Ayr Wellness Inc.

Hey everyone, as you can see the recent trends we've highlighted in our press release, our business is stronger than ever reflected by significant month over month improvements across our markets since the lows of the pandemic in April. Although we're detailing our operating results for Q2 today which were in line with our July 6th pre-announcement, we are also updating you on how well the business has been doing so far in Q3 simply continued exceptional performance.

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

Our ability to deliver these kinds of results especially amid a challenging operating environment speaks to the financial and operational foundations we have built. M&A which is what I'm most excited to talk about builds on that foundation.

Today we are announcing the expansion of our footprint to include the extremely attractive Pennsylvania market as well as two additional markets that we will detail later this quarter. We will get to the specifics on the expansion of our footprint shortly but first I'll pass the call over to our CFO, Brad Asher to walk you through our financial results.

Thanks Jon and good morning everyone. Our business coming out of Q2 is battle tested and stronger than ever before.

The response to COVID by our team, partners, and community allowed us to ramp our revenue from 50% below pre-COVID level to 10% above pre-COVID levels all within the same quarter for the month of April and June respectively. Our ability to adjust our business plan was a key driver including revenue of $28.3 million for the quarter which represents a decrease of 15% from the prior quarter due to COVID related closures.

Despite the sequential decrease in quarterly revenue, our adjusted EBITDA for the second quarter was $9.1 million which represents an 8% increase from Q1 and an EBITDA margin of over 32%. The increase in adjusted EBITDA was primarily driven by our increasing gross margins before fair value adjustments which improved dramatically to 60% compared to 50% in Q1.

This was driven by the successful cultivation expansions coming on line in the second quarter in both Nevada and Massachusetts resulting in more in house product being sold at our retail stores in Nevada. Our SG&A costs for Q2 of $9.4 million was consistent with prior quarter and both June and July were in line with the annual monthly average for SG&A costs indicating revenue will continue to grow faster than expenses in the second half of the year.

Moving to July we are excited to share our preliminary numbers of 15.1 million of revenue and 6.4 million of adjusted EBITDA. These are both monthly records and represents significant growth month over month.

And when compared to pre-COVID numbers adjusted EBITDA was up 127% over the Q1 monthly average. July EBITDA margins of 43% also represent an 1800 basis point increase from the Q1 average, clearly placing us among the top of the MSOs in terms of profitability with August every bit as productive as July.

Moving on our balance sheet continues to strengthen as we accumulate cash from operations, grow inventory from our expansions, and continue to pay down our debt, which is among the lowest levels in the industry with some of the most attractive terms. As of July 31st, we had 17 million of cash on the books with our Massachusetts and Nevada cultivation expansions completely paid off and a positive net working capital position on our balance sheet of $8 million.

We also continue to generate strong cash flow from operations during the quarter, which was up 16% quarter-over-quarter to 8.6 million. I'm incredibly proud of our team's performance and response to the adversity we faced during the quarter and believe we are well positioned to drive growth in the back half of the year and into 2021.

I'll now pass the call over to our COO, Jennifer Drake.

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

Across our business, we've benefited from the scalable systems and operational control framework that we've built over the last year and also from the completion of our recent cultivation expansions. Specifically, in Nevada, new product from our expanded cultivation facility arrived in stores in May, and that increased our internally sourced product from 25% in Q1 to over 40% in Q2, delivering the significant improvement in gross margin that Brad mentioned.

We also recently gained two additional dispensary licenses in Nevada from the disputed 2018 round of license grants, one of those dispensary is in Clark County and one in Henderson. This was the most attractive settlement agreement secured by any operator in the state at two licenses granted, one in Clark County and one in the city of Henderson.

The Clark County location is excellent and we plan to open that location later this year. Switching to Massachusetts, our wholesale business continues to ramp there.

Massachusetts has more recreational dispensaries coming online every month, and our newly expanded cultivation facility continues to produce excellent results with some of the most potent flower we've ever grown at 30% THC levels and those products are being extremely well received. Our monthly wholesale revenues have ramped to over 3.4 million as of July, that's a 30% increase over our wholesale revenues at the start of this year.

And in Massachusetts retail, our medical dispensaries are maintaining the revenue gains they made over Q2. We also launched two new brands over the quarter, Entourage [ph] Concentrates and Wicked Sour edibles.

We started these in Massachusetts and we've been really pleased with the response so far. The success of our business to this point including the large scale expansion projects that we've successfully completed demonstrates the strength of the systems and operational controls we've built over the last year.

And we'll continue in the same vein as we take this show on the road to new markets, on-roading new teams and new assets and beginning similar expansion projects to accelerate growth. We have been working diligently with strong institutional financing partners to ensure that our expansion is fully financed and the debt markets have been highly receptive to our strong credit profile.

Our teams on the ground have done incredible work to sustain our momentum, and we look forward to executing our growth initiatives on an even larger scale going forward. On a final operational note, we want to welcome Megan Kulick to our team as our Head of Investor Relations.

Many of you know Megan already as she's a seasoned Wall Street and cannabis industry veteran. We're excited to have Megan on board and I know she is excited to be in regular dialogue with Ayr investors.

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

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

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

As highlighted in our earnings press release, in Pennsylvania we've reached an agreement to acquire and develop six retail dispensaries in excellent locations as well as a significant cultivation and production footprint. The State of Pennsylvania has only 32 grower processor licenses and 198 dispensary permits, despite having a population of 13 million people.

For comparison, Nevada has permitted 130 dispensary licenses for a population of 3 million people. The cultivation and processing facility we are acquiring is a 143,000 square feet, with the initial Phase 1 construction of 45,000 square feet nearly completed.

The remaining 98,000 square feet of the facility is primed for further buildout. We plan to make full use of the additional capacity.

Beyond this, the 13-acre site provides ample room for further expansion, even beyond the existing 143,000 square foot facility. As for the retail dispensaries, four of the six are in development in prime locations, predominantly clustered in Pittsburgh and Philadelphia regions.

And we expect three to open by January of 2021. This geographic coverage provides us the opportunity to establish our market presence in the most highly populated regions of the state.

We have acquired these assets at very attractive levels of roughly 2.5 estimated forward adjusted EBITDA for a combination of 27 million in cash, 15 million stock, and 15 million in vendor notes. In addition to great physical assets, we are also bringing on exceptional teams with diverse backgrounds to add to our deep talent pool at both the ground and corporate levels, as well as a strong research program affiliated with the local academic institution.

As we have this excellent team and assets to our thriving platform, I'd like to remind everyone of the criteria we have consistently applied to our M&A initiatives. We are targeting best in class assets in the most attractive and relevant markets with large addressable populations.

Limited license states that are either currently or soon expected to be approved for adult use and strong operating talent that is motivated to help build one of the largest, most profitable MSOs in the country. All of this criteria applies to our Pennsylvania acquisition, as well as the target acquisition in two additional markets we plan to announce soon.

We've always thought ahead to where our capital will have the highest return, which is an approach that has enabled us to capitalize on attractive market opportunities and maintain our strong adjusted EBITDA profile. Even in the face of challenging environment, this high level of discipline will continue to characterize the next phase of our expansion strategy as we increase our total footprint to five states later this quarter.

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

In 2018 and 2019 cannabis businesses could go public. Six or nine months ago, all sorts of cannabis companies were raising debt, but today money is only available for the top businesses in this sector, the best operators, the people who'll be around, and winners in Cannabis 2.0.

We are decidedly one of those winners and this has allowed us to expand our footprint with excellent returns to our shareholders. As a closing thought, I want to leave you with a few data points that reinforce just how far we've come since we've formed Ayr in May of 2019.

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

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

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

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

Operator we will now open up for questions.

Hey, good morning. Congratulations on the strong results and strong July.

I'm just curious, as you look at closing on the Pennsylvania assets and another two markets behind that in Q3, let's have a cash balance or cash surplus which you guys like on the balance sheet once you are done financing this?

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

No, thanks Jon. Bobby, we are -- so as we embark on the next phase of our expansion, clearly we have thought long and hard about doing it at the right price and at the right time as Jon mentioned.

And clearly, we are looking at the right financing options. I mean as we mentioned, I think we feel very -- extremely confident about the reception we've had on the debt markets so far.

In terms of cash balances that we run on the books, I don't think we've ever explicitly said how -- what our cash balance needs to look like. But I think what you'll find as we announce these transactions through Q3 when it will be clear they're not closing in Q3, we will be announcing the other two markets throughout Q3.

What you'll find is giving our -- given our financing plans, we'll have a cash surplus for some time throughout the rest of this year and into next as we engage in these further expansions, our financing activities, and then some CAPEX activities around Pennsylvania.

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

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

But from an operational standpoint, the economies of scale continue to fall to the bottom line. And we don't see this sea change in gross margin in particular as a temporary thing.

We see this as more persistent and certainly in Massachusetts, we're just getting started in terms of pushing our gross margins up and those should expand further as rec comes in. Brad, do you want to just make any comments there.

Yeah, I mean, I'll add there Jen, I think July is a good indicator for the run rate on the EBITDA margins. As our internal sourcing is going down because the revenue is improving, we're also recognizing operating leverage to kind of counteract that.

So I think July is a good indicator and definitely some upside from there as well.

Great and then just one last quick one. Looking at Massachusetts, it seems like there's a nice supply demand imbalance favoring your wholesale operation and it sounds like your medical retail footprint continues to perform very well.

What do you think in terms of licensing in the State going forward, is there a backlog, it's more acute for cultivation or for retail where you expect maybe supply demand imbalance to favor wholesale to continue for a while or just what's your visibility in terms of how licensing goes from here in the State?

From a licensing standpoint, Bobby what we've seen is since the CCC, the Cannabis Control Commission has opened up post-COVID. We've seen them increase the pace of approving new licenses.

We're seeing some of the municipalities moving faster to start their local approval processes, so we're seeing people move. Maybe that has to do with tax revenue, it's hard to know.

But we are seeing movement on the dispensary side and so our expectation is that we might even have more demand over the next couple of quarters relative to what we saw for the first half of the year in terms of the supply demand imbalance.

Bobby, I would say in terms of supply and demand, well the CCC is moving as fast as they've ever moved. Capital still remains constrained for the ability to build out large scale cultivation.

So we see this supply and demand imbalance lasting for quite a while.

Excellent, thank you.

Hi, guys and congrats on the post quarter momentum and on the M&A agreements. I just wanted to ask here first on the first M&A agreement announced, it's a little bit different of approach than some of the assets you've acquired previously.

These assets are still in the build-up phase of their development rather than the improving proven operating businesses. So I just want to get your thoughts on how much CAPEX remains for that Pennsylvania -- for the Pennsylvania operations?

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

Jon, do you want to take -- no, I'm happy to do it. This is the problem of being COVID and working remotely.

So apologies guys. In terms of the -- in terms of CAPEX and in terms of our approach to this Pennsylvania business, first of all, taking a step back, we are incredibly pleased to be able to have such a sizable, such a sizable presence immediately in the State of Pennsylvania with this size cultivation, with six dispensary footprint in one go.

We are extremely excited. It more than -- it almost doubles our dispensary count and almost -- and more than doubles our addressable population, just adding this state.

So we are extremely, extremely pleased with the transaction. We -- the transaction is -- the facility is almost complete for its first phase, which is very different than the situation we had, for instance, in Massachusetts where we were building the Phase 2 from scratch.

So we're putting the final touches on Phase 1 here and then in 2021, expect to be able to bear fruits from Phase 1 cultivation. And as Jon mentioned on the call, we expect three of those six dispensaries to be open at the beginning of 2021.

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

Hey, good morning. Congrats on the joint numbers and the announcement in Pennsylvania.

Just wanted to ask a few questions on Pennsylvania in particular, I guess, do you envision expanding into the wholesale market as well and I'd say we understand that market is still supply constrained, is wholesale on the radar, and this will be -- assuming so it will be done pre-market in your expected capacity?

Thanks Russ, yes. We with the size of just Phase 1 of this facility, which is about 45,000 square feet, we have ability to sell into our retail stores as well as address the wholesale market.

So we absolutely are thinking about both markets and developing relationships. The company that we're acquiring obviously has been thinking about that up to this point.

So they have established relationships and like every time we make an acquisition, we're looking for a great asset and a great team. And part of the great team is the IP that comes in terms of their customer relationships.

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

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

Great, and if I could just swab in one more, coming back to Nevada, apologize if I missed it, but can you I guess provide us with an update as to the current retail revenue breakdown and how it splits out between curbside delivering and so we are given the gyrations we've seen since late March?

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

Yeah, no happy to, and things have pretty much settled out at roughly 50:50 split between curbside and store. And as you mentioned on the earnings release, the average ticket is now around $70 so we have seen that trend pretty consistent over the last few months.

Excellent. That's great color.

Thank you very much.

Good morning and thanks for the time for the call. Real quick, just to follow up on Nevada, kind of focus now, you're back to kind of around 4,400 transactions a day in that market and that's kind of without tourism.

You can expect, what to grow the internal sourcing to about 50% of your product, basically kind of what’s the target and can we expect just kind of just to stabilize at these levels right now without tourism or kind of expectation of Nevada moving forward and from a gross margin standpoint too?

Sure, so we've always had more of a local business in Nevada, even when locals weren't as cool before COVID. But we've always had more of a local focus than a tourism focus and that's continued for us and we're very pleased that our locals have been very loyal.

And it also speaks to the strength of our dispensary operations in Nevada that we've been able to maintain, share even as a lot more people are coming to maintain or actually grow share, even as a lot more people are coming after the same customers that we have. So we in terms of our expectations going forward, we will continue to focus on the local markets in particular with this new dispensary that we're opening in Clark County.

Again, we do expect that to be more of a local store. And that location is a really, really great location.

It's in unincorporated Clark County, but it's quite close to the western side of Henderson. Our Henderson store is on the Eastern side of Henderson, so very far away from the new location.

So we don't expect much in the way of anything in the way of business shifts there. But it's a great location because Henderson has a moratorium.

So we are essentially just over the town line on the Western side of town in unincorporated Clark County. So we're very excited about the prospects for that new store.

And we expect that new store to drive lots of increase in transaction count per day. So those numbers that you've seen are going to be, we'll have a whole new store in a great area to add to those numbers starting hopefully in Q1 of 2021.

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

The main constraint to getting that to 50% is our flower production capacity. So that is the one thing that may keep us from getting to 50%.

We will work diligently on our kind of downstream infused products, edibles, chocolates, concentrates, etc., oils to increase our internal sourcing. But in terms of flower, that's the -- the main thing we're looking to do is increase our yields so we can increase the internal sourcing of our flower.

And there are obviously…

Jen, I would say this, the constraint for us to get more of our product as a percentage of our sales in our store so far has been the enormous sales growth. And what we're actually seeing in the Nevada market is continued to stress.

And so we're seeing a deal that we are down the path of a situation where we can just step in and pay rent and increase our capacity for very, very minor CAPEX. And so I would think that the margins will increase and I think the percentage of our own product as we develop more product and expand the cultivation should increase.

Good morning Jon, Jen, and Brad, thanks for taking my questions and congrats on the strong results in July and upcoming market launches too. Really nice to hear about the expansion in Pennsylvania.

Sounds like the three dispensaries will begin contributing January of next year. When should we expect the remaining three to open?

Well, one of those three is in development also currently. So that's going to open a couple of months later than the first two and we'll have, I think, sorry, the first three rather.

And we'll have a further update on the remaining two dispensaries probably as we get closer to closing the transaction.

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

Well, on maintenance capex is pretty minimal. We generally -- I think we conservatively budget between 1 million and 2 million a year, we generally come in closer to the bottom of that range.

Our major expansion projects in Massachusetts and Nevada are complete with the exception of, as Jon alluded to should we do something regarding expanding our cultivation capacity in Nevada, which we're making strategic decisions on, and we'll let people know when we've made a strategic decision on that. So I would say in Massachusetts and Nevada, you're talking about a couple of million of CAPEX requirement, nothing material.

And with the one exception being we may spend a few million, let's call it 4 plus or minus on building out rec stores in Massachusetts, either Q4 or Q1, depending on when we get local municipal approvals to open in those areas. So nothing material in terms of CAPEX.

We're talking $5 million to $6 million total across everything I just spoke about in Massachusetts and Nevada. And then with respect to Pennsylvania, we're looking at, I'd say spending between 15 and 20 over the next two to three quarters.

Got it, very helpful. Last one for me, if I could just follow up on the previous question, really nice to see the cultivation expansion boost internally sourced products this quarter.

How should we think about maybe your targets for the optimal level of internally sourced in stores and then maybe what gross margins might look like once that level is reached?

Well, I think the optimal level -- look, there's the optimal level for us and then there's the optimal level for the consumer and ultimately the consumer will determine what the optimal level is of in-store product. We've had real success in Nevada at 40% plus over Q2 during COVID.

As Jon mentioned, we as our sales have grown, we haven't been able to sustain the high 40s because we haven't -- because we need to make more product. But ultimately it will be about consumer choice.

And we constantly evaluate whether we have the right products in the stores to keep the customers coming in because our dispensaries are the most productive in Nevada and we want to keep them that way. We want to keep people coming in the door having a high volume, high turnover approach to our retail.

And that means you have to have what people want. So we're constantly assessing that.

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

Great, thanks, guys.

One thing I -- just coming back to your prior question, and I should have mentioned this when we were talking about kind of CAPEX, I also want to just highlight the cash flow generation of the standalone business. So, we're generating an actual free cash flow after tax provisions, etcetera, etcetera.

So real cash added to the balance sheet, over $3 million a month just right now. So I think it's really important for people to understand that cash generative power of our standalone business in the context of CAPEX spend that we may be planning going forward.

Well, thanks for taking my questions, most of them have been asked and answered, but just maybe if you can give some color on the Pennsylvania acquisition. By the way, great acquisition and a great state, looks like it could go out use here in a reasonably short period of time.

But my question is, it sounds like the motivation for a lot of these acquisitions is due to private businesses that are capital starved, was that the situation in Pennsylvania? And secondly, do you have an expectation in terms of a closing date for that that deal?

So let me answer this question, the question earlier was asked, what is your strategy? Is this a new strategy in terms of the acquisitions?

Ayr as Jen said, generates 3 million of free cash flow a month. So when we identify a state we want to be in and because of the capital constraint and the narrowing availability of funding, if we see an asset that we think is an enormous generator of EBITDA forward and with a modest amount of our cash flow, we can turn that and finish it from something that's near completion to completion in relatively a short period of time.

We're going to do those acquisitions. And so this is one of those situations and the other two that we have referenced are exactly the same with a modest amount of CAPEX, we complete an asset that hasn't been able to be completed because of the current capital environment and turn it into a EBITDA cash flow generator.

And we're going to do that kind of transaction because that's the environment where the funnel is continuing to get narrower and narrower for capital availability as cannabis as I mentioned earlier 2.0, the investment community is being more selective of where they want to place their capital. And those transactions, while we talked about the three on the call, exist in the states that we've always identified, we've always talked about the 80-20 rule that we never wanted to be in every state in the U.S.

We were going to take a very focused approach on the states that we think would afford us 80% of the total cannabis wallet. And we're just staying in our discipline.

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

No, that's great, very great approach. Any time you're on the closing that you would expect on this deal?

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

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

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

Yeah, well we always talked a lot about what Ayr does extremely well is share IP and whether it's the technology, the curbside, the in-store experience, but also the product sets. Products that have been developed in Massachusetts are now in Nevada.

Nevada products are now being sold in Massachusetts. So we'll be able to enter the Pennsylvania market with a full suite of products.

And what we've said before and what we've observed in medical markets, there are very few brands. But when they convert from medical to recreational, the consumer is looking for a broader array of a branded product.

So what our plan has always been is in the medical market and we don't necessarily think Pennsylvania is going to stay medical for very long, we start off immediately with branded product, develop those relationships with the consumer because we offer them the biggest variety of choice, and then develop that loyalty and build our business.

That's helpful, thank you. And just on the potential debt financing, I wonder what kind of terms you are seeing on debt these days is in line with some of the previous debt financing pieces that have been announced by some of the peers?

And I just want to clarify whether that debt piece would be straight or whether it would have the conversion feature?

Thanks, Andrew. We'll have more information out when we're in a position to do so.

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

Looking forward to it. Congrats again.

Thank you.

Thank you. Good morning.

I want to ask you a modeling question first and then I'll follow up on Pennsylvania. Can you talk about August, I mean, obviously, July was up almost 18% versus June.

We are at the end of August, do you have some caller in terms of what's happening there, especially are the medical retail sales in Massachusetts holding up? And as part of that question, also just remind us, you had a capacity increase in wholesale in Nevada and Massachusetts, which I assume did not come through in full into Q3, have that benefit in 3Q, just if you can expand on that first please?

Thanks.

So I think Brad mentioned in the call that July was excellent and that we haven't missed a beat in August, and I think that that doesn't mean that --

Does it mean that August was the same as July or does it mean that August will show growth over July?

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

Okay, and I had a wholesale question.

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

Yeah, I remember in the past you said that your wholesale capacity in Massachusetts was equivalent to $2.5 million in sales and that it would go to 5 million, so 15 per quarter. I'm just trying to understand -- the run rate already in the third quarter, if we're modelling and you're able to sell everything you can produce pretty much with your wholesale capacity with 15 million versus 7.5 million in the second in Massachusetts and the same thing [Multiple Speakers]?

Thanks.

Got you. I'll turn it over to Brad in one second for this.

But high level, we can produce a certain amount of pounds out of our facilities and those need to go to either retail or wholesale. I think originally our expectation was that our retail stores would be about half as productive as they have turned out to be.

I think everyone who has been following us knows that our medical retail stores are now nearly twice the revenue that they were at the beginning of the year, so they're taking more product than we expected. And that product cannot then go into the wholesale channel.

So the wholesale capacity is perhaps a little bit less than it was prior but the pounds that we're turning out are absolutely the same amount of pounds that we expected. It's just some of them are going to retail.

And we do expect further ramping of wholesale relative to the numbers we quoted you from July, because we've seen a testing delay in Massachusetts. So we are not able to get everything we make, for instance, in a month out to the market in that month because there's a delay.

It used to be -- it took two or three weeks for testing, now it's taking four or five plus weeks. So there's -- then this happens in Massachusetts from time to time.

We expect that to compress based on what the labs have told us about getting some new equipment, etcetera. But we -- that's 3 point boorish number that I mentioned is light because of the testing also.

Brad, what would you add to that?

Yeah, I would just highlight again that our retail doubled in Massachusetts and that was not baked into that forecast. And what you saw in July already has an upside in that lift in our wholesale business.

So at least 25% lift over Q1 that we saw in July. We do think that there's additional room there, but we are already realizing that upside in the month of July.

And Pablo, I'm sure you understand as the stores do better and they consume more of our capacity, we go from selling our products at -- from 4000 a pound to 7000 a pound, so it's a good fact that our stores are consuming more of our flower.

No, of course, the only question is whether in states like Massachusetts, obviously the medical stores benefited from the rec market being closed, right. As the rec markets begins to reopen, do medical retail sales suffer.

I mean, I don't know if you can comment on that in general or you're not seeing that? [Multiple Speakers]

Well, it happened -- the lifting is happening more than a month ago and we talked about July. So I think the consumers, they've changed their behavior to a certain degree and they have said and the way we merchandise our stores or medical stores now look like recreational stores.

We have our product, which used to be 100% of what was available to the consumer and third party product. And so what the consumers figured out, I could go into an adult use store without a medical card or I could go in with a medical card and buy product 25% less expensive.

And it looks very much like the same product I could find in the adult use stores. So that learned behavior in the way we merchandise our stores to give them a near identical experience has really added to the lift we've seen in the revenue numbers.

Understood. And if I can just ask on Pennsylvania.

I mean, obviously, congratulations and very interesting state, the vision would be you said forward estimate of 2.5 times EBITDA, right. That means, whatever is at 23 million EBITDA your estimated 25% margin, $90 million in sales.

You know, as per my math [indiscernible] Pennsylvania are probably doing right now 110 to 120. So your estimate sounds quite ambitious, which probably makes sense if those assets are that good.

Right. But just based on the numbers you gave us while you are acquiring a licensed operator that's not running yet would be a decisive [indiscernible] Pennsylvania, which would put you from the start at a leadership position.

Am I missing something on those numbers or am I being too bullish on my math?

Well, I think that you assume that being the market leader today means you are supplying 100% of the demand. And that's just not true.

There's a shortage in the marketplace. And if the Governor actually does what he announced the other day and the state goes recreational, there'll be a massive shortage and so there is plenty of room for new entrants into this marketplace.

And what we talked about is the kind of acquisitions we look to do, which are ones that are near completion that take a modest amount of capital to get them to completion so that they're in the market relatively quickly, rather quickly. So again it really doesn't matter who the leader is in this particular time in the medical market and for sure if the Governor executes and it seems like the momentum is there, there will be a massive shortage in this market and that's why we've been so focused on it.