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Edited Transcript of RBE.V earnings conference call or presentation 15-Aug-19 12:00pm GMT

Q2 2019 Harvest Health & Recreation Inc Earnings Call

Vancouver Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Harvest Health & Recreation Inc earnings conference call or presentation Thursday, August 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine Hersey

Harvest Health & Recreation Inc. - Director of IR

* Leo E. Jaschke

Harvest Health & Recreation Inc. - CFO

* Steven D. Gutterman

Harvest Health & Recreation Inc. - President

* Steven Mathew White

Harvest Health & Recreation Inc. - Founder, CEO & Director

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Conference Call Participants

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* Bill Papanastasiou

Canaccord Genuity Corp., Research Division - Associate

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Jesse Pytlak

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

* Navdeep Malik

Industrial Alliance Securities Inc., Research Division - Research Analyst

* Robert Fagan

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

* Rommel Tolentino Dionisio

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

* 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 Harvest Health & Recreation conference call to review second quarter 2019 financial and operating results and discuss the company's performance outlook. (Operator Instructions) Today's conference call is being recorded. (Operator Instructions)

I would now like to turn the conference over to your host, Christine Hersey, Director of Investor Relations for Harvest. Thank you. You may begin.

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Christine Hersey, Harvest Health & Recreation Inc. - Director of IR [2]

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Thank you. Good morning, everyone. On today's call are Steve White, Harvest's Chief Executive Officer; Steve Gutterman, President; and Leo Jaschke, Chief Financial Officer. Earlier today, we issued a press release announcing our results for the fiscal quarter ended June 30, 2019. The press release is available on the company's website and filed with the Canadian Securities Exchange and SEDAR.

Before we begin, I'd like to remind you that the comments on today's call will include forward-looking statements, which by their nature involve estimates, projections, goals, forecasts and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. And certain material factors or assumptions were applied in drawing a conclusion or making a forecast in such statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press releases with SEDAR and the Canadian Securities Exchange.

During today's call, Harvest 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 our earnings press release we issued earlier today. Reconciliation to IFRS measures are contained in the press release and our filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated.

I'll now turn the call over to Steve White, Harvest's Founder and Chief Executive Officer. Please go ahead.

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Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [3]

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Thank you. Good morning, everyone, and thank you for joining us this morning. On this call, we are first -- we are going to first review our strategic initiatives then provide an update on our year-to-date progress and, finally, give guidance for the remainder of this year and 2020.

We started Harvest in 2011 with a simple goal: to improve people's lives through the goodness of cannabis. We believe that there's real importance to what we're doing. Every day, we see people who use our products to sleep better, manage pain, control anxiety, reduce seizures, replace opiates or just unwind after a long day. And we're grateful to play the role that we do. We're also excited to bring our products to more people and more states as we continue to grow.

Increasingly, people understand the importance of cannabis. According to a recent Gallup poll, 75% of Democrats and 53% of Republicans support full legalization. And importantly, 78% of people aged 18 to 34 support legalization. So as an industry, we have a tremendous opportunity in front of us. Global sales of cannabis products are expected to nearly triple over the next several years from approximately $20 billion this year to $60 billion or more in 2024. Rarely have industries grown as quickly as this one has or will continue to grow.

I'd like now to turn to our progress. We remain on track to hit our 2020 top and bottom line guidance. And I'll take a few minutes to talk about the important components of this. We continue to make good progress on expanding our footprint. Through our organic growth and pending acquisitions, we have the right to open over 210 revenue-generating facilities across 18 states and territories. This is one of the largest footprints in the industry.

During this quarter, we announced the pending acquisition of CannaPharmacy, which will add key new states like New Jersey and Delaware to our operations and increase our reach in others. We opened 3 stores in Florida. And since the end of Q2, we were selected as 1 of only 8 companies out of 81 cultivation applicants to move forward to finalize a license in Utah. We opened 3 new dispensaries: 2 in North Dakota and 1 in Florida. We've closed the acquisitions of Leaf Life, Urban Greenhouse and 805 Beach Breaks. This adds 3 open dispensaries to our total in Arizona and California.

At the end of the quarter, Harvest standalone store count was 16, up from 13 at the end of Q1. Since the end of quarter 2, we've added 6 additional stores in Arizona, California, Florida and North Dakota. As of today, our Harvest-operated store count sits at 22, which is lower than our original projections. And the difference comes primarily from 2 things: we've seen delayed openings, primarily in Pennsylvania and Ohio, as we have ongoing conversations with regulators in both states; and we've deliberately slowed our growth in Florida as we expand our cultivation capacity there. As more capacity comes online in the latter part of the year, our store count in Florida will increase.

We do remain optimistic that we'll have 60 open stores by the end of this year, both through organic growth and through the completion of tuck-in acquisitions in select states. Specifically, we expect to see large jumps in both Pennsylvania and in Florida.

Winning licenses remains an important part of our growth. It has been and will continue to be our policy to apply for as many licenses as we can across the country. We do that because we firmly believe that we bring integrity and operational rigor to every facility that we operate and that by opening in a state, we actually help patients and customers. Our track record has been excellent. Over the past 8 years, we've won multiple licenses for cultivation, manufacturing, distribution and retail in 10 states across the country.

In winning these licenses in all of these states, we've learned how to work closely with state and local regulators. We understand that their success is our success and vice versa. Our relationships across the country are strong. Unfortunately, nobody reads about those in the press. Occasionally, though, we run into issues as local programs evolve, such as the case in Pennsylvania. There, we were awarded a permit during the first round of grants to operate 3 dispensary locations in the state. In the second round, Harvest-related entities applied for and were awarded 6 additional permits to operate 18 dispensary locations. Under Pennsylvania State regulation, no single company can hold more than 5 permits. The result of this is that we have had extensive conversations with regulators to determine the best path forward, given that Harvest-related entities now hold 7 permits. We're glad to be engaged with the Pennsylvania regulators, and we expect to announce a resolution shortly that will bring Harvest facilities online throughout the states and move into 2020 with considerable momentum.

We have faced similar challenges in Ohio. There, we're working with regulators and our local partner to open facilities that meet state objectives and serve patients. We hope to find resolution soon, and we believe that our facilities will open in that state in the back half of this year. Though there is nothing specific to report right now, I can anticipate that there will be other times down the road where we work with states in a similar manner to both Pennsylvania and Ohio. Frankly, that's the nature of our nascent business.

Cannabis programs are being rolled out quickly to meet patient and customer demands. And as that happens, we will continue to apply for licenses everywhere we can. This brings us in close contact with local regulators, and we'll work collaboratively with them to determine how best to simultaneously produce wins for regulators, legislators, patients, customers and our shareholders.

We also continue to make good progress in taking leading brands and selling them throughout our footprint. Our CBx products, including the popular Colors and Alchemy lines, are selling in California, Arizona, Maryland, Florida and Pennsylvania. And this is the way our model works: we develop or acquire brands and then we take those brands to state throughout regulated cannabis markets. We will continue to do that as we grow.

During the quarter, we also announced our entry into the CBD marketplace. There, we're leveraging the expertise of the CBx team who's been extracting alternative cannabinoids from hemp and cannabis plants and making products for years. And we will be using existing product designs to create CBD-only versions of our vaporizers and topical products. We've formed a partnership with the Asian American Trade Association Council (sic) [Asian American Trade Associations Council], an association that represents or has contact with 300,000 gas stations, mini-marts and convenience stores across the country. With that council, we'll be rolling out our CBD products into 10,000 locations this year with an ultimate goal of placing our products into 100,000 locations. While we have not added this revenue to our projections and guidance, we believe that there could be significant revenue potential here. If the council partnership works, we will seek to find additional outlets for our CBD product lines.

And now I'd like to turn the call over to Steve Gutterman who will discuss capital, M&A and our share count.

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [4]

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Thanks, Steve, and thanks to everybody for your time on the call today. Building out a national footprint in cannabis requires a series of large investments, and we're pleased that we've consistently raised capital since our RTO. Most recently, we announced terms for financing from Torian Capital Partners, or TCP, in the form of senior secured notes issued by Harvest totaling up to $225 million. The TCP loans will come in 3 tranches of $75 million, callable at Harvest options. We expect to close the first tranche in August. We're pleased with this facility. We believe that it is amongst the best-priced funding achieved in the industry to date. And importantly, our debt coverage ratios remain quite manageable.

Our total interest payments next year will be approximately $29 million, which is a small percentage of projected EBITDA, and this is important to us. While we appreciate our access to capital and we're continuously mindful of both the benefits and risks of leverage, we will not over-leverage the company, period, full stop.

Over the last 1.5 years, we've been extremely successful in raising capital. We raised approximately $300 million in equity in conjunction with our RTO last November. We subsequently secured commitments of $500 million in convertible debt, of which we have called $100 million. And now we have commitments for $225 million in senior secured notes. In total, we have received commitments for or raised over $1 billion to fund growth and to pursue accretive M&A. And our ability to raise capital is a significant advantage in this industry.

I'd like to pause here for a moment to discuss our convertible debt. We have always and will always seek the best available form of capital to support every project at each stage of our growth. The convert is available to us if we see an opportunity, an accretive M&A deal, for example, that would create shareholder value. As a general rule, in a capital-intensive business, you can rarely, if ever, have too much access to cash.

Now I'd like to turn to M&A. We are making progress in closing our large transactions. To provide context, earlier this year, we made Hart-Scott-Rodino, or HSR for short, filings with the Department of Justice for our pending acquisitions of Falcon, CannaPharmacy and Verano. This filing is required for any transaction regardless of industry that is over a certain asset or transaction size. In fact, the Department of Justice received multiple HSR requests from multistate cannabis operators at the beginning of this year. To come up to speed on the industry, the DOJ has issued requests for additional information on almost all of these filings.

We're moving along through the process. We believe that we will achieve substantial compliance with the DOJ's information request for all 3 transactions in the fall. We continue to believe that all of these transactions will close by the end of this year.

With our completed acquisitions of Leaf Life and Urban Greenhouse and our pending acquisition of Devine, we will significantly increase our presence in Arizona. And we're excited about this. Arizona is the fourth largest medical market in the U.S. Expanding our already market-leading presence here is a strategic priority. If, as we believe, the state moves to recreational use in late 2020, the opportunity becomes even bigger as we believe that revenue per dispensary will significantly increase.

More generally, these are the kinds of acquisitions we are seeking to make. With our pending acquisitions of Falcon, Verano and CannaPharmacy, we have coverage in nearly all of the key U.S. states. And moving forward, we will seek acquisitions that will help deepen our presence in a state or provide additional brands for us to move through the footprint. To make acquisitions, we use a combination of cash and stock. To that end, I'd like to take a moment to review our current and estimated share count, and you can see the totals in the PowerPoint that we have provided for today's call.

Here's the summary. As of June 30, we had 285 million total subordinated voting shares outstanding on an as-converted basis. And if we include all pending acquisitions, warrants and options, total share count increases to 494 million. Now this number will change over time. More specifically, as we make more stock-based acquisitions, the total number of shares will increase. 183 million shares of our 285 million total are held by insiders, primarily Jason Vedadi and Steve White. These shares are subject to a 5-year lockup agreement. 10% of the shares become freely tradable every 6 months. The first tranche or 18 million became freely tradable in May. The next 18 million shares become freely tradable in November, then 18 million in May 2020 and so on. We have these long-term lockups in place to facilitate management continuity.

Now I'd like to turn the call over to Leo who will discuss our financial results and guidance.

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [5]

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Thanks, Steve. Let's get to the numbers. For the quarter, Harvest standalone revenue was $26.6 million. We ended the quarter with 3 cultivation facilities, 3 manufacturing facilities and 16 open stores. Our revenue increase was driven by growth in our wholesale business and continued maturation of our stores.

Our pending acquisitions continue to perform well. Falcon, Verano and CannaPharmacy continue to grow. Altogether, our pro forma revenue, which is Harvest's reported revenue for the quarter plus internally reported revenue for the quarter from both completed acquisitions and disclosed pending acquisitions, was $78 million. This is over $300 million annualized run rate and is one of the largest numbers amongst U.S. multi-state operators. We are proud of this growth.

The key to continued growth is our total number of facilities, including all of our pending acquisitions. By the end of 2020, we anticipate that systemwide, we will have the following key operating metrics: 120-plus dispensaries in 15 states in Puerto Rico; at least 15 cultivation facilities in 13 states with over 1 million total square feet of growth, producing over 200,000 pounds of biomass; at least 12 manufacturing facilities in 11 states producing over 4 million units per sale. Overall, we are on track with projections on pro forma revenue for both 2019 and 2020. We remain confident that we will achieve our previously stated targets of $350 million to $400 million in 2019 and $900 million to $1 billion in 2020.

Let's turn now to adjusted EBITDA. Our Harvest standalone adjusted EBITDA in Q2 was a loss of $2.2 million, close to breakeven and an improvement from our $4.7 million adjusted EBITDA loss in Q1. We are encouraged by this progress. We continue to show near breakeven results as we build out our infrastructure.

Over the last 2 quarters, we have increased our infrastructure build-out to ensure that we are well positioned to take advantage of positive developments in key states. Specifically, the size of the markets continue to increase in Florida, California and Maryland. Illinois passed a bill allowing recreational use, and we expect Arizona voters will vote for recreational use in 2020. We need to be ready for these increases. Therefore, while we believe that quarterly profitability is important, we believe that it is more important to be ready to accommodate dramatic market growth.

As Steve discussed, we have also experienced delays in opening stores and closing large transactions, and this has also delayed our ramp in adjusted EBITDA growth. Accordingly, we are refining our 2019 adjusted EBITDA projections. We now believe that we will achieve approximately 10% adjusted EBITDA for 2019 on a pro forma basis compared to our prior forecast of 20%. We are leaving our guidance of 30% to 35% for 2020 adjusted EBITDA unchanged.

We're excited to keep growing this business and helping shape this industry. And we'd like to thank you, our shareholders, for joining us on that journey.

And with that, let's open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Robert Fagan with GMP Securities.

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

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I just maybe wanted to look a little bit at the gross margin in the quarter. It seems like it's come under a little bit of pressure from past gross margins. And just wondering if there's some color you can give around that in the sense that you're growing so quickly. Is that -- are you -- as a result of that, are you required to source some wholesale product to fill the demand you're seeing?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [3]

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So there's a few factors in that gross margin. First of all, the reported gross margin for the quarter actually increased versus the prior quarter. I believe what you're referring to is gross margin before the biological adjustments. So that number did decline over the first quarter, and one of the factors is sourcing product for our retail stores as we build our cultivation. That certainly plays into it. But we're also seeing a shift. As we grow our wholesale business, we're seeing a shift in mix impact that number.

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

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Okay. Great. So kind of just on that same theme, where -- is there anywhere you can indicate you're seeing some capacity constraints and maybe give us an idea of when those could be alleviated?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [5]

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Yes. Rob, it's Steve. There's a -- it's an interesting dynamic. First of all, we are seeing some capacity constraints in Florida, and that's why we slowed the growth of our retail stores. And so we'll see more capacity coming online at the end of this year and the beginning of next year. Also we anticipate, with our pending acquisition of Verano, we anticipate that the whole -- in the whole state, there's going to be more demand for and then supply of biomass. And so we're working hard. Verano team is working hard to increase capacity there.

And then what we think we're going to see is that we, as you know, always model price compression, right? We always think that the prices are going to compress over the next year or 2. It's going to be interesting to see how that plays out because if in states like Illinois there is actually more demand than supply, then pricing, not just for us, but for everyone who actually has cultivation capacity, will stay flat or potentially even increase. And so that's going to be an interesting dynamic that we're going to watch carefully.

And then, Leo, I think you were going to add something?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [6]

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Yes. In addition to Arizona, although we have good product supply, the high-end indoor product, we did not have on a year-to-date basis. However, with the closing of our recent acquisition of Urban Greenhouse, we now do have supply of that, and we have other items in the queue for the balance of this year that we expect are going to provide more indoor.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [7]

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Okay. Great. That sounds promising. Maybe last one before I get back in queue is, the I guess, 6 locations that you've highlighted have been added to the network post quarter end. Are those -- or how many of those, I guess, are kind of the new locations that you had mentioned on the Q1 call? And/or are there additional ones in that count that could basically indicate that these new stores could be -- could actually exceed quite a bit 6 locations in Q3?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [8]

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Those were all ones that we had mentioned by way of reference in the Q1 call. Having said that, our pipeline of potential acquisitions of tuck-in dispensaries as well as our organic build is quite robust. And so there are a lot of opportunities.

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Operator [9]

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The next question today comes from Graeme Kreindler with Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [10]

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First off, just a matter of housekeeping. I was wondering if you could provide a breakdown of the pro forma revenue with respect to the contributions from the various entities and if you're disclosing a pro forma EBITDA figure at all.

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [11]

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Yes. Graeme, we're actually not breaking things out by entity right now. And so as we get closer to the end of the year into next year, we may amend that for now, but we're not breaking anything out.

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [12]

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I will clarify that the pro forma revenue includes the closed transactions that we publicly announced and also the pending transactions of Verano, Falcon and CannaPharmacy.

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Graeme Kreindler, Eight Capital, Research Division - Principal [13]

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Okay. All right. Just moving on to a separate topic. With the license wins and the application (inaudible) that's going to be a future focus of the business, as Steve White mentioned earlier. I was just wondering, in the quarter -- in this quarter, were there any specific costs related to license applications that aren't separately broken out of that adjusted EBITDA figure?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [14]

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Yes. Every quarter that we've reported to date has costs associated with license acquisitions. And we expect that, that will continue through the balance of this year and likely into 2020 and beyond as each state ramps up. We are certainly incurring those costs.

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [15]

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I will point out, as I think we've discussed on previous calls that the ROI, when you look at a license win versus an acquisition is quite high.

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Graeme Kreindler, Eight Capital, Research Division - Principal [16]

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Got it. Okay. And then finally here, I know you touched on the prep on market share and positioning in Arizona and the possibility of that coming RAC in the medium term here. I was just wondering, could you get a bit more granular in terms of Illinois and the preparations being made there from the existing infrastructure in scaling that up as we're approaching into 2020 here?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [17]

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Sure. To provide a little context, let's just size the opportunity. Illinois is currently a $400 million state when you look at total annual revenue in the industry based on the fact that there are -- it's a large population, 11.7 million, a large number of visitors into the state. If you look at what other comparable states are doing, this should be a $3 billion-or-more market. And we believe that the implementation of the RAC program is going to go smoothly, and it's going to go much better than it has in some other states that haven't had the infrastructure and the expertise and the experience of a medical program. So this is a massive opportunity for companies like ours with our pending acquisition of Verano that have assets in the state. And so for companies like us, the question is, how do you meet the demand in a state where the total size of the market is going to increase 8 to 10x? And so as you can imagine, step number one is dramatically increasing cultivation capacity. Fortunately, this is something that the Verano team has been thinking about for a long time because even though the bill passed, I think, about 6 to 8 weeks ago, it's something that's been in the works for a long time. And so progress in expanding our cultivation capacity is well underway.

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Operator [18]

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The next question today comes from Nav Malik with Industrial Alliance.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [19]

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I just want to first ask, so I guess -- did you mention that you were not going to disclose the pro forma EBITDA number for the quarter? Or was there -- or can you disclose that?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [20]

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Pro forma EBITDA for the quarter isn't -- we are not disclosing. Our adjusted EBITDA, reported EBITDA was a loss of $2.2 million.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [21]

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Yes. Okay. And how about -- in terms of that guidance, I just was hoping if you could help me reconcile. So I know you took down the 2019 number in terms of the EBITDA 2020. I guess I'm trying to reconcile the store count at the end of the year is a bit lower than when you originally provided the guidance, but the financial numbers are essentially the same for 2020. Could you maybe just help reconcile what kind of went in -- what sort of assumptions went into that guidance?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [22]

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Actually, Nav, I'm glad you asked that because this is a very, very important point. Our store count, both on a Harvest standalone basis and also on a pro forma basis, remains the same at the end of this year, right? So there's some delays that we've had in opening stores in Pennsylvania and Ohio and Florida for various reasons that Steve talked about. We expect to catch up over this quarter and the next quarter. And so we expect to be at 60 Harvest standalone stores by the end of this year and 90-plus stores on a pro forma basis. We still expect to be at 120 stores with all of the pending -- when we include stores from all of the pending acquisitions in 2020. And so the impact of opening stores, primarily in Pennsylvania, Ohio and Florida a little later in this year than we anticipated, is that we'll see that part of why we have EBITDA decline relative to the original forecast in this year, but it shouldn't have any impact on 2020 because we're going to be exiting the year with at least as many, if not more, facilities, and now I'm talking about cultivation, manufacturing and retail, facilities than we originally anticipated.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [23]

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Okay. Okay, I see. Okay, that's great color. And then I'd also want to ask on the CBD products. Is there any update? Like how far along is that? Or when would we expect, in terms of the timing, to maybe see some results from that? Or if you could just maybe elaborate on that.

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [24]

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Yes. Yes. As we've talked about on previous calls, there is tremendous potential here, though we're not exactly sure how to size it. And so therefore, we haven't put any CBD revenue into our projections or our guidance. Though the opportunity to blow out this program with the AATAC as well as other partnerships that we have lined up behind it could really be substantial. Good news is that products are going to be hitting shelves this quarter, and we will update that as the first products start going into these little shops and stores. We will update the market. We're excited that's going to happen this quarter.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [25]

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Okay. Okay. That's good to know. And I just also want to ask on Florida. So you mentioned that, I guess, you slowed down the retail openings because you're focusing on cultivation or in terms of expanding the cultivation capacity there. Maybe could you give us an update on where that is or what facility, where it's at and that sort of thing?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [26]

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Sure. Yes. And when we say slow down, what we did is we opened up a handful of stores, right? So we could really start seeing what sells well. We could start training our people. We can get -- establish a beachhead. But we're not going to open -- we have, as we've talked about in previous calls, we have 25 great locations already picked out. We're ready to go. We have 6 stores open. And so the question is, how soon do we open those other 19 and then another 10 after that? We expect that we -- our cultivation, we're increasing the size of our cultivation as we speak. We expect to see the yields from that in the fourth quarter. And so we're going to time the opening of additional stores for that. We like having a beachhead. We like having those handful of stores opened. It's providing great insights for us in the state. But we don't want to get too out in front of ourselves, and so the rest will be timed a little bit more to the increase in cultivation.

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Operator [27]

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The next question today comes from Bill Papanastasiou with Canaccord Genuity.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division - Associate [28]

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I just have a quick question in regards to the recent acquisition in California. Would you be able to provide some color at this time in terms of what contribution you're expecting? How does it line up to the other locations in California?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [29]

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Yes. We generally don't break out the performances of the individual stores like that. We're -- it's a good location. We think it's going to be a really, really productive store for us. And it's indicative of the kinds of acquisitions we like to make that strategically serve to deepen our footprint in a state. We really like that location, fits well with the way that we look at our whole real estate portfolio. And it's also nice to buy a dispensary that's already up and running as -- so you don't have to wait 6 months to a year to see it ramp.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division - Associate [30]

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Okay. Great. And just jumping back to the CBD space. I think you've answered most of my questions, but I understand that the product hasn't hit shelves yet. But do you still think that the option to expand to 30,000 AATAC stores is still in line for -- by the end of this year?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [31]

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Yes. And by the way, we've gotten some questions. I'll take this time to answer. We've had some questions about how large the opportunity with AATAC is. AATAC has 90,000 direct members and then 210,000 other stores that it has affiliations with. And so the total potential universe there is 300,000. And so our partner's goal there is to get us into 100,000 of those 300,000, and we'll see.

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Operator [32]

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The next question today comes from Rommel Dionisio with Compass Point.

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Rommel Tolentino Dionisio, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [33]

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Just wanted to ask if you could provide a little more color on your commentary about the potential for a voter referendum passing in 2020 in your home state of Arizona. It did fail a couple of years, I guess, in 2016 by just a couple of percentage points. But maybe just what do you think has changed? Is it just continued shift in voter attitudes towards legalization of cannabis on a recreational level? Or is it -- is there something unique about the proposed legislation from a couple of weeks ago, I guess? Just love your take on that.

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Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [34]

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Sure. This is Steve White. There are a handful of things that are different in Arizona. First, the electorate has changed considerably over the last few years and we've seen polling nationally change significantly. Secondly, the way that this initiative rolled out was quite different than the previous one. The campaign before releasing the language met, for example, with 129 different stakeholders across the state. These are -- include people who are supportive of the measure last time and includes all of those people who were in opposition last time and raised significant funding. Certain concessions were made to the organizations and people who were behind a lot of the opposition funding. And we believe that, that's going to have a significant impact on their behavior this time around with the initiative. The initial polling that we have done where we've tested both attitudes generally and then the specific language is significantly different than the polling that we did a few years back and significantly different in a very positive way. So the polling that we have seen shows that it will most likely pass this time. You can't obviously predict the future, but the polling is nearly overwhelming.

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Operator [35]

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The next question today comes from Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [36]

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So I guess the first relates to the pending transactions and the second request for information. I just wanted to clarify, have you, I guess, checked all the boxes and submitted everything that the Department of Justice is looking for in the second request? And if there are items still outstanding? I guess when do you expect to complete those submissions?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [37]

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Yes. We're not complete. We expect to complete all of those in early fall, and then we'll wait for the DOJ to approve or do whatever else it does.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [38]

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Great. And just on Florida, understanding your plan there to decelerate, I guess, the retail build-out. I think you were previously looking to open 16-plus dispensaries this year. Apologies if I missed it earlier, but I guess what is your new exit number in that state?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [39]

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It's going to be the same.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [40]

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Okay. They're just more back-end loaded. Okay.

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [41]

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Correct.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [42]

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And just a final question around M&A and you mentioned your criteria earlier. I'm wondering, given the pullback we've seen in the market, are you seeing potential vendors become more realistic in their valuation demands? Are you seeing any improvement in terms of the availability there?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [43]

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A little bit. And I think that it's going to be interesting to see, as availability of capital could become an issue over the next 3 months, 6 months, 9 months for smaller companies, it's going to be interesting to see how that dynamic plays out.

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Operator [44]

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The next question today comes from Jesse Pytlak with Cormark.

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Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [45]

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Most of my questions have already been asked, so just one quick one from me. Just kind of wondering, given the HSR reviews and just kind of the impact that it has on the time to close the transaction, does this change your approach at all to M&A? More so, will you kind of now maybe look at doing more smaller deals as opposed to some larger, chunkier things? Or is this just part of doing business?

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Steven D. Gutterman, Harvest Health & Recreation Inc. - President [46]

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The answer is -- the answer, generally speaking, is no. I mean so we evaluate opportunities on 3 criteria: one, if it's a strategic fit; two, if it's a financial fit; and three, if it's a cultural fit. And we've talked about that on previous calls. And so if an opportunity is a good one, we're going to really look at it, HSR notwithstanding. Having said that, we're now moving to a place where we have already established beachheads in almost all of the states that we want to be in. And so now, for us, our acquisition strategy shifts a little bit towards how do we fill in the states that we're operating in and how do we add depth and how do we add brands in those states.

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Operator [47]

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(Operator Instructions) The next question is a follow-up from Robert Fagan with GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [48]

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I just want to confirm because you had mentioned your pending M&A includes mainly Falcon, Verano and CannaPharmacy. So I think that will imply that the Devine transaction has closed?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [49]

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No. Sorry, I -- Devine is included in our pro forma. It has not closed yet. It is -- we believe it is imminent.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [50]

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Okay. Great. And just a final one is, the pro forma numbers you guys are putting up in the quarter are quite impressive and are growing very substantially from Q1. Can you give just any kind of indication of the drivers there? I mean obviously, Harvest standalone is doing great. But where amongst your pending M&A are you seeing the most traction?

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Leo E. Jaschke, Harvest Health & Recreation Inc. - CFO [51]

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Yes. We are not going to disclose by each of the M&A targets. However, we are seeing growth across every single one of the -- of our pro forma revenue contributors.

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Operator [52]

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As there are no further questions, this concludes the question-and-answer session. The conference is now also concluded. Thank you for attending today's presentation. You may now disconnect.