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Edited Transcript of IAN.CD earnings conference call or presentation 21-Nov-19 1:30pm GMT

Q3 2019 Ianthus Capital Holdings Inc Earnings Call

VANCOUVER Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of iAnthus Capital Holdings Inc earnings conference call or presentation Thursday, November 21, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hadley C. Ford

iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director

* Julius John Kalcevich

iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director

* Pat Tiernan

iAnthus Capital Holdings, Inc. - COO

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Conference Call Participants

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* Alan Brochstein

New Cannabis Ventures - Founding Partner

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Jesse Pytlak

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Matthew Pallotta

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

* Robert Fagan

GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare

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Presentation

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Operator [1]

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Good morning, and welcome to the iAnthus Q3 2019 Earnings Conference Call. (Operator Instructions)

Before beginning formal remarks, iAnthus would like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events, any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. iAnthus does not undertake to update any forward-looking statements except as required. During today's conference call, iAnthus will refer to certain non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as pro forma revenue, EBITDA and adjusted EBITDA, which are defined in the earnings news release iAnthus issued yesterday, November 20, 2019.

Reconciliation to IFRS measures are contained in the news release and our filings. I'd like to remind everyone that today's conference is being recorded on November 21, 2019. I would now like to turn the conference over to Hadley Ford, CEO of iAnthus. Please go ahead, sir.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [2]

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Good morning, and thank you for joining us on our third quarter earnings call. Before we start, thank you. We greatly appreciate your support and the opportunity to create value for you. We take that trust very seriously. A period of accountability is upon us. Fortunately, in this tough financing market, we are fully financed. We are being prudent with our capital. We are generating cash in our operations, and we need the majority of our Gotham money, not for operations, but for additional major growth in our key markets.

Operationally, we are well into rightsizing post our MPX acquisition. Fully integrated across all our acquisitions, including 2 full quarters of MPX. We are rightsizing our company for growth. Revenues are strong and gross margin and EBITDA are moving in the right direction. Customer acquisition and retention initiatives are beginning to have real results and channel distribution of our brands continues to expand. We're building out our ability to carefully measure and manage our business. We are rolling out our selected ERP system across the company, and we have just completed our 2020 strategic review and planning process that was exceptionally robust and rigorous. And we've established leadership in the governance of your company.

We have moved the company to a single class of stock. We've recently announced plans to move our Board of Directors to majority of independent directors, who are wholly unaffiliated with any existing investor or manager. All committees, including audit, nomination and compensation, will be staffed by fully independent directors. No one told us to do this. It was not required by anyone, but it's the right way to comport yourself when you've been entrusted with capital from public investors. Why do we do what we do? What are we trying to accomplish? In cannabis, in the United States, we have a choice. We have licenses to grow, process and sell cannabis. With those licenses, we may choose to be farmers, retailers or sellers of branded goods. We've chosen to use your hard-earned money to pursue the last one. Why did we choose this? Let's look at a few numbers. Branded beverage players like Coke, Pepsi, Diageo, Constellation, Brown–Forman, the list goes on. They trade at 5 to 6x forward revenues and 17x forward EBITDA. They have an average 29% EBITDA margin and average revenue growth of 4% across the group.

Now let's look at the U.S. MSOs. The United States has been a brand driver for worldwide consumption for 3 generations. And yet our cannabis pure group trades at 2.5x forward sales and 10x forward EBITDA. We all have forecasted margins well into the 30s and strong double-digit growth per quarter. Just look at the earnings at iAnthus and our peers have posted this week. Real revenues, real cash flow, great growth, as we all make inroads into the $60 billion existing illegal market. Typically, in an early stage industry, like legal cannabis, we would see premium multiples to mature industries for the growth and yet our group trades at a significant discount to both low-growth brand companies and our Canadian cannabis peers. And what about iAnthus? We trade at a further discount to our peers. At the end of Q2, using enterprise to last quarter annualized reported revenue, we traded at 30% of where our peers trade. That just seems crazy, especially when you look at how we are executing. I encourage everyone to look at our numbers, not on a stand-alone basis, but in the context of our peers, as we begin to differentiate ourselves on our progress across brand penetration, gross margin and EBITDA.

As we look out over the balance of 2019 and into 2020, we expect to see more store openings, strong revenue growth, prudent expense management, and we'll continue to prioritize our capital and operating investments to maximize returns for you, our shareholders. We are very excited about the remainder of 2019 and the opportunities in 2020 and appreciate your continued support. I'll now turn it over to Julius for more detail on the quarter.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [3]

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Thanks, Hadley, and good morning, everyone. Our reported revenue for the third quarter was $22.3 million, up 16% from the prior quarter. The Q2 to Q3 increase is driven, primarily by new dispensary openings in Florida, continued strength of our retail footprint, where same-store growth continued in the mid-teens and expansion into the CBD market.

Revenue for the period was slightly impacted due to softness in Massachusetts wholesale orders as a result of the statewide vape ban. Having said that, based on preliminary results for October and November, it appears that this softness may have been temporary as wholesale sales have picked back up in Massachusetts.

On a pro forma basis, revenue for the third quarter was $30.9 million, an increase of 5.9% or 23% from the prior quarter. This pro forma number, which is detailed in Table 2 of our press release, reflects revenue from our pending acquisition of Sierra Well as well as managed revenue in the States of Arizona, Colorado and New Mexico. I would also like to point out that from a seasonal perspective, this is the slowest quarter for our Colorado operation. Managed revenue includes operations where we have management contracts and/or licensed operations, which we are unable to consolidate under IFRS.

Moving on to gross profit and margin. Our gross profit for the quarter was $10.7 million, up almost 17%, from $9.2 million in the prior quarter, resulting in a gross margin of 48.1%, which is up from 47.9% in the second quarter. These figures represent a modest increase from the results achieved in Q2 and are reflective of the scale and operational efficiencies we continue to achieve across the company. The company expects to see continued improvement in gross margins in the coming quarters and years, as we scale our operations in our key states, expand our wholesale programs against key markets and as our lean initiative programs and operational efficiency plans continue to deliver across our footprint.

Operating expenses for the quarter totaled $37.3 million, reflecting a modest increase of 5.8% from the prior quarter, which is primarily due to increased salaries from an increase in head count and increased estimated tax estimates as a result of higher revenue, partially offset by lower share-based compensation and professional fees. To give you more context of that $37.3 million, $14.8 million or roughly 40% of the OpEx incurred during the quarter pertain to noncash expenses, such as depreciation, amortization and share-based comp. $2.4 million was also a noncash tax provisions. Removing the effects of noncash and nonrecurring items results in a normalized OpEx amount of $19.8 million for the quarter.

On the cost side, we saw sequential increases in SG&A and salaries as we continue to add personnel and expand our operations, and we saw a 10% sequential decrease in the professional fees, as we have continued to focus on cost containment across the organization. During the quarter, we have also recorded $4.6 million of onetime costs, particularly acquisition and integration costs, including advisory, professional, legal consulting and accounting fee incurred in the quarter. These related to residual MPX integration and license transfers and our CBD For Life and Sierra Well acquisitions.

The company continued to maintain expense discipline in the quarter and began to see results of planned expense control initiatives. Our adjusted EBITDA before the impact of biological assets for the quarter was a positive $2.2 million compared to a loss of negative $4.7 million in the prior quarter, representing a 146% improvement. Our adjusted EBITDA, net of the impact of biological assets, was a loss of $3.6 million in the quarter compared to a loss of $6.9 million in the prior quarter, representing a 48% sequential improvement. The details of our adjusted EBITDA are in Table 3 of our press release.

Our net loss for the quarter was $15.3 million, which equates to a loss of $0.09 a share. In terms of capital expenditures, we deployed $19.7 million in the third quarter, the majority of which, almost over 80% of spends, on the cultivation and store expansion in Florida, which is reflective of our strategic and judicious approach to our use of capital. As of September 30, the company had total assets of $831 million, a cash balance of $28 million. The company also has the potential to receive approximately $140 million from the exercise of outstanding warrants and over $70 million from the exercise of auctions. On September 30, we announced a $100 million financing plan with Gotham Green Partners. To date, we've received $20 million. And we anticipate closing tranche 2 in December and the final tranche shortly thereafter. The arrangement consists of convertible debt with an interest rate of 13% per year with interest payable quarterly as well as an option to extend the maturity date by 12 months and 50% warrant coverage. Current fully diluted share count is 266.2 million shares, which includes 171.6 million common shares and almost 95 million in dilutive securities.

Lastly, I'd like to take a moment to further expand on what Hadley had mentioned around corporate governance. On October 17, we announced our nomination of 5 new independent directors in an effort to move towards having an independent Board of Directors. Subject to the shareholder vote, which is being held on December 5, the iAnthus Board of Directors will be comprised of 3 members of management and 5 independent directors. The 5 nominees bring a wealth of experience and proven track records from across multiple industries, including finance, marketing and retail. Institutional Shareholder Services and Glass Lewis, 2 leading independent third-party proxy advisory firms, who provide voting recommendations to pension funds, investment managers, mutual funds, have both recommended that shareholders vote for all proposed resolutions at the upcoming Annual General and Special Meeting of Shareholders.

With this, we have completed one of our main 2019 objectives, transforming our Board into a best-in-class Board within the cannabis space, which is truly independent and highly experienced. I would like to now hand over to our COO, Pat Tiernan, for an update on our operations.

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [4]

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Thanks, Julius. Good morning, everybody. I got to tell you, I'm so excited about the path we're on, in particular, because we're just getting started. It's interesting to me when I see a report in the industry, a new dispensary here, more cultivation there, these are interesting. But let me tell you about what I see within the business. Of course, my focus is on the customer profitability, cash flow, return on capital and an ongoing focus on operating performance. But the fun I'm having is about developing and leveraging brands, acquiring and retaining customers, expanding our points of distribution, cranking up the innovation engines and enabling initiatives that allow us to improve across the board.

At my last company, Stone Brewing Company, a leader that punched well over its weight and brand and had one of the largest craft beer distribution companies in the world, became very successful because of the focus on these dimensions and is where our focus needs to be as well. I see us moving to best-in-class dispense rates, generating margin in all that we do, cracking into the top 5 in the categories we play in and driving double-digit market share gains, in a sense blowing out distribution. The talent we have on the team, Todd Karnig, Woolston, Julie Winter, John Henderson, these folks leading the businesses. They've done it before in companies, both small and large, and done it successfully. There's so many, I just don't have time to name.

With our expanded leadership team, we've just finished our initial round of our 2020 business plans in New York over the last couple of days. The energy in the room was palpable. Mike Medor leading the thrust in Florida; Drew Reich, in Maryland. Others, I can't name and don't have time, but it was awesome to see. Indeed, it's a very exciting time to be in the business. I'm not only motivated by the results we've generated thus far, but the potential we have moving forward.

So let me give you some highlights of the quarter. First on revenue. Eastern region revenues increased to $13.2 million, up 30% from the prior quarter, as a result of the company's expanded retail presence in Florida, where we added 4 more stores as well as increased demand for MPX-branded products in Maryland, and our continued expansion of our CBD business, which was up 37% over the prior quarter. As Julius noted, we saw some offset by lower wholesale revenues in Massachusetts, due to the ongoing vaping products ban. But order indicators are showing recovery and the alternative products we released have helped to offset that gap, while providing some upside moving forward.

Western region revenues increased to $9.1 million, up 1% from the prior quarter, due to very strong same-store sales at retail in Arizona, but also countered by lower wholesale in Nevada. In Nevada, we had a planned shift away from bulk wholesale offerings to selling more MPX-branded products, so we expected some softening, as it just takes a little time to drive increased distribution of branded goods. Our retail revenues totaled $14.4 million and were up 28%. On a same-store basis, sales were up over 17% over the second quarter.

Next on the brands. Our initiatives to build the MPX brand, further leverage the acquisition and listening to the consumer through new customer insight initiatives, led to a successful extension of the offerings, new products across Arizona and Nevada. It included edibles, cultivar pre-rolls, a new brand of Black Label concentrates, feedback has been strong so far. And we have plans to release these products across the entire footprint starting in the fourth quarter. Our innovation is absolutely key and is paying off. I think the efforts to heighten demand and preference are also paying off in the existing lines as well. In Arizona, MPX is now ranked #1 in non-vape concentrates category and commands a 12% market share as reported by BDS. In Nevada, we've just broken into the top 4 in the same category with a 5% share and have 1/5 of the top 20 products in the market. Preference is building for our core and this is just great to see. In Maryland, for example, our MPX products are now in 77% of the dispensaries statewide.

And speaking of distribution, we continue to build momentum in all of our markets. Overall, the company's THC products were wholesaled in 186 dispensaries in the quarter, up 12% from 166 in the prior quarter with an average penetration rate of 54% in the states where we wholesale. In CBD For Life, we're now in 2,300 doors across the country, up 53% from the second quarter, and we've signed 3 new aggressive distribution agreements, gaining access to over 43,000 outlets and built a fantastic team to drive results and satisfy our chain distribution and customers, in general.

Across every state, we're up double digits and gaining traction by having the right product assortment, wide and timely availability on the shelf and an experience our customers and partners find reliably easy and trusted time and time again. Next, like distribution and brands, we're centered on customer acquisition, their experience and retention and, of course, around the right product assortment. I've mentioned same-store sales, certainly a good indicator. We had planned to open 4 new stores in Florida, bringing the total to, in the state, to 9. We have another scheduled for later this month and a couple more next month. There's 4 more under construction currently and have 7 more leases signed and ready for build out next year.

And our revised larger store in Scottsdale, Arizona, in fact, opens on Saturday. So we're really excited about that. These new stores are great, but what I'm thrilled about is the newly employed customer acquisition and retention loyalty initiatives that we've launched throughout the company. We saw an increase of 30% in unique patients, an improvement of 8% in retention and all of this leading to an improvement of average daily transactions of over 28% in our retail channel. Florida, for example, our Net Promoter Score of 61 is just great to see from the push in the state. But a particular strategic importance on the CBD side, we completed our e-commerce and 3PL transition. I'm pleased we hit this out of the park. It not only makes conducting business with us significantly easier for our channel partners, but it also enables several planned improvements in servicing our B2C channel. In fact, since its deployment, we've been -- we've seen a doubling of our conversion rate across our web properties. So initial results are really encouraging.

Finally, I'll give you a snapshot of some key initiatives and capacity. Overall, our total production increased 11% in the quarter to 5,900 pounds from 5,300 in the second quarter, despite having less access to our outdoor shade facility in Florida over the summer months as expected. In addition, we opened up building 5 on the Florida campus, resulting in doubling of our indoor flower capacity and a ForEx improvement of output to be realized in the fourth quarter. Our flower is regularly noted as or among the best there. So having expanded capacity up and running in the fourth quarter is key. In Maryland, to meet robust customer demand for our MPX products, we invested in a new state-of-the-art lab and equipment to increase our processing capabilities to over 8,800 pounds by the end of this year, on track. Our lean initiatives deployed in Massachusetts, Nevada and Arizona, increased yields, lowered cost per gram, resulted in about a 4-point margin improvement in those states. So good early signs of those programs working.

The process work we've done to deploy formal sales and operations planning, new product introduction and procurement consolidations are gaining good traction. These initiatives will ultimately help us not only execute for our customers with the right products in the right places at the right times, but help ensure the highest fill rates that maintain a very positive experience across all of the shelves we sit on. Our first adult-use store in Massachusetts was approved in Worcester. Sorry, if I didn't say that right for everybody out there and is under construction with the targeted open date in early 2020. Construction continues at our flagship Brooklyn Be. store with a targeted opening date in late January 2020.

Perhaps most strategically, however, we finalized the planned ERP selection we've been working on in preparation for program deployment in the fourth quarter. We'll deploy a multi-phase, multi-year program to improve operational transparency and predictability, cost reduction and business performance. Data enablement across the entire operation is simply paramount in order to have the real-time visibility and controls necessary, not only just to steer the ship, but continue to rightsize and streamline the operations. I'm very excited about our path forward. The team, talent, systems and processes we put in place, we've only just begun. This business isn't just about the number of states, the number of licenses, it's about growing strategically and profitably with a plan, a team and the capital in place to be a leader for the years to come. Thanks. Now I'll turn it back over to Hadley.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [5]

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Thanks, Pat. Thanks, Julius. We're now ready to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Robert Fagan from GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [2]

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So I thought I would just ask about -- Julius, maybe about -- or highly about general capital deployment decision criteria now and with seemingly a good amount of liquidity available from the Gotham Green infrastructure, how would you rank your kind of most important capital deployment projects, where you see the best return? Like -- are you maybe going to focus on the certain areas of the platform for initial deployment over others? I'm just trying to get an idea of these strategic priorities.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [3]

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Sure. And I think that, obviously, we look at some of the dynamics that's happening in some of the key states in terms of the supply and demand and the robustness of the program. Obviously, you're quite familiar with what's been happening in Massachusetts and Florida, whether for ourselves or anyone else. Those are obviously top priorities. And I think we continue to distinguish ourselves there. We're building great market share, and we're going to continue to make sure that we're deploying adequately in both of those states. And then I think, as we start looking up further ahead, in terms of ballot initiatives, for instance, in Arizona, that is something that we already have one of the leading market shares within that state. We're going to continue to make sure that we're preparing for potential adult-use in that state. That's obviously a big target. And then I would say lastly, New York and New Jersey, which just in terms of population with over 30 million people and adult-use in recreational on the horizon, those continue to be a focus, but we continue to be prudent in terms of the spend in those states as based on better visibility and transparency into the timing of those programs as well as ballot initiatives or legislative initiatives. But that's generally how we would rank everything. And then sort of the final one, obviously, we have a great position right now on the wholesale and cultivation side. In Nevada, you are obviously familiar with the Sierra Well acquisition. There's going to be some integration efforts in terms of building out that platform there, which, again, is going to give us sort of a similar presence and potential market share that we have in some of the other key states.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [4]

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Okay. Great. That's a great overview, Julius. If I could ask another one on focus on Florida for a moment. So we did kind of see a little bit of a drop-off on the flower side, just on the volume basis, in the past, let's say, a month or so. Is that just a function of rooms being cleaned out, and that's going to rebound quickly? Or is there just anything that short term could derail -- or could not allow your volumes to rebound in Florida?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [5]

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This is Pat. And the answer is no, nothing unexpected. Two real drivers: one, the opening of our building 5 indoor grow. It's about 27,000-foot incremental addition for flower capacity. And the closure of our shades structure. It's -- only really produces a couple of cycles of year. Things don't -- our plants don't tend to like that climate down there in the summer. And so indeed, we did anticipate the softening, however, it was a process of getting the new infrastructure launched during that period. And so we actually only see an increase moving forward.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [6]

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Okay. Thanks for that detail, Pat. Just a quick follow-on, on Florida. Are you guys -- I'm just wondering if there's any kind of pricing pressure that you guys are noticing at this time? I mean the market is, obviously, growing really well. But I was just curious if there was maybe a little bit of pricing actions happening to get promotional on either extract or smokable flower product?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [7]

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No, we have not. In fact, we've made a number of pricing adjustments ourselves to better serve our customers in different categories and products, and we've seen an actual slight increase.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [8]

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Okay. Okay. Great. I guess if I could try and find out about Sierra Well time frame from you guys. If you could maybe just provide an update on when you might think you could close that transaction? And kind of a similar question is we could see the pro forma revenue numbers, some very robust sales. Is there some competitive advantage that Sierra Well has that gets that kind of strong revenue generation?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [9]

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Sure. This is Hadley. Looking backwards from your questions. They have a great reputation from a retail perspective, they've #1 share in the towns that they're in. And it comes down to customer service, when people come in and enjoy being there a broad selection of products, and they've had leadership from day 1. Very excited to be working with the team there. We're doing what we can from an integration perspective until we close the transaction. From a closing perspective, it's cannabis. So there's politics. It's the way the world works. Hard to give an exact date on what we see, but we have complete confidence the transaction will close sometime probably in the first half of 2020.

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Operator [10]

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Your next question comes from the line of Brett Hundley from Seaport Global.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [11]

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Hadley, I just have one question for you on funding and then maybe I can ask a question to Pat on the wholesale business. So I think going alongside the comments on the funding announcement and something else that I talked to investors a lot about recently is the confidence in actually obtaining that financing. So if we could get a comment from you Hadley, as it relates to the full $100 million from GGP. As capital gets tighter across the marketplace broadly and as you continue to just have regulatory risk over this space, it feels like cannabis capital suppliers are going to start maybe having to make some tough decisions. And I know with GGP, they have multiple uncommitted lines of convertible credit outstanding out there. And so I think people are wondering if GGP and other capital suppliers are going to have to -- if they're going to actually follow through on making all these funds available. So to the extent that you could just give a comment on your confidence with your particular funding, I think, it would help.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [12]

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Sure. And I guess, firstly, I don't lose any sleep about the availability of money from Gotham. It's the reason we picked them as our partner 1.5 years ago. They've been tremendously supportive and have always followed through on everything they've always said they're going to do. And I can't speak to their structure and internal dynamic, but I do know them personally. They never say something unless they can deliver it. And I have full confidence that if we do need the capital, they will be there. And I would like to make an observation that we are cash generative in our operations. We're covering expenses. We're covering maintenance CapEx. The vast bulk of that money from Gotham is for growth initiatives. So the viability of our company is fine. It's really the growth aspects of it, and we'd like to be in that position. We think that can help differentiate ourselves against a lot of our peers in the marketplace in 2020.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [13]

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I appreciate that. And then just Pat, my second question is on the wholesale dynamic in Nevada. So that state has just been noisy over the past year. And I'm wondering if some of that noise is leading to certain competitive actions within the state, up and down the supply chain. So when you talk about the mix shift that you've made, are there any other factors that we should be aware of as it relates to your wholesale business getting back on track outside of just pure channel sale?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [14]

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Sure. So I think the West is an interesting market, whether it's California, Nevada or Arizona, I think, they're all leading indicators for what's to come at some point. I do believe that the competition levels have increased. But if you look at BDS data, they actually outweigh on a average retail price per gram over both Arizona and California, fairly significantly. I believe that's probably due to the transient nature of the state and its visitorship. But I don't see any immediate challenges in wholesale distribution. For us, this was about a formal business -- a former business model that relied on selling wholesale in bulk. And there's just more value to be had on the branded products goods side. But that takes the right sales team, the right pricing structure. You've to have boots on the ground and trucks to get the product there. And we're just doing a better job of doing that, in general, in that shift to branded products.

We've also launched a new business model in both states for toll processing to use our capacity, because our partners find that we can execute consistently and with higher quality and we can differentiate ourselves against our competition in that regard. So we believe that, that's an upside for us as well outside of the wholesale -- of the conventional wholesale business as well.

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Operator [15]

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Your next question comes from the line of Matt Bottomley from Canaccord Genuity.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [16]

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Just wanted to touch briefly on the adjusted EBITDA. So given your pro forma bridge, a sort of 50-50 split between, it looks like Sierra and then your managed revenues, you mentioned Sierra is already operating about 20% margin positive net income. I'm not quite sure how the cost structure works for the managed revenues below that line. So can you give any color on what your pro forma adjusted EBITDA might look like today? Because it seems like it could be positive already. I'm just wondering if you can give any color on that?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [17]

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Sure. Matt, it's Julius. So we had some components of it. And obviously, with what's happening in Colorado, that will be a state that we will be able to sort of consolidate and then that will move into our reported revenue next year. So I just wanted to call that one out. And then obviously, as Hadley mentioned, Sierra Well, where that will move in -- as it closes, that will move into our IFRS revenue. So if we were to bundle both of those together, on a pro forma basis, we would still have a slight loss based on Q3. But just given directionally the way that the business is moving with both of those sort of being bundled in or incorporated into our structure, we would be very close on a pro forma basis for this quarter. And then I think as we look out sort of a quarter 2 with some of the built-in growth that we're already seeing and obviously, we're halfway through Q4, in some of the cost containment initiatives, we have a lot of confidence in that direction. And I think that you're going to see a continued strengthening on that line over the next couple of quarters.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [18]

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Great. The next question relates to your Western operations. And I believe, just looking back, obviously, MPX had some Eastern contribution in their historical numbers. And I think they reported in Canadian dollars, if I'm correct. So I'm just trying to line up where MPX was a year or so ago, particularly, in Arizona, and how that's trended today given that we do see a relatively flat contribution from that part of your segment reporting, but, obviously, it's the Nevada portion wholesale that's bringing it down? So can you carve out just how Arizona in isolation is doing over the last year or so since acquiring and integrating MPX?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [19]

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Sure. So this is Julius. Again, I can give some sort of historical context around sort of the Arizona business. First off, I would want to call out that the way that MPX had consolidated their operations in Arizona. There were -- in my mind, there were 2 components of it. There was, first off, the Arizona IFRS business, it's all -- fully consolidated in our numbers right now. And then there was a part of the MPX Arizona business that we have taken a more conservative approach and we have that in managed revenue. So there's a component of -- there's obviously -- in our reported revenue and then there's some in managed revenue. That all used to be in MPX' numbers. So first off -- I think, Matt, I can walk you through some of the nuances off-line around that or walk you through some of the financial statements. So that's the first component. But when I also look at where they were a year ago compared to right now, we see that business, sort of, on the retail side, it's continued to have strength across all 4 dispensaries. On the retail side, it's probably up over the year around 10% to 15%. And on the wholesale side, which is really only -- was initially only a couple of percentage of the total revenue, that's grown to be about sort of 5% of the pie right now.

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [20]

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Yes. So from the retail number, these are not official numbers. But last year, we did in Arizona, at retail, right around $21 million. This year, we're up, as Julius had said. And that's with the shutdown of one of the major dispensaries because we're redoing the dispensary for the opening that I mentioned earlier in the Scottsdale location. We've taken revenues on average in the high 4s, $400,000 per month, and we're now punching over $600,000. So pretty good growth rate and the focus and the customer engagement programs that are in the state.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [21]

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And Matt, I'll just add one other quick point around that and sort of the revenue that is in the managed revenue for Arizona, that is a -- it is a manufacturer of vape carts and vape pens across Arizona. Given some of the volatility in that business, there has been -- that has moved some numbers around. That is a lower-margin business compared to the typical iAnthus businesses. And as I mentioned, that's not part of our reported revenue or IFRS revenue.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [22]

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Understood. And just lastly, you had mentioned earlier on a previous question or perhaps in the prepared remarks that New Jersey and New York are going to be more prudent in your CapEx allocation given that those programs are so medical and there's still some useful to come. Just curious what we can expect, specifically in Q4 and maybe early 2020 with respect to what you plan on your spend in those 2 states? If not in dollars, maybe just the types of CapEx by category that we can expect as you continue to move on those markets.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [23]

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Go ahead, Julius.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [24]

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Yes, sure. And Matt, I think, our #1 perspective with those states are that they are incredibly valuable and that there are huge end markets. What we're always trying to work with is the visibility of when those programs come online. We've obviously seen a state like Massachusetts, where it's been very, very difficult to plan. How various states are recreational or adult-use comes online. So first off, we're always attuned to that. The second thing I also want to make the point of, is that we understand that we have a license from the state. And there are sort of regulatory requirements that we have within those states that we have to comply with. So in the state of New Jersey, we will have plants in the ground in December. That is regulated by the state, and we're always going to make sure that we're observing the necessities of those regulations. So we're continuing to move forward in New Jersey. But until we get sort of continued visibility into the expansion of some of those programs, where you're not going to see sort of heavy CapEx spend over the next couple of quarters, but you will see us continue to move the ball forward there. Pat, I'm not sure if...

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [25]

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No. I mean, that's -- we're on track to both open up our dispensary as well as the grow that's required by law, per what Julius just said. So I think low couple of millions for the near term and increasing as the reality of the market takes shape.

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Operator [26]

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Your next question comes from the line of Matthew Pallotta from Echelon Wealth Partners.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [27]

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Just wanted to touch on Massachusetts, you said there's a bit of a decline in wholesale revenues due to the vape ban. Just wondering how transitory that is? Have you seen wholesale pick up again after the quarter with different sorts of products demanded in sort of a substitution for those vape sales where the demand was previously? And if not, when do you expect to see that pick up again?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [28]

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So this is Pat. We have, as Julius noted and I noted earlier, an uptick in the wholesale channel in the October time frame and the early part of November, thus far. We've also introduced a couple of new products, like syringes, that we didn't offer before that are showing some pretty good uptake as well. So it's not completely replacing that revenue as of yet. But if orders continue at their current pace for the rest of the year, we'll -- I believe, we'll still show a slight decline, but have recovered. I think what we hear from our partners is, people are preparing for that ban to go away. Now we don't know whether it will or whether it won't, but the actions being taken by our partners that we typically supply are putting in orders and are communicating with us that they want to be ready for when that ban lifts.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [29]

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Okay. And are you guys at all supply-constrained in that state? I mean I know there's -- didn't talk of other operators who just don't have enough supply to meet the demand on the wholesale side. It sounds like you guys might have more than enough to meet your demand. Just wondering on that front and if there's more supply coming online in that state in the near future.

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [30]

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So we sell everything we make. Our flower -- Mayflower flower is noted as the best. The feedback from our consumers there is nothing short of fantastic. I personally wish I had more flower capacity today. But really, our channels and the limits that we have currently on the dispensaries with regulatory approvals in other markets are more the inhibitor for us than supply. Our Fall River facility, which essentially doubles our current capacity, depending on when the authorities say we can open it, probably thinking about that right now in the May time frame on the medical side, would have essentially doubled that capacity from our Fall River cultivation and add significant kitchen facilities as well. It also allows us to execute a few, what I'd call, scale out initiatives and leverage between the 2 sites that will obviously improve our [COG] profile as well. So we're looking forward to that, but I would say the answer to your question is we're not constrained at the moment. I just wish I had a little bit more flower capacity to satisfy the 2 channels that we're operating in.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [31]

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Okay. And then quickly back on Nevada. I understand the mix shifting from sales of bulk, I'm assuming that means bulk dried flower to MPX-branded products. Just wondering as well if you're at all supply-constrained in that state given that you're shifting raw product into another line there. And if there's any plans to increase capacity beyond what we already have there.

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [32]

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The answer is yes, and yes. It's currently being discussed actively in the company with certain initiatives that we're putting into the budgeting process. As I just noted, I wish I had more. The other dynamic in the Southwest for us is that the players that do have capacity, we find it challenging with the quality levels and the consistency that they can provide. And for example, we were the first to launch live resin products on the vape side, sauce carts, if you will. And to do that, it requires a certain level of quality in your biomass. And so our focus there is to be very selective in what we can purchase on the wholesale side as well. But yes, we are constrained in Nevada, and we're actively looking for spend cultivation.

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Operator [33]

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Your next question comes from the line of Jesse Pytlak from Cormark.

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Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [34]

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I just want to kind of come back to the Massachusetts wholesale dynamics. Just kind of given that the ban actually came in at the very end of the quarter, did you experience more of a gradual softening just through September as kind of the vape headlines kind of made their way out and the ban accelerated that? Or what was just the dynamic to drive such a big softening in that market in the period?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [35]

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Jesse, it's Julius. There were some planned wholesale orders, specifically on the trim side that were scheduled in the back half of September. And as you correctly pointed out, the ban, I think, it was around September 15, 16 that it was actually announced, there were some scheduled trim orders, once again, in those last 2 weeks of the month, which were canceled at that point. But then we saw whether those customers or other customers sort of come back in, whether around trim or whether around trying to shift to other products on the wholesale side. So it was somewhat temporary, but I would call it a little bit of a knee-jerk reaction in those final 2 weeks of September. And what we've always seen, one other just a general point, is just around the vape ban. We've continued to see strength on the retail side within mass. We've seen substitution away from vape products into flower and some of the other products there. So it hasn't been necessarily something that's a hit at the retail level, overall revenues all that much, but more so on the wholesale side. But again, a little bit more of a knee-jerk reaction.

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Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [36]

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Got it. That's helpful. And then maybe just switching gears to CBD For Life. I think in the prepared comments, you mentioned that products are now in 2,300 doors, and you've also signed 3 deals for expansion of 43,000 outlets. Did I hear that correctly? And if so, can you maybe just give a bit more color on some of those deals?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [37]

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You did hear that correctly. Julie and her team, which has been put together over the course of the last 4 months or so, has done a phenomenal job in developing relationships within chain accounts, whether it's Dillard's or a number of others that we're currently in, she has done a fantastic job developing the chain side of that business. In addition, we've brought on increased marketing efforts and other channels that we've really focused on quite extensively for general distribution across the United States. So 3 partners have been brought on. And these partners have access to over 43,000 outlets across the nation. And that business is essentially just ramping up. So we're really excited about it. And then even more so, if you think about this type of business, we had limitations in fulfilling orders, not because of supply, not because of any manufacturing, but simply logistics. And so the shift over, both in the e-commerce side to just make it easy, connectable for any chain account, they oftentimes have their own purchasing requirements and how to conduct business electronically, has greatly smoothed sort of the ability for these customers to transact with us and new 3PL partnerships have allowed us to really streamline delivery across the nation. Julie and her team -- Julie referenced as well on the marketing side, is just doing phenomenal jobs and the training teams that they're doing with the accounts for the benefits of CBD has just been outstanding. So we're really bullish on the business. And it's really allowed us to get that -- our footprint extended across the nation.

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Operator [38]

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Your next question comes from the line of Alan Brochstein from New Cannabis Ventures.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [39]

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Just a couple of quick questions. It seems like you're making progress in the CBD business. But unless I missed it, it's not being detailed. I'm just wondering if you guys will provide or can provide just some sort of color of the magnitude of that business and profitability?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [40]

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Alan, your voice went out just -- I couldn't hear about -- which business?

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Alan Brochstein, New Cannabis Ventures - Founding Partner [41]

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The CBD business, sorry, Julius.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [42]

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Sure. No problem. Yes. So that's not something that we specifically segment -- we don't segment at this point. Going forward, next year, depending on some of the different dynamics, that maybe something that we will provide a little bit more segment detail around, especially as that business continues to grow. Some of those expanded doors and the expanded pipeline that's all happening in real-time right now, as we start to get better visibility into what some of those channels look like. That's going to be something that we evaluate how we present or segment out next year. And I think that's one component of it. I think the second part of -- I think, generally, the second part of it is, though, in terms of what the actual dynamics of that industry look like. It's obviously a CapEx-light business compared to some of the typical licensed operations that we have. So it has a different profile. Obviously, there's different inventory requirements and working capital requirements. But generally, from a gross margin perspective and from a margin perspective, it is something that is definitely additive to our business. And it's something that as that business continues to grow, I think, it's going to add continued strength to our gross margins across the entire company.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [43]

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Okay. And then I have a very detailed specific question. Colorado doesn't seem core to you guys. Public companies can now -- you have the ability to consolidate it now, but you also have a bigger market to sell your single asset into. I'm just wondering what your thoughts are on Colorado, go bigger or get out of it or stay where you are?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [44]

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Alan, it's a great question. It's Hadley. I think you note correctly, it's not core. You'd have to make a decision to go deeper in the state or get out. It's something we have on the table as part of our 2020 strategic planning. We'll have more visibility on that going forward through the balance of the year. But it's on the table. It's up for discussion. It's sort of all new markets or existing markets when we do our planning process.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [45]

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Got it. And then bigger picture, if I understand correctly, you think the store is the most important thing. And obviously, you're doing a lot of things right now, creating your own brands. But more importantly, building out all this capacity that ultimately you may not want to have it or cost a lot of money. I'm just wondering, as you think about the tough environment that we're in right now that hopefully changes, but it's probably not going to instantly change. Some of the capital projects, are you prepared to cut some of them back? I mean you've already shared some of your priorities, but are you guys thinking about this in your 2020 planning where you may have prepared to cut back?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [46]

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Yes, that's a great observation. I think, Alan, you and I've spoken about this in the past on -- today, just given the federal legality and the state legality, you're forced to have this strange way of creating products. We have to be vertically integrated state-by-state-by-state. I think we all recognize that at some point in the future, if you don't pick your favorite crystal ball, you'll have federal legality and you'll see a centralization of grow, processing and look -- it starts to look like a normalized industry at that point, which by definition, means a lot of the capital you're putting to work in a lot of these states has no terminal value. So you have to be exceptionally judicious when you're making those decisions. And that's why you'll see us do things, as Julius referenced earlier. You incrementally look at things, you don't want to build out a million square feet in New Jersey if you don't really have great visibility on the demand curve and some view as to what's going to happen over the next few years. So you'll see us adding incremental, trying to do that feathering of where the demand curve is, what the politics are and what we need to actually have enough supply to meet our demand. It's quite challenging, both from a strategic perspective and a corporate finance perspective. And that's key to our process that we're going right now. You've got a certain amount of capital. You have a lot of projects across a lot of markets, and you invest to get the best bang for buck for your shareholders' money. And you kind of start at the top and say, "Wow, these are really great slam dunk projects and you finance those and you work through them, and then you get down to a certain level and you say, "Okay, that's it. We'll wait and see what happens."

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Alan Brochstein, New Cannabis Ventures - Founding Partner [47]

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Okay. And then the last question I have really is, [I know you have] access to additional capital from Gotham Green. Am I correct in assuming that you're not really able to pledge any more assets of sale leasebacks beyond that, are not really on the table. Is that correct?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [48]

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No, I think anything's available. One of the things we love working about with Gotham is -- we're a big equity play for them that's structured as a senior secured piece of debt, but they're in for the lending returns. So anything that can effectively lower our cost of capital or allow us access to capital to build something out to enhance the shareholder returns, they are in favor of. So there's nothing off the table from a corporate finance perspective.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [49]

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Okay. So then -- I've seen some people -- the reason I ask is that I have seen some people that have sworn they wouldn't do sale leasebacks with certain New York Stock Exchange listed company, do them anyway? I just -- is that one of the options for you guys at this point?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [50]

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Yes. Look, everything is an option. It's just a matter of what the cost is. A lot of these sale leasebacks are very costly because of the time and commitment associated with them, right? You're locking in for a long period of time. And I think we all know within those time frames, you probably have full federal legality and you're probably going to have -- wish that you had access to that Citibank mortgage at 3 points. So that's the trade-off you make. And on the other side, I can see why some of our peers would access that capital because you can rationalize and think of it as cheap equity. If your choice is equity or sale leaseback, I'd probably guess the sale leaseback is going to compare favorably to the cost of equity given where stock prices are today. I can't fall people from making that decision. It's something that we have, some of the arrows we have in the quiver, and we look at that just like we look at any type of fundraising to continue to drive shareholder value.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [51]

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Well, it's good to hear you have that flexibility. Congratulations on the continued growth.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [52]

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Yes. Thank you very much, Alan.

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Operator [53]

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This concludes our question-and-answer session. Mr. Ford, I turn the call back over to you for closing remarks.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, Chairman of the Board, CEO, MD & Director [54]

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Fantastic. Thank you. And thank you all for dialing in for our third quarter earnings release. We wake up every day, our team does ready to create iconic cannabis brands and great experiences for our customers. We wake up every day, work willing and able and go out and work very hard for you, our shareholders, and we thank you very much for your trust and support. We look forward to a good balance of this year and great opportunities in 2020. Thank you.

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Operator [55]

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