capacity in Massachusetts was equivalent to $2.5 million in sales. And that we go to $5 million, so $15 million per quarter. I'm just trying to understand, are you at that run rate already in the third quarter? If we're modeling and you're able to sell everything you can produce, pretty much with our wholesale capacity be $15 million versus $7.5 million in the second in Massachusetts. And the same thing for Nevada. And remember, the magnitude increase.

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [57]

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Got you. I'll turn it over to Brad in one second for this. But at a high level, we can produce a certain amount of pounds out of our facilities, and those need to go to either retail or wholesale. I think originally, our expectation was that our retail stores would be about half as productive as they've turned out to be. I think everyone who's been following us knows that our medical retail stores are now twice -- nearly twice the revenue that they were at the beginning of the year. So they're taking more product than we expected, and that product cannot then go into the wholesale channel. So the wholesale capacity is perhaps a little bit less than it was prior.

But the pounds that we're turning out are absolutely the same amount of pounds that we expected, just some of them are going to retail. And we do expect further ramping of wholesale relative to the numbers we quoted you from July because we've seen a testing delay in Massachusetts. So we are not able to get everything we make, for instance, in a month out to the market in that month because there's a delay that used to be -- it took 2 or 3 weeks for testing. Now it's taking 4 or 5-plus weeks. So there's -- then this happens in Massachusetts from time to time. We expect that to compress based on what the labs have told us about getting some new equipment, et cetera. But we -- that $3.4-ish million number that I mentioned is light because of the testing also. Brad, would you -- what would you add to that?

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Brad Asher, Ayr Strategies Inc. - CFO [58]

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Yes, I would just highlight again that our retail doubled in Massachusetts, and that was not baked into that forecast. And what you saw in July, already has that upside and that lift in our wholesale business. So at least 25% lift over Q1 that we saw in July, we do think that there's additional room there. But we are already realizing that upside in the month of July.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [59]

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And Pablo, I'm sure you understand as the stores do better and they consume more of our capacity, we go from selling our products from $4,000 a pound to $7,000 a pound. So it's a good fact that our stores are consuming more of our flower.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [60]

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No, of course. The only question is whether in states like Massachusetts, obviously, the medical stores benefited from the rec market being closed, right? As rec markets begins to reopen, do medical retail sales suffer? I mean, I don't know if you can comment on that in general? Or you're not seeing that?

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Jennifer Adele Drake, Ayr Strategies Inc. - COO [61]

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Yes, and these things -- go ahead, Jon.

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [62]

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Well, the stores -- the lifting and -- it happened that the lifting has happened more than a month ago, and we talked about July. So I think the consumers, they've changed their behavior to a certain degree. And they said -- and the way we merchandised our stores. So our medical stores now look like recreational stores. We have our product, which is used to be 100% of what was available to the consumer and third party product. And so what the consumer has figured out, I could go into an adult-use store without a medical card or I could go in with a medical card and buy product 25% less expensive. And it looks very much like the same product I could find in the adult use stores. So that learned behavior and the way we merchandise our stores to give them a near identical experience has really added to the lift we've seen in the revenue numbers.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [63]

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Understood. And if I can add just a question on Pennsylvania, I mean, obviously, congratulations and very interesting state. The question would be, you said forward estimate of 2.5x EBITDA, right? So that means whatever is at $23 million EBITDA, you're estimate 25% margin, $90 million in sales. As for my math, Cresco and Green Sam in Pennsylvania are probably doing right now, 110% to 120%. So your estimate, it sounds quite ambitious, which probably makes sense if those assets are that good, right? But I'm just -- based on the numbers you gave us, what you are acquiring, a license operator that's not running yet, would be at the size of Cresco and Green Sam in Pennsylvania, which would put you from the start at a leadership position. Am I missing something on those numbers or am I being too bullish on my math?

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Jonathan Everett Sandelman, Ayr Strategies Inc. - Chairman, CEO & Corporate Secretary [64]

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Well, I think that you assume that being the market leader today means you're supplying 100% of the demand, and that's just not true. There's a shortage in the marketplace. And if the governor actually does what he announced the other day and the state goes recreational, there'll be a massive shortage.

And so there is plenty of room for new entrants into this marketplace. And what we talked about is the kind of acquisitions we look to do, which are ones that are near completion that take a modest amount of capital to get them to completion so that they're in the market relatively quickly, rather quickly.

So again, it really doesn't matter who a leader is in this particular time in the medical market. And for sure, if the governor executes, and it seems like the momentum is there, they will be a massive shortage in this market, and that's why we've been so focused on it.

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Operator [65]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.