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Edited Transcript of IAN.CD earnings conference call or presentation 27-Aug-19 12:30pm GMT

Q2 2019 Ianthus Capital Holdings Inc Earnings Call

VANCOUVER Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of iAnthus Capital Holdings Inc earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hadley C. Ford

iAnthus Capital Holdings, Inc. - Co-Founder, 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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* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Jason Zandberg

PI Financial Corp., Research Division - Special Situations Analyst

* 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

* Russell Stanley

Beacon Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the iAnthus Q2 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 and 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. I'd like to remind everyone that today's call is being recorded on August 27, 2019.

I will now turn the call over to Hadley Ford, CEO of iAnthus. Please go ahead.

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

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Thank you very much. And with me today, I also have our CFO, Julius Kalcevich; and our COO, Pat Tiernan.

Bear markets are no fun. I hate them, you hate them, republicans hate them, democrats, progressive, technical traders, fundamental value investors, even my dog hates bear markets. We all hate them. In the strange world of quantum physics, a particle may be in 2 places at once, and that's what's happening in the cannabis market today. The business of cannabis is fine. We look at the business of cannabis and our revenues are up 35% from our last earnings call. We look at our stock and it's down 60%. Our peers have put up good numbers so far during the earnings season, but their stocks are off as well. This is where we are today. The business of cannabis is doing fine, the stocks not at all. Two separate realities existing at the same time. And like quantum physics, I can read the words, I can see the facts, but I just don't understand it.

Every new industry goes through its ups and downs. Remember the cable industry with 57 channels and nothing on, mobile phones were the rich man's toy. And as a young banker, we even pitched Apple to AT&T at an acquisition price of $10 billion. Investors and young industries look out into the future and see the potential for billions of dollars of revenues and cash flow, but they also see that it isn't here today and that there's great risk.

Will someone buy the widget? Who knows. So small movements in the perception of the future can cause huge swings in valuation today. That is why in new industries you have such volatility. That's how a stock like iAnthus can be up 3x in 1 year and down 60% the next. But there's one key difference in this industry as we look out to the future revenue and cash flow potential versus other new industries, we're selling marijuana. There's a proven demand curve. We know people pay for cannabis. There's an orderly transfer of wealth from bad guys to good guys. There's a reason El Chapo was one of the richest man in Mexico. You make money selling marijuana. You make money selling something people want. You make money selling into a proven demand curve. New York State alone has been estimated to have as much as a $4 billion illegal market today. And the existing customer base today only represents 11% or 12% penetration of that whole population across the U.S. In every market that has legalized the use of adult cannabis, the penetration rate's gone up dramatically, 20%, 25%, even 30%.

You've heard me say in the past that the ultimate revenue opportunity in cannabis in the U.S. may be north of $200 billion, and that the market valuation of the sector may be north of $1 trillion. The opportunity to invest in cannabis is one of the great investment opportunities ever.

And giving that potential, it's clear today all the cannabis stocks are on sale right now. It's like a two-for-one sale. Investors should buy a share of every one. Well, actually, you should buy a share of every 1 and buy 2 of iAnthus, but you get the idea. Buy a share every month, don't look at the stock price, average into a great basis and 3 years from now you'll be very glad that you did.

Of course, even with the proven demand curve, one of the things an investor needs to see is that the company is executing on its promise of delighting its customers. Our second quarter was our first complete quarter with MPX and iAnthus as one company. Our business looked bright on our last earnings call and it looks even brighter today.

Operation in the second quarter saw 35% sequential revenue growth, expanding gross margins and limited incremental G&A expenses. Since opening our first Florida dispensary last December, we just opened our eighth store, grown our market share to 3.5%, and we're the third highest in the state in terms of THC volume per store. In Massachusetts, we've made significant progress toward opening our first adult-use store in Worcester, and our products are now carried in 27% of the retail stores in the state. In New York, this fall will mark the launch of our new Be. store brand with the opening of our flagship Brooklyn store across the streets in the Barclays Center, followed by a national rollout. In Maryland, our products are now on the shelves at 73% of the stores in that state, up from 53% in the first quarter.

Revenue growth continues to be strong in Nevada driven by consumer demand for MPX products. And in fact, our MPX products are now carried across 3 states and over 110 stores, and our CBD For Life brand is now carried in over 1,100 stores nationwide. As always, reducing our cost of capital remains a focus of the company, and we're very pleased to have recently announced a $50 million senior secured term loan with Taurean Capital. This will give us access to lower cost capital to continue to build out our footprint. And as we look out over the balance of 2019, 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 our shareholders. We're very excited about remainder of 2019 and appreciate your continued support.

I'll now turn it over to Julius for some 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. Good morning, everyone. Before I walk through our results, I would like to reiterate that our transformational acquisition of MPX closed in February. This transaction was the first public-to-public deal in the U.S. cannabis space and the first and largest transaction in the sector that had successfully passed the U.S. Hart-Scott-Rodino act for Antitrust oversight. The transaction was approved and closed in less than 4 months from the announcement date.

Our results for Q2 have both MPX and iAnthus results consolidated for the entire period. Due to timing of the -- our CBD For Life transaction closing, our reported results do no materially reflect the results of CBD For Life's operations, but we have included them in a pro forma adjustment as details in table 2 of the press release.

For the second quarter of 2019, our reported revenue was $19.2 million, up 100% from our first quarter of 2019 and up more than [7,400%] from Q2 2018. Our pro forma revenue, which is a more accurate reflection of the quarter, was over $25 million for the quarter, up 35% from the previous quarter. This pro forma number, which is detailed in table 2 of the press release, includes the full impact of our CBD For Life transaction as it was consolidated as of the beginning of the quarter as well as managed revenues in the states of Arizona, Colorado and New Mexico.

Managed revenues include operations where we have management contracts and/or licensed operations, which we were unable to consolidate under IFRS.

Looking to gross profit, our unadjusted gross profit for the quarter was $9.2 million with a gross profit margin of 48%. Our adjusted gross profit was $10.1 million with a margin of over 52%, which reflects an $864,000 fair value adjustment of inventories acquired as part of the MPX transaction that is being released into COGS for revenue recognized during the period. These figures are reflective of the scale we've achieved to date and represent a significant increase from the results achieved in Q1, where our adjusted gross profit was $2.3 million or a margin of 23%.

Investors can continue to see our gross margins of this caliber as we continue to expand our market share in key states and scale our existing operations.

Within our operating expenses, the company recorded expenses of $33.2 million for the quarter, of which $1.1 million related to nonrecurring acquisition costs and $13.1 million of noncash expenses. This brings us to a normalized figure of $19 million of cash expenses for the quarter.

I want to quickly walk you through our expense line and comment how we continue to be focused on synergies and efficiencies that we more than doubled the size of our business over the last few months. Quarter-over-quarter, our G&A increased by 39% to $5.7 million due to the continued integration of MPX, onboarding of CBD For Life and expansion of our team. In Q1, we were only able to consolidate 2 months of MPX results, which is one of the drivers of this quarterly Q2 increase. Additionally, approximately $1 million of tax payments for various entities were paid during the April tax season which obviously falls during Q2.

Our salaries and employee benefits increased by 33% to $8.1 million as we continue to expand our workforce and management. The increase from Q1 is mainly driven by the fact that, once again, Q1 only had 2 consolidation months of MPX. We're now at approximately 700 people across iAnthus. Our professional fees increased by 39% quarter-over-quarter to $4.9 million as the result of the continued legal work associated with the former MPX entities, marketing expenses involved in the launch of our unified dispensary brand Be. and continued pursuit of M&A.

Given time -- given the timing of year-end reporting at the end of April, the second quarter of the year tends to be the most significant for audit, accounting and legal fees as well. These expense lines -- these 3 expense lines, which I mentioned, which were up respectively 39%, 33% and 39% should be compared across our reported revenue, which grew over that same Q1 to Q2 period by 100%, which demonstrates our operating leverage as we scale our business and maintain strong expense controls.

Our EBITDA loss for the quarter was $4.7 million, reflecting an 8% improvement from Q1. The details are outlined in table 3 of our press release. And lastly for our income statement, our net loss for the quarter was $6.9 million, which equates to a net loss of $0.04 a share. While our net loss position is by no means ideal, the loss incurred during the quarter represents a 72% improvement from Q1 further demonstrating the scale we've achieved this -- thus far.

During the quarter, we deployed approximately $24.6 million of capital in support of continued build out of operations in key markets, especially in Florida.

As of June 30, 2019, total assets amounted to $810 million. The company's cash balance was $30.5 million at the end of the quarter. The company also has the potential to receive over $120 million from the exercise of outstanding warrants and options, of which approximately $10 million is expected to be received by the end of the year, based on strike prices and expiry dates. Our fixed asset and real estate base also is at approximately $106 million, which we believe is beneficial as we continue to seek out and explore nondilutive financing sources to fund our expansion plans and preserve shareholder value.

As announced last week, we announced our intent to secure a $50 million term loan with Taurean Capital Partners in 2 tranches of $25 million. The loan will bear interest rate of 9% per year with interest payable quarterly, have a duration of 3 years and option to prepay the loan after 12 months and 20% warrant coverage. The warrants will be struck at a price equal to 25% premium to the closing price on the date of the closing and can be called by the company if the VWAP exceeds 2x, the strike price for 20 days within a 30-day period, and the daily average trading volume exceeds 25% of the warrants issued as part of the financing.

And finally our capital structure. Our current fully dilutive share count is 249.7 million shares, which includes 156 million common shares, 15.5 million Class A shares and 78.1 million dilutive securities. I would like to now hand it over to our COO, Pat Tiernan.

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

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Thanks, Julius. Good morning or good day to everybody out there. Before I start, I'd just like to give you a refresher on my mandate as COO of the company. My job is pretty simple, to build best-in-class scalable operations with a key focus on quality and consistency through innovation and profitable growth. In my prior role as COO at Stone Brewing, which was one of the largest craft breweries in U.S., I had the same mandate, scaling the company, its operations, its processes and really ramping up its innovation engine so that no matter where you got the beer from, it was the same high-quality bold and aggressive beer that their fans desired. And that company has scaled from just under $100 million to about 2.5x that and from several hundred people to over 1,000. We drove a fourfold increase in the company's hospitality and retail footprint.

And to serve the new channels we created to meet that demand, we added in parallel production facilities on the East Coast, in Europe, while reengineering the established West Coast operations to more than triple its collective output, and we expanded distribution nationally into over 34 international countries. Our priority internally was pretty simple, it was data transparency that kept us focused. On the outside, it was new innovation, it was product and brand that kept our customers engaged in support of that tremendous growth, while keeping these companies edge in the market. I see an incredible analogy in cannabis to the craft beer space. It's a great parallel from my past role to my current. Only this a more exciting industry, and I look forward to taking our operations to the next level.

So let's get the execution against the company's planned road map and second quarter milestones. First, I'll say I'm really pleased with the momentum, especially in and around the MPX integration and strength in our infrastructure across really all of our markets. I'm going to hit this in 2 regions. I'll first hit the East region and then the West region, so I'll start in with Florida. On the retail side, just a brief refresher that of the 22 licensed Florida operators, only 12 have operation dispensaries. We finished the quarter with 5 operation dispensaries and since then, we've added 3, as you've heard Hadley say, bringing us to a total of 8. Late in second quarter, we released Daytona and Orlando and had a very good success there. And most recently, since July and August, have opened up Miami, Gainesville and Lakeland.

By January of 2020, we expect to have 17 dispensaries open, pending of course the local permitting and OMMU regulatory approvals. And based on the last OMMU report, as Hadley hinted on, our Florida subsidiary grow healthy, is ranked third in terms of THC milligrams sold per dispensary, which is amazing since for most of the quarter, we only had 3 open, fifth in terms of flowers sold per dispensary, sixth in terms of overall flower sales, seventh in terms of open dispensaries and eighth in terms of total THC milligrams sold.

And to me, it really feels like we're just barely hitting our side -- our stride. In fact, I'm with the Florida team, Mike and company down in Florida today, given their views over the next couple of days and it's just really amazing to see the transformation we've driven here in the state.

On the production side, our 33-acre Lake Wales cultivation campus achieved numerous planned milestones that will allow us to basically increase our output by 4x in the November period. It's been the target of our CapEx spend. All the numbers Julius noted there was real spend in Florida during the quarter, and we'll see that payoff for us, when our November harvest and production is complete. Numerous milestones we've hit on time and in budget within our shade house, our greenhouse. The core of the buildings 5, 7 and 8. Migrating the team have just been heads down focused in the market here and it's just -- it's a real pleasure to see all the progress in the state.

Moving to Massachusetts on the retail side. We received approval for the adult-use dispensary in the city of Worcester, the second-largest city in the state that's got a metropolitan area of just under 1 million. New opening in Worcester is expected in the fourth quarter, pending approval from the MCCC, which is the Massachusetts Cannabis Control Commission. Our 3 locations in Mass are amongst the strongest in the state, and we're excited to have them all up and running as full-rec dispensaries in the fourth quarter and early first quarter of next year.

On the wholesale side, a big focus of ours, that strategy continues to payoff. We've seen a 40% quarter-over-quarter increase in our penetration of the market there. And on the production side, we've nailed the milestones that are going to allow us to increase our process capacity nearly sevenfold, so that's been really good to see. The opening of Fall River cultivation facility is planned for the fourth quarter and that will allow us to more than double our production capacity in the state. With our growing wholesale customer base, that capacity is going to be timely and position us to win in the state.

Moving to Maryland. We've seen continuous month-over-month growth from all 3 dispensaries, particularly strong results coming from Baltimore and White Marsh. The team there is just doing a fantastic job. We see a 77% increase in retail revenue over Q1. On the wholesale side, that penetration rate has increased 17% quarter-over-quarter. We now serve 73% of the licensed dispensaries in the state, up from about 56% in the first quarter. On the production side, again, we've hit our planned milestones during the quarter that will allow us to essentially double our production capacity by the end of the year.

And on the products side, we've successfully hit milestones throughout the quarter that allowed us to launch our MPX branded cartridges. And we've got a unique partnership with placebo, this is a joint venture that we established and hit the milestones that allowed us to release our first set of products in April and the second set of product extensions in July. The Balance Pen, for example, is a product formulated by -- for women and is another exciting collaboration of ours. We believe that, that notion of innovation, relevance in the market and collaboration is key in the markets that we play in and that it's been a fun project, and that we're seeing great success from at the moment.

In New York on the retail side, in Staten Island, we signed a lease and began to build it -- build out of our dispensary there, which will be the only one serving its roughly 0.5 million residents, and that opening is expected during the fourth quarter. In Brooklyn, the construction and milestones that we planned for the quarter have been achieved that allow us to open our flagship Be. retail outlet, and that's located directly across the street from the Barclays Center. That opening is expected this fall.

We've also successfully transferred the fourth dispensary license that we have from Chemung County to Tompkins County, which has a population of around 100,000, of course, hosts a couple of well-known schools like Cornell. On the production side, we eagerly await further clarity as to the development of both the medical and the recreational programs within the state in order to refine our capital expenditure programs.

As Hadley mentioned at the beginning of the call, the black market in New York is significant at $4 billion and while the medical program has been slow within the states, I'm excited about the huge potential that the market has on horizon, pending those regulatory changes.

In New Jersey, production of Phase I of our Pleasantville, New Jersey cultivation and processing facility is underway. Once completed, it gives us about 33,000 square feet of cultivation processing space.

The Phase II expansion, which will add another 47,000 square feet, will follow after that. On the retail side, our Atlantic City dispensary is being developed, and we're hoping for an early first quarter '20, pending regulatory approval. And on the CBD For Life side, we've built in the Red Bank offices there in order to support not only the integration but a very significant training and customer engagement program for our customer base there as well. So that's been an exciting development for us in the quarter.

Our Western region. Moving on now, out West, the Southwest region is where the most mature MPX businesses were located, so you can imagine lots of time and effort spent there. Again, our wholesale strategy and folks we've had has really paid off for us, showing a 30% growth over the last quarter.

In Arizona, which was the crown jewel in the portfolio, we have 4 open dispensaries in the state, a market share that hovers in the high single digits, and we relaunched completely our wholesale program and are starting to see some significant benefits.

On the product side, we've hit milestones. We're releasing 3 new product categories, including gummies, live resin and sauce cartridges as well as new value segment offerings in the cartridge space. Those milestones allow us to release the products in July as we had planned and thus far we've seen a really positive response from the products and our fans.

We also established a collaboration with Grow Sciences for the expansion of our product offering and retail sales, highlighting, again, our focus on innovation, unique sought after strains and our ability to partner with reputable brands that are local, have a high affinity and broaden our own customer base as well as their own.

On the production side, we achieved planned yield gains in cultivation, actually slightly overperformed, hitting about 13% improvement during the quarter, while also producing about 30% more cured resin for MPX products.

In Nevada, we achieved 50% revenue growth quarter-over-quarter, a 40% increase in customer growth, demonstrating our focus on deeper channel penetration in the state. We've also signed new toll processing partnership with a very key player in the state in the concentrated market, which is a key aspect of our strategy in wholesale to drive value out of our assets and become the most respected wholesaler and toll manufacturer there in the market. I think operationally, we've never been stronger. I continue to feel the momentum. The team's coming together. The initiatives we've put in place, the plans we've put in place are paying off, and I'm super excited for the rest of the year and well beyond.

I think that's a wrap for operations. And at this point, we can open up for questions, and I'll turn it back to Hadley.

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

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Thanks, Pat. We're now open for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Graeme Kreindler.

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Graeme Kreindler, Eight Capital, Research Division - Principal [2]

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I just wanted to ask in terms of the segmented reporting on the gross profit side of things, and a very strong gross profit out of East region compared to the West region. I was just wondering, one, if there is any sort of seasonality that might come into place that affects the gross profit on the West region? And as well, given that there's a lot of production ramp happening on the East region, probably would've expected the gross profit profiles to sort of be flipped across the regions. So just wanted to get a bit of color there in terms of what to expect moving forward.

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

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Sure, no problem. Graeme, it's Julius. Yes, so let me give you a little bit of color. So some of those observations, especially, first off for -- I'll take the one around the Eastern region. So in some cases, or generally across the Eastern region, especially in the case of Massachusetts, even though we continue to be ramping up across that state, from a cultivation perspective that facility has been open and operational for cultivation since the beginning of 2018. So in a lot of cases, it's already been operating for 18-plus months, so there already has been a tremendous amounts of runway.

Your observation around sort of facilities as they're sort of -- as they're getting going, you kind of see that inverted gross profit. But I just want to kind of remind you that that's been open sort of 18 months. And also in the case of Florida where there is a tremendous ramp up, that facility has been producing product for similarly probably around 14 or 15 months, so they're -- they already are quite a bit into their cycle.

In the case of what has been happening in the Western region, there is a couple of factors there at play. First off, obviously, some of the circumstances, especially in Arizona, where you're allowed to buy either third-party product or you're -- unlike the Eastern region, where you basically have to be vertically integrated in a lot of cases. In the Western region especially in the case of Arizona, where you're buying third-party profit, you don't obviously have that same ability to drive those sort of margins -- or those higher gross margin, especially when you're cultivating everything on your own. Also in the Western region, as we continue to sort of clean up some of the historic inventory and some of the other historic products that we have in the Western region, especially Arizona, there were some onetime charges that would have hit gross margin in this quarter that also slightly depressed the gross margin in the Western region. Hopefully, that helps.

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Graeme Kreindler, Eight Capital, Research Division - Principal [4]

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And just a follow-up question with respect to Florida. We hear that you're going to be adding around 285,000 square feet of additional cultivation space and the plan to open up a number of dispensaries by January 2020. Just on the backdrop of a couple of your competitors mentioning some capacity constraints within the state and affecting sort of license rollouts, I'm just wondering what the time line is like on that expected additional capacity? When is it expected to come on and what that could do for future store growth?

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

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Do you want me to take that?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [6]

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Yes, go ahead, Pat.

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

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Sure, yes. So we have been, in earnest, developing out the core of the infrastructure that we have in Florida, which just had to be rehabilitated. So all aspects of the facility from power availability to just rightsizing the shelves of the existing footprint that were there, in addition we're coming up with some very unique low-cost ways to create high-quality biomasses, that has been our challenge. But we're bringing it online throughout the summer. And well we believe that by the November time frame, we're going to be in a great state to supply all of those 17 dispensaries and that I mentioned would be opening in that time frame. So it's a month-by-month grind that we're in. And we're bringing on more and more growth, so for example, we opened a building 5 in, I guess, it was July. Started planning that building 5, got us significant increase in plant growth on the way to about a 4x increase in plant growth by November. So we've got notches up the tiers from now until then. But basically, we believe we will not have constraints, and we've been hitting the market pretty well regardless, by being in a full -- unconstrained by November.

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Operator [8]

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Your next question comes from the line of Robert Fagan. Your next question comes from the line of Brett Hundley.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [9]

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Julius, just 2 for you first and then one for maybe Pat or Hadley. So Julius, first, if we look at MPX revenue contribution in Q2, was performance up or down sequentially from Q1? And I'm talking apples-to-apples as if you want to put all of MPX in Q1. Can you just give us directionally how that that business performed in Q2?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [10]

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Sure. So it was up in Q2. Most of the growth in Q2 was coming from growth in the Nevada assets, but that was largely across the former MPX entity. There was growth in Q2 mostly driven by Nevada. But as you can see that we're not necessarily segmenting the business based on sort of the former MPX assets and -- versus iAnthus. But yes, some color is that there was growth between Q1 and Q2, mostly driven by Nevada.

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

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Okay. I appreciate that comment. And then on CapEx, would you be okay giving us some guidance from a absolute dollar standpoint or whatever you're comfortable with, in terms of what CapEx could look like in quarters ahead and maybe the next year or so?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [12]

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So generally, obviously, and Pat made some of these comments specifically, whether it's around New York or whether it's around New Jersey, that those are states that obviously formatic, sort of -- and dramatically large end markets, but continuing to wait on, sort of, more disclosure and more detail around what the programs are actually going to look like -- ultimately look like there. And in some cases, that's going to help determine what, sort of, the sequential quarter-over-quarter CapEx will look like. But just some directional guidance, there's going to be continued dollar spends through the remainder of the year, obviously in Florida. Some of that, obviously, dispensary build out as we move from 18 -- excuse me, 8 to the 17.

Obviously, that's one component. A continued build out on the cultivation side. And then in terms of the 2 last big sort of slugs of CapEx that we need across the company, will be New York and New Jersey and those will continue to be spent over the -- little bit over the remainder of the year. But I think then, sort of, starting much more at the in the Q4, Q1 that's when we'll see some of those step ups. But we're waiting on a little bit more regulatory guidance of what those programs will actually look like before. And I think of that as more guidance is out there, then we'll release more detailed plans about our build out and the associated cost with them.

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

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That's really helpful. I guess I'll bypass New York and New Jersey for now and ask a question on Massachusetts for Hadley or Pat. So we've all seen the lines outside the adult-use stores in Massachusetts. Do you think that the local government there is more understanding that it needs to move at a quicker pace on store conversion or store opening there? That's kind of the first part of my question. And then as it relates to your Worcester store directly, can you give us a sense of whether you think that might be early Q4, late Q4, any read on that? And then I'll yield the floor.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [14]

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Sure. I'll take the first piece and then I'll let Pat talk specifically about the timing of the Worcester store. As it relates to the local government aspect of Massachusetts, I guess, a little historical context, the voters in Nevada and the voters in Massachusetts passed a referendum on the same day, allowing for full adult use, actually, for -- I guess couple of years ago. And we still have limited stores open and very lengthy processes. So I think the local governments have good intention, but the way that the process is set up between the state and the local authorities, essentially giving them taxing authority, just makes the process very long and arduous.

For instance, in the city of Boston, we're still going through our process. We've had our medical store open for quite some time, and we've been talking with the city about getting full-rec approval for better part of the year. We're 100% confident that will occur, it's just a matter of the timing, it's the internal politics the city went around. Worcester has moved a little more expeditiously, so we have gotten full approval there. And we've begun construction, we've got a great location. And I'll ask Pat to comment whether we can have that open in the fourth quarter. Pat?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [15]

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Yes. I'm planning on having it open late the fourth quarter, so I would target December.

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Operator [16]

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Your next question comes from the line of Robert Fagan.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [17]

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So I just wanted to ask again a little bit follow-up on the gross margin question that Graeme asked. And wondering about kind of like, in part of the explanation for the improvement quarter-over-quarter and how we should kind of see that evolution going forward. How much more improvement we may be able to see?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [18]

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Sure. Robert, it's Julius. So obviously, there is -- whether it's ourselves or any other MSO, as you bring any new facility online, there is going to be a little bit of that, sort of, ramp up for a quarter, especially if you're bringing plants in and there's going to be some movement obviously kind of quarter-to-quarter. And as I look over the next couple of quarters, where we're bringing on the MPX facility in Massachusetts, that's going to provide long-term benefit, but obviously, there is going to sometimes be little blips as some of these facilities come on. Similar what's going to be happening in Florida in some cases. Those are going to be the 2 next sort of big amounts of cultivation that are going to be coming on. Our view is and very strongly our view is, the MPX Mass facility or the other additions that we're putting in Florida are going to have low-cost cultivation footprints over the long term, where we see our sort of gross margin now, we're going to be able to continue to drive efficiencies into that, over the next couple of quarters. Again, there may be some movements and blips as we bring on some of the capacity at any one point. And we'll always kind of make note of that on any of the specific calls where gross margin may have been -- is moving around because of some of these new capacity adjustments, we'll try to point those out and isolate them and provide that sort of guidance. But our view is, is that the facilities that we have online which are demonstrating these gross margins, this is going to be the caliber of cultivation that we're going to have across the network. So I think we feel reasonably confident gross margins directionally in these ranges, other than some general movements as we're bringing on new facilities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [19]

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Great. And I apologize if someone asked this next question already while I was relogging in. But I noticed you highlighted, Julius, in the comments around the OpEx that you had some additional legal work for MPX, you had the marketing expenses for the Be. launch, and perhaps a little bit more legal fees than you might have otherwise had. Just wondering how we can think about the SG&A base going forward if you guys have achieved kind of the scale at, which you need to then further gain operating leverage, or if we should expect some continuing increases in SG&A as percent of sales?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [20]

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Sure. It's a great question. And I would say that directionally, on the corporate side and sort of management side, what you see is a team that is robust at this point. Obviously there's always some additions around the margins. One area that we continue to add people to is to the marketing side of the business, so there's going to be a little bit of movement probably on that component on the sales side, sales and marketing and which will get bundled into SG&A. And then there's always some seasonal blips up around some of this. As I made the point right now, under G&A that's where our taxes are incorporated. And obviously that sort of hits in this quarter. But I would say directionally that line item, sort of, feels like it's been scaled for a company that sort of has 700 people as we quickly scale up to 1,000. Some sort of seasonal movements are here and there, a little bit more, sort of, on the sales side, but directionally where we are kind of at these levels, this feels like it's well scaled for a business our size.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [21]

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Great, that's very helpful. I guess the last one before I get back in the queue is, I had noticed that you guys in your press release mentioned entry into California for MPX. Just wondering maybe Hadley can give some more color around that.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [22]

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Yes, sure. Our strategy is pretty straightforward. We want to have a footprint in meaningful cities across the United States. We want to drive traffic, hit the right customers and then have them buy products, and over time they can't live without those products and they become household names and brands. That means you need to be in cities like in New York and Miami and Vegas, but also needs to be in California and California is probably the big key market for that strategy to have fruition. It's the largest legal market on the planet and we have a small toehold there, we've got a little co-pack arrangement, but we do need to be in the state in a more meaningful manner and we will -- we'll do some things in the back half this year and hope that it will help us launch both the MPX products and have more of a meaningful presence in the state.

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Operator [23]

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Your next question comes from the line of Matthew Pallotta.

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Matthew Pallotta, Echelon Wealth Partners Inc., Research Division - Special Situations Analyst [24]

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Just have a question on the wholesale distribution. You commented that there is MPX products in 110 dispensaries across the country. I believe last quarter you also commented that your products were in 110 dispensaries but I'm not sure if that was only MPX or that included other states where MPX has not yet been rolled out but your other products are there. So I was just wondering if you could comment on the wholesale front outside of just MPX, all of your brands, how many dispensaries would those products be in, nationally, at this point?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [25]

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Pat, would you like to comment on the wholesale strategy and how we're rolling that out into various states?

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Pat Tiernan, iAnthus Capital Holdings, Inc. - COO [26]

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Yes. Sure. So a big part of the strategy here is to only think about how we treat our retail customers, it's all about film and consistency of product. Well we need to be able to do the same thing on the wholesale side and become a known and sort of dependable player out there in the market. So it's been a big part of our strategy. As to the 110 number last time, I, to be totally frank, don't know about where that number came from, so I can't comment there. However if that was the baseline looking at the penetration gains we've had across Maryland, across Arizona, across Nevada, in particular I would say it's probably broader than that, so I'd have to come back to you on what the overall count is.

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [27]

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And this is Julius. And Pat, I'll just a little bit of commentary to that as well, Matt, for your benefit. So the way that we calculated that number whether it was a 110 or 110 now, that is 2 unique dispensaries that we're shipping across in some of those states. If I look at, sort of, the numbers of dispensaries that we have sold to or touched over a 12-month period, right? That number would be higher. In some cases it's not every sort of dispensary that we're selling to on the wholesale side may buy within that quarter, so it's unique expense within that quarter, hopefully, that shed some light on it, but the ones that we neither touched across any of these states, that number tends to obviously be higher, right? Because some people are sort of buying in and out on the wholesale side, for whatever reason, to their purchasing patterns.

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

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Okay. And then, should I start?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [29]

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Yes. Just one more comment around the 110 number. Just sort of a random occurrence. The last quarter was 110 dispensaries that we were distributing products into, which included Mayflower, and we are now 110 -- there is 110 dispensaries now, just MPX as an additional layer on the wholesale distribution with the Mayflower brand as well.

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

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Yes. That's what I figured. That was, yes, if you were able to get the number for all brands across all states. That's kind of what I was looking for to compare apples-to-apples there. Yes. We can take that offline, right? The other question, just quickly in terms of -- you spoke to Florida in the ramp up in production, they're expecting to be 4x in November. Are there any other states right now where you guys are seeing cultivation capacity as one of sort of the bottlenecks in serving the demand with the existing dispensaries you have open? Or -- I mean in some states, I'm sure part of it is just opening more dispensaries, but is there any other states where you see cultivation and capacity to produce the dry flowers as a bottleneck for serving the demand that you guys are seeing in your existing dispensaries?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [31]

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Pat, would you like to talk about our cultivation across various states?

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

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Yes. The primary area is in the Southwest and it's indicative of the nature of the footprint that was acquired through MPX, the growth that we have are on the smaller side in Arizona and Nevada. So we are actively looking for both partners and new cultivation space for our sales to open up. Anybody can deliver biomass, but the right biomass to get right terp extractions to get the right products that we want, high-quality flower is a challenge and the dynamics in each of those markets has been rapidly changing, some of the biggest providers on the wholesale side of flower and biomass have now their own branded products, they didn't a couple of quarters ago.

So there's lots of changing dynamics in the market, but for ourselves, it's larger in the Southwest and we've got ongoing programs to both partner with locally relevant brands there that grow, sciences relationship that I mentioned, these are guys who are very, very well known in the market. We have a very synergistic relationships, there's personal relationships, there's professional synergies between us that allow our client to go to market to benefit both of us and gain sort of a shared customer base. So we're finding different ways to address that challenge; one through cultivation arrangements that we're structuring at the moment; and two through partnerships to get that high-quality source of supply.

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Operator [33]

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Your next question come from the line of Matt Bottomley.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [34]

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Just had a couple of questions on the revenue line. I think you had mentioned, Julius or Hadley, last quarter that the April month started off at about $8.5 million of revenue. So just wondering how that lines up to the pro forma number? And if there was any seasonality, or ups and downs within the 3 months getting you to your final $25 million number?

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

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Sure. Matt, so yes, in terms of April, obviously with 420 being as close to a holiday for the sector. April in every year that we've had in every state that tends to be that top tick sort of the year in terms of monthly sales, so April was definitely -- was higher relative to whether that was March or May or June, that's been the best month for us this calendar year. So that is that little bit of seasonality there. But obviously, directionally as we continue to expand and sort of what we're seeing now as we're moving through Q3 that is sort of the level that we're continuing to build off of. But yes, April was sort of the top tick, just given sort of the 420 -- some of the 420 specials and otherwise.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [36]

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Make sense. Thanks for that. And then just on the pro forma IFRS delta, couple of states, the 3 states maybe that are in there, is Colorado the most significant? And then given some of the regulatory changes there, when do you expect that gap to tighten up a little bit as you're allowed to consolidate more?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [37]

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Sure. So the delta -- in terms of the delta, which is roughly around $6 million for the quarter, so there's a couple of components that are actually in there, right? So there's pro forma, the adjustment of sort of a full quarter CBD For Life, so that will be one component of it. There is going to be Colorado, which is -- Colorado tends to be little bit seasonal, right? It's busy during key months, the summer perhaps not as busy, but that's roughly typically around a 7 figures that gets lumped into that managed revenue so CBD For Life, Colorado. The largest component actually is some managed revenue in Arizona.

This relates to some former MPX businesses, where there are various operators in the brand developers who work within our facility, rely on our license that we have management contracts with, we're just not able to consolidate them, that's, sort of, the largest component in managed revenue. And then there's also small -- a small pickup of a couple of hundred thousand dollars that is, yes, from our New Mexico asset, which we own 25% of, and we obviously just pick up a smaller component from the management company there.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [38]

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And are you expecting that obviously normalizing for the CBD For Life with the actual managed revenues, are you expecting that to sort of stay consistent at $4 million or $5 million or is it going to be more of a proportion of your overall growth?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [39]

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Yes. So what we're going to definitely see is Colorado at the beginning of next year if not sooner but I would sort of safely say at the beginning of next year for Q1 of next year, that will all shift from managed revenues over into our reported revenue. Obviously made the points around CBD For Life, that's going to be a one component that's 100% going to switch into our reported revenue. And some of the components in Arizona, that relates to the former MPX business, we continue to kind of grow our Arizona platform.

Pat just made the point about continuing to grow our cultivation there. I think as a proportion, that managed revenue in Arizona, I think it's going to kind of either slightly move over to our reported revenue or we're going to robustly be growing our reported revenues in Arizona, and that managed revenue will just be a smaller component. But I see that managed revenue as a percentage of our total revenue over time over the next 6 or 9 months, that's going to shrink as a percentage to a point where it's I think very quickly going to be, sort of, less than 10% -- in the 5%, 10% range.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [40]

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And just last one for me. Can you just give an update what your total -- and apologies if it's in any of the filings I've looked, but your pro forma dispensary count as of today, I don't know if it's broken 30, it might have, and then also if you're comfortable giving goalpost of where you think you might be, and leaving December this year?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [41]

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So as of right now it's 18. In terms of where we're going to be at year-end, we've provided obviously some guidance around where we're going to be in sort of the December, January time frame in Florida. There's obviously some moving components as it relates to Massachusetts, sort of the upgrades between recreational and medical and obviously around law, but I think that's going to be a number, Matt, that we're going to get more confirmatory over the next sort of month or 2 if there's a little bit more regulatory guidance.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [42]

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Preempted that you're in the tail end of earnings here so if I confused with other MSO there, my apologies, I've got the numbers, that you.

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Operator [43]

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Your next question comes from the line of Russell Stanley.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [44]

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First, on Nevada, just wondering your latest view I guess given the recent ruling that partial injunction, what impact you see on the ability to develop those retail licenses now. How do you envision this playing out and what your game plan is there?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [45]

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Sure. Russ, it's Hadley. And just a little context for everyone, there was a process that was run in Nevada to award the dispensary licenses, the people who lost in that process, it being cannabis too, a judge just came out yesterday, day before, with a ruling that put a lot of these things on pause that typically means more lawsuits, more appeals. My guess is at the end of the day, no license will be imperiled, but we're going to have to work through a legal process to have access to open and whatnot. It's unfortunate but not unexpected, given the industry that we're in. I can't think of a state that hasn't had a variety of lawsuits over the value of the assets that get divvied out by the state.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [46]

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Great. Just moving on, I guess, to Arizona, given your comments, there we're seeing I think some of the other MSOs be active on the acquisition front in Arizona. Is that a route you might look at taking as well, or have they kind of bid up that market, especially given the potential for adult use to be on the ballot on November 2020?

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [47]

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Yes. I mean our strategy is typically incorporated M&A, it's a big component of finding additional footprint and locations, so we're active. In most of states you might imagine we are looking at opportunities, your observation in Arizona that prices are higher is true. But I don't think that they've progressed to the point where you couldn't do something that was accretive. But you want to make sure you get the right opportunity and the right location. So we always take a look and we'd look in any number of states.

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Operator [48]

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Your last question comes from the line of Jason Zandberg.

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Jason Zandberg, PI Financial Corp., Research Division - Special Situations Analyst [49]

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Just wanted to touch on CapEx. You spent just under $25 million in the second quarter. Just wondering if you could give any sort of outlook for the second half of this year and possibly early 2020, if that's possible?

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Julius John Kalcevich, iAnthus Capital Holdings, Inc. - CFO, Corporate Secretary & Director [50]

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Jason, it's Julius. So as I mentioned on one of the earlier questions, there is a couple of moving components, obviously, sort of New York and New Jersey with some of the -- the regulatory programs there, we're going to be sort of scaling out the -- based on the regulatory guidance that we received from the state around what those programs will continue to look like, we're going to be providing a little bit more guidance as that outlook actually comes out, so we refresh sort of what the view will be. There's obviously going to be continued spend in Florida.

We've got 8 dispensaries open and we'll continue, there's at least another 9, there's another, yes, 9 that Pat has mentions, so there's always going to be CapEx deployment there and just with some of those other dispensaries that have -- that he had mention, there's obviously a ramp-up of openings kind of across the network, there's going to be one -- that's going to be one large component and then there's going to be continued buildout in Florida, but we'll be refreshing some of those numbers, but we kind of continue to see whether it's for the next couple of quarters, there is going to be sort of CapEx of -- in the range of probably $15 million to $20 million per quarter as we continue to build out some of those states. But again, for the larger ones that are out there we'll provide a little bit more guidance as those programs are a little bit -- made a little bit more clear.

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Hadley C. Ford, iAnthus Capital Holdings, Inc. - Co-Founder, CEO, MD & Director [51]

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All right. And this is Hadley. We've got 1 minute left. So I want to thank everyone for dialing in, we thank you for your time. We thank you for your trust. We thank you for support. And we thank you for the opportunity to run your company. We wake up every day and we work very hard on your behalf. We look forward to creating shareholder wealth in the balance of this year and on into 2020, and thank you very much.

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Operator [52]

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This concludes today's conference call. You may now disconnect.