MedMen Enterprises Inc.

Thank you. Good afternoon and welcome everyone.

Today I'm joined by MedMen’s Co-Founder and CEO, Adam Bierman; and CFO, Zeeshan Hyder. On today's call, management will provide prepared remarks and then we will open the call to your questions.

Earlier today, we issued a press release announcing first quarter fiscal 2020 results ended on September 28, 2019. The press release, along with our financial statements and MD&A, are available on the company's website and filed on 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.

Forward-looking statements relate to among other things, the business and operations of MedMen, our plans for new stores and factories, our financial and operational expectations, our expectations as to future sources of funding, the terms, conditions, structuring and timing for completion of acquisitions, and the prospects of MedMen upon completion of the acquisition. 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.

Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in MedMen’s Annual Information Form dated November 8, 2019, the Management Discussion and Analysis for the period ended September 28, 2019 and the earnings press release issued earlier today, all of which are available under the company's profile on SEDAR. During today's conference call MedMen will refer to certain non-IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA and adjusted EBITDA, which are defined in the earnings press release we issued earlier today.

Reconciliations to IFRS measures are contained in the press release and our MD&A. Please note, all financial information is provided in U.S.

dollars unless otherwise indicated. Now with that, I'd like to turn the call over to Adam.

Good afternoon and thanks for joining us today. On November 15th, we announced our five-part strategy to reduce our costs and accelerate our path towards profitability.

Through a rightsizing of our organization and a newly intensified focus on generating positive cash flow, we have entered fiscal 2020 on a laser-focused mission toward building a leaner and more flexible company that can continue to develop its exemplary leadership position as the most recognizable cannabis brand and retailer in the U.S. Through the execution of these goals, we expect to be EBITDA positive by the end of calendar year 2020.

Our recent decisions to streamline our business and cut costs were necessary. And now we are taking an even deeper look at our operations as we evaluate our priorities.

In making changes, we said goodbye to many of our hardworking mission-based employees who have been strong contributors to MedMen’s growth over the years. We thank each and every one of them for their dedication and support.

Now we must turn our attention to building a stronger, more financially efficient organization, which better serves our stakeholders in the coming year and beyond. At the same time, as we are cost cutting, we must find ways to promote our growth.

And therefore, we will continue to invest in those areas that matter most to our company. These include operationalizing our highest ROI licenses, optimizing our retail vendor agreements, investing in our employees and culture, and scaling our delivery and loyalty platforms.

We must unlock our operating leverage, and these areas of continued investment will enable us to do so. Moving forward, our focus will be on our core markets, particularly California, the most important cannabis market in the world.

In the first quarter of 2020, retail revenues across our 13 California retail locations totaled $30 million up 51% year-over-year and 9% sequentially. During the quarter we closed the acquisition of a flagship retail location at Long Beach and launched our delivery program in the state.

With over 400 products now delivered in California, MedMen Delivery is the most robust delivery program of its kind. In Nevada, we also brought delivery service to our customers in Q1, launching same day delivery in September.

Residents of Southern Nevada can now access roughly 300 products as well as enjoy MedMen’s unparalleled retail experience from the convenience of their residences. In Florida, we are currently licensed for 35 retail locations.

We opened three stores in first quarter of 2020 including St. Petersburg, Key West and Pensacola, and another four stores post quarter end in Jacksonville, Orlando, Tallahassee and Sarasota.

This brings our total Florida store count to eight this calendar year, and we are on track to open our South Beach location in the coming weeks. The only limiting factor in Florida today has been our own supply of product, and as we expand our Eustis factory, we anticipate an uptick in our ability to service the Florida market.

Further, we have high expectations for our medical stores once Florida transitions to a recreational state. In Illinois, we also eagerly await the transition to recreational sales, which is slated to begin on January 1, 2020.

Illinois is projected to be a $2 billion recreational cannabis market at maturity. And with our premier Chicago location in Oak Park, this legislation bodes well for MedMen in Illinois.

The transfer of the Evanston store which we received through the PharmaCann merger termination is anticipated to close by mid December. Beyond investing in our core retail markets, we will continue to develop our first of a kind delivery platform.

Once delivery is fully ramped in all of our core geographies we will be able to serve over 50% of our total addressable market across the U.S. Although we are still gathering preliminary analytics on our nascent program, we are proud to report that we have already surpassed $6 million in annualized delivery sales within three months of launching, and are seeing average basket sizes from delivery customers greater than the average basket size we report from in-store sales.

We are also generating strong gross margins on each purchase by strategically deploying our drivers to make multiple deliveries in nearby locations for each scheduled trip. We will keep you updated as our delivery platform progresses, including the launch of delivery in Florida this December.

Over the past several years, we've made strategic investments into our foundational technology to be able to quickly deliver new and improved retail shopping experiences to our customers. Our efforts focused on providing a fully immersive shopping experience spanning all possible ways of reaching our target customer base.

This includes our delivery platform, as well as our recently launched loyalty program MedMen Buds. Launched this past July, MedMen Buds has over 170,000 individual participants and continues to grow daily, with memberships in California comprising a majority of the total loyalty network.

Through our loyalty program, we are building one of our industry's most robust data repositories, cultivating a tremendous breadth of information on how, when and why consumers are purchasing cannabis in both medical and recreational markets so we can customize the shopping experience, stock our retail stores with preferred products, and ensure we are partnering with the right brands to best serve our customer base. Whether our customers are purchasing our products through one of our trained sales associate in-store, buying ahead of time online for in-store pickup, or adding to their mobile baskets for delivery, we keep track of exactly what types of products they purchase, their average basket size and various other demographics, from gender to age and geographic location.

Through the collection of millions of these points of sale data points each and every day, we improve our brand awareness, increase our customer stickiness, elevate our shopping experience, and ultimately, improve our four-wall economics. We are headed in the right direction executing against the plan day-after-day.

We appreciate your support as we position MedMen toward long-term growth. With that, I'll turn the call over to Zeeshan, our CFO, to review our first quarter performance and our five-part plan to be EBITDA positive in further detail.

Thank you, Adam. Over the past month since assuming the role of CFO I have spent a significant amount of time on our long-term strategy and how to best position MedMen for profitability, while also maintaining growth.

The first phase of this process which incorporates all of our senior level team’s input is our recently announced plan to be EBITDA positive by the end of calendar year 2020. To that end, we have set five specific goals for the company, which include: One, focusing on our core markets, while simultaneously divesting any non-core assets.

Two, reducing our corporate SG&A. Three, driving asset level EBITDA at both our retail stores and factories.

Four, limiting our cash outlays over the next 12 months. And five, reinvesting in both our employees and our culture.

I'll refer back to these goals during the remainder of my prepared remarks. Before going further, I want to pause here and provide a few quick notes.

Consistent with prior quarters, all the figures on today's call are in U.S. dollar.

In addition, I'll refer to our top-line performance in terms of system-wide revenue, as we believe that is the best representation of our economic progress. You can find further information on these financial measures in our MD&A for the first quarter.

With that, let's get into our results for the first quarter. System-wide revenue for Q1 '20 was $44 million, up 105% from $21.5 million in the same period last year, and up 5% sequentially.

Gross profit before biological asset adjustment was $21.8 million or a margin of 50% compared to $11.7 million or a margin of 54% in the prior year period. Operating expenses for the quarter totaled $66.1 million, a decrease from $73 million in the prior year period.

First quarter 2020 net loss attributable to shareholders of MedMen Enterprises was $31.5 million or $0.16 per basic and diluted share. Overall adjusted EBITDA loss for the quarter was $22.2 million compared to $39.4 million in the previous quarter.

Please note that in the fiscal first quarter of 2020, the company applied IFRS 16 leases effectively requiring the company to capitalize a majority of its property leases, which were previously treated as operating leases. Under the old methodology this would have resulted in an additional approximate $7 million adjusted EBITDA loss in the fiscal first quarter.

Let's now take a deeper look at the details around adjusted EBITDA and to build up from our four operating units, which include retail operations, manufacturing, corporate SG&A, and preopening expenses. Starting with our retail highlights for the quarter, retail revenue for Q1 '20 totaled $41.5 million up 94% year-over-year and up 6% sequentially.

In California alone which represents approximately 75% of our retail revenue, we were up 9% sequentially. This increase in revenue was driven by growth in our same-store sales and new stores coming online during Q1.

While we don't report same-store sales growth across our retail footprint, we would like to highlight the year-over-year increases for a few of our flagship locations. Our Beverly Hills location was up 82% year-over-year, our Downtown Los Angeles location was up 69% year-over-year, our LAX location was up 65% year-over-year, and our Abbot Kinney store was up [64%] year-over-year.

Going forward, we believe the expansion of our retail revenue will be driven by the growth of each of our current stores, as well as the opening of new flagship locations in our core geographic markets. In line with our first goal of focusing on our core business, when it comes to new store openings and current store expansions, we will emphasize operationalizing our highest ROI licenses.

These include locations that have a potential to generate $10 million or more in sales within their first year of operation. We have 37 non-operational licenses at present, several of which are in recreational markets and have the potential to generate significant revenue going forward once they're opened.

Having a higher threshold for new store openings and store expansion will likely result in a scaling back our target of 30 stores in California by the end of calendar 2020 and delaying certain expansions. The prominent stores we still expect to open are Pasadena, Long Beach, Emeryville, Grover Beach and two in San Francisco.

Outside of California, we plan to open our pilot location in Las Vegas, albeit at a much lower cost; three additional stores in Illinois, including Evanston to bring us to four locations in the state; and two stores in Massachusetts, Fenway and Newton which are pending state approval. In total, that is 12 new recreational stores, which we believe have the potential to generate at least $15 million on average on a steady-state run rate annualized revenue, which represents in total $180 million in additional revenue.

We will also continue expanding certain lower performing stores, such as our LAX location application, which is currently on an annualized run rate of over $16 million, despite having a sales floor that is less than 1,000 square feet at present, and our Oak Park location in Illinois, which is prime for recreational given location alongside a high traffic Trader Joe's store. As part of this strategy, we will not be opening additional Florida stores beyond nine for the foreseeable future given the limitations on supply.

We will reassess our strategy each quarter. In total, we expect to be on a $300 million plus retail annualized run rate by the end of calendar 2020 with our revised retail expansion strategy, assuming no regulatory or licensing delays.

We will also divest non-core assets, which aren't critical to our strategy today. This includes the sale of our interest in Treehouse.

To-date we received approximately $13 million in total proceeds. We're also in the process of selling off non-core licenses in states that are not a priority to us today to free up additional cash for working capital and growth within our brand building markets.

We've already received substantial interest in these non-core assets and expect to provide updates on these sales on a rolling basis. In line with our core objectives, limiting our cash outflows, as we invest in our core assets and divest our non-core assets, we will also delay any major capital intensive projects.

As mentioned earlier, this means indefinitely postponing the build out or expansion of retail stores not core to our business, with the additional Florida locations which were originally expected to open in early 2020 and the expansion of our Arizona stores. We anticipate this delay in capital intensive projects will save MedMen approximately $55 million in CapEx.

In addition to further manage cash outflows, we will slow down our M&A, focusing only on highly accretive bolt-on deals in our core markets of California and Nevada. Turning to our retail margins, retail gross margins for the first quarter of 2020 were 52% versus 50% for the fourth quarter 2019.

In California, specifically, our retail gross margins were 53% for the quarter. As I noted on last quarter's call increasing retail gross margins remains a focus from MedMen.

We recently signed vendor agreements with a number of our top suppliers in California, which include terms that the brands must generate a minimum of 60% gross margin to remain on store shelves. We anticipate signing agreements like this with at least eight brands in total comprising approximately 30% of our retail sales.

We will also look to rationalize other retail costs such as payroll expenses to further reduce retail level operating expenses to drive margin and EBITDA. At the end of last week, we reduced our retail headcount by over 175 employees across California and Nevada and Florida and we look to make further reductions.

With the heavy taxes on cannabis retail particularly in California, we're looking at deeper savings within our stores to improve the cash flow profile of our retail business. Speaking specifically about EBITDA, overall retail EBITDA prior local taxes was $4 million for the first quarter, representing 9% four-wall EBITDA margin.

In California our four-wall EBITDA margin, prior local taxes, was 17%. If you include both local taxes and distribution costs into our calculation of adjusted retail EBITDA, we recorded a margin of 4% compared to 7% in the previous quarter.

Objective three which was driving asset level EBITDA will be achieved through the aforementioned retail optimization, along with scaling our delivery platform. On the cultivation and manufacturing.

For the quarter, we reported cultivation and manufacturing revenue from operations of $2.5 million and an adjusted EBITDA loss of $1.4 million an improvement from $4 million in the previous quarter. These losses largely stemmed from our factories in Florida and California.

For the first time ever Mustang, Nevada produced positive EBITDA for the quarter. Our California and Nevada factories are both expected to be at full capacity in the first half of calendar 2020.

For our California factory, we expect all output to be used by our in-house brands for sales through our California retail footprint. Assuming 10,000 pounds of output, this would represent approximately 30% to 40% of our retail sales, with a potential for additional penetration through further utilization of the manufacturing and extraction space.

During this ramp up period, we will continue to grow our private label business to drive our retail margins and EBITDA. We're already seeing progress in this regard, as over the past eight weeks, [statemade] was the highest-selling pre-roll brand across all MedMen stores across Nevada as well as select stores in California.

Next, I'd like to discuss reducing our corporate SG&A, our third reporting unit. As of December 2018 quarter, the company's SG&A was $154 million on an annualized run rate basis.

For the first quarter 2020, our corporate SG&A loss was $30.6 million which represents $122 million on an annualized run rate basis, and a 21% decrease from the all time high in December. This does not reflect our recently instituted corporate SG&A reduction plan, which includes bringing our corporate SG&A to $85 million on an annualized basis by the end of our fiscal third quarter 2020.

This figure will be achieved by a number of near-term initiatives including: One, a reduction in force which we initiated just over a week ago. This should save us approximately $10 million per year.

Two, scaling back our technology and marketing spend, which will lead to roughly $20 million in annualized savings. Three, renegotiating ancillary costs such as healthcare, D&O and property insurance, which would say at least $2 million per year.

Fourth, consolidating our corporate offices. Fifth, flattening the organization to foster greater efficiency.

And last but not least, realigning performance incentives heavily weighting company bonuses to EBITDA level targets. We plan to continue revaluating our corporate SG&A needs and we will be only undergoing phase two of these efforts in the coming weeks.

Our fourth and final reporting unit is preopening expenses. For the first quarter, we incurred $5.5 million in preopening expenses, which include rent expenses for retail stores and factories, not yet operational.

As more stores open and we're producing at all of our factories, we expect preopening expenses will significantly decline. The majority of our preopening losses to-date relate to our Desert Hot Springs facility in California, and the leases we’ve secured across Florida.

We will also look at actually sublease locations where there is no plan to open a store in the next six months. The reduction in preopening expenses in fiscal 2020 will support our reduction in cash outlay.

Let's now turn to our balance sheet metrics for the quarter. We ended the first quarter 2020 with $42.2 million of cash and cash equivalents.

We understand the challenges in the capital market for all cannabis operators, including ourselves, but believe that our current cash balance in combination with the additional $10 million in capital we are obligated to receive under our Gotham Green convertible note and other pending asset sales will provide us with runway as we enter calendar year 2020. In summary, by following these five key objectives over the coming year, we will emerge from fiscal 2020, a leaner, more financially and operationally efficient company.

We promise to update our shareholders as we continue to make progress against each of these initiatives. Thank you again for your time today and for your continued support.

We wish everyone a very Happy Thanksgiving and safe holiday season. We will now open up the call to your questions.

Operator?

I just wanted to start out with a housekeeping matter. With respect to the 300 million retail run rate at the end of 2020, is that on a fiscal or a calendar year basis?

Hey, Graeme, yes, that's on a calendar year basis.

And then I wanted to ask a question with respect to the growth seen in California. I know you had 9% sequential growth this quarter on the California level assets.

But it looks like what was previously double-digit sequential growth on a quarterly basis in California has now come down to high-single-digits. And I know you outlined significant expansion at retail in terms of that market.

But I was just wondering in terms of driving organic growth across the assets in California, I was wondering what sort of factors are going to be key in terms of keeping that ramp up going? And then what are the main risk factors with respect to operating in a competitive market like that?

Thanks.

Good question. So I'd say, there's a couple things there.

One, in terms of the 9%, we only had one store in California opened during the quarter. I think, historically, you've seen some more store openings to get to that kind of sequential double-digit increase.

In terms of the second part of your question about what factors we see driving those numbers up going forward? I think there's a few different things there.

One, I think with our loyalty program, you're seeing a lot more repeat visits from our customers. And we're seeing that in the data so far, not only repeat visits, but increased ADS is coming from our loyalty members.

And then the second part of that is delivery. As we've launched delivery, we’re past $6 million in annualized revenue.

A lot of our in-store customers are seeing value in having a omni-channel type option for the store. So all that revenue will then go flow down through the stores, and that's how we're also kind of factoring in growth going forward for our California location.

And then just one final follow up. Is there any -- see any effects of seasonality within the retail environment in California and could you mention in terms of the illicit market how that's been playing out over time and how that is affecting the business?

For the most part in our California locations, we've seen slight seasonality around certain holidays and things like 4/20 and Thanksgiving and holiday season. For the most part, cannabis retail, especially in recreational market behaves more like alcohol, where you also see similar types of bumps in sales.

But overall, you don't see the same type of seasonality that you would see in a non-alcohol or food related category. And the second part of that question around the illicit market, I think the illicit market in California is still pretty robust.

You have seen some shutting down of stores and delivery services, but for the most part they still are competing with the legal operators in the state. For us, we don't really see the full impact from the illicit market given the locations that we have today.

But over time, that is something to monitor.

Zeeshan if I can ask you a couple of funding related questions? So on your amended agreement with GGP, can you just revisit the language around access to the fourth tranche and just the word consent there by both parties.

Can you just explain that to us a little bit and maybe get us comfortable with your ability to access that funding going forward? So that's the first part of my question.

And can you talk to us a little bit about, I think the -- one of the amendments to that facility allows you to look at other financing opportunities. Can you just talk to us a little bit about what the marketplace looks like on that side as well?

Yes, on the GGP funding question around the two tranches, so the $10 million tranche that's obligated to come in based on the amendment, we will be receiving that tranche by November 29th. As it relates to the final tranche, as you referenced that’s at the option of both parties.

So depending on the company's stock price and other kind of performance metrics at that time is going to require mutual consent by both parties. So we will see it that day, whether it makes sense for both sides, and we'll have a plan after that.

So the second part of the question around the financing situation. So as you can imagine the capital markets have dried up for cannabis.

I think historically prior to the amendment there were restrictions on our ability to access certain debt and equity instruments. With the amendment, we now have the flexibility to kind of open up what we're able to do from a financing perspective, knowing that there are still challenges in the marketplace.

So maybe with that as a backdrop, maybe we can go into the potential for sale proceeds from any future divestitures. I mean can you at least give us a hurdle in a sense of what might be possible out there.

It was good to hear you guys say that there doesn't appear to be market demand for some of these licenses and then assets that are non-core. But I mean can you give us a hurdle.

I mean do you think that the company can do better than $20 million, $25 million in proceeds, would it be below that. Just any comment that you can give to us I think would be helpful as well?

On the first question, so as it relates to the average sales, we've already received close to $20 million in proceeds from the sale of our GP interest in Treehouse, as well as our sale of certain brand investments. Anything beyond that relates to actual licenses that we owned.

I mean as we noted in our last press release, we have engaged Canaccord to gauge interest in those licenses. Based on some of the initial feedback we received there are pockets of capital available to acquire some of these licenses.

A lot of these offers are not coming from the kind of existing MSOs. We also have kind of balance sheets that don't justify huge cash outlays but there are other pockets of capital, other private equity funds, stack and things like that.

They do have cash to go acquire these assets at these evaluations.

Okay, and then just one quick one and I'll jump in the queue. Did -- I suppose it wouldn't be you guys at this point, but did PharmaCann participate in that Chicago lottery?

And do you have a sense for what location they may have gone or that would be transferred over to you?

So through the PharmaCann termination we received our Evanston Store, which comes with an additional location in Greater Chicago. So we'll have updates on the exact address as we go at that store.

Just wondering if you guys can expand a little bit more, provide a little more detail on what you define as non-core. I know you had mentioned, obviously you're looking at prime real estate locations in various markets, which is what you've always been telegraphing since day one.

But can you give any more color on what markets those might be? And then specifically with New York, because obviously you have one of the better locations in Manhattan, but that's a market that doesn't necessarily line up in my view with the direction of the company considering that, that market -- there's some unknowns with respect to how far or how long it's going to take for it to ramp up or potentially get recreational contribution.

So anything outside of California and Nevada that you consider to be that, that non-core nugget of your business?

Good question. The way we view core versus non-core relates to if we're going to get revenue or EBITDA contribution in a significant way from those assets in the next two years.

So I can’t kind of lay out each license and tell you if it’s core or non-core, that's how we're thinking about it. So, based on that and kind of guess what we're opened to potentially divesting today to bringing cash on the balance sheet.

Okay, thanks. And then just on your gross margin.

So outside of the four-walls, it looks your consolidated gross margins also saw a decent uptick this quarter. Is that all just from increased scale at Mustang in California and potentially Florida?

Is there anything in there we should be aware of? And do you think that current level that you reported this quarter is sustainable in the near term?

Most of that increase in gross margin is coming from our retail stores, particularly in California. And what we've seen over the past few months is just us just having more leverage with some of our key vendors.

With all the new vendor agreements we're putting in place, we're going to be targeting 60% plus as a baseline for our retail location in California which represents 75% of our overall sales. So I think a lot of that growth in margin will come from that footprint.

Great. And just one more from me, just on -- a bit of a housekeeping, but just on the balance sheet there.

So you talked a bit about cash and the proceeds from Gotham that could be coming in. Just on your actual current liabilities though, your AP balance has been growing or least growing in excess of your top-line for many quarters now.

So can you give us some color, I think it was $50 million so in AP and accruals outstanding. Are those typical 90 day terms or are there other longer term accruals in there that we don't have visibility on.

Any sort of granularity on what portion of that balance might be a near-term, call it, three months payout?

I would think of our AP balances kind of two main buckets. One is on the inventory side.

So these are the branded vendors that we have in our stores. And the other kind of half is payments related to store build outs.

So the reason why you saw the big bump in AP had more to do with on the CapEx side of things and payments that we have due to some of these contractors, particularly in Florida. A lot of those terms aren't necessarily the standard 30 or 60 day terms that you see with some of the brand vendors.

So we're working with all of our vendors across all areas to figure out payment plans as it relates to that. And usually our contractor payments are deferred out 90 days plus.

A real quick follow-up on the $300 million for the calendar year '20. And you kind of laid out the stores where you’re looking to add to.

How many stores are you kind of expected to be operating at that level to get to that $300 million annual rate?

That is 13 additional stores beyond the 33 that we have open today.

And then can you provide a little bit more color on the CapEx as a build out as we're not going further into Florida, I guess one more store there, but a little bit kind of a color on the CapEx for 2020 as we look out here?

The CapEx related to those 13 stores currently we're estimating roughly $20 million to $25 million. A few of those stores will be funded by Treehouse.

So it won't require any cash off of our balance sheet. But that's kind of the number based on our existing store ramp up schedule.

Okay. And then a real quick, the last tranche is a $115 million that potentially you guys have to mutually agree on that.

Is that correct, $115 million that's left out there?

Yes, that's correct.

Okay. And then you mentioned -- last question from me, is kind of the delivery platform and mix shift from your own brands into the stores, can we get a little more color -- or on the percentage increase of what you're getting from the average basket on the delivery platform and then what kind of Nevada mix is from your own brands versus third-party in the stores as you target that up?

On delivery, right now our ADS in California is higher through delivery than it is through our in-store. So through delivery, we're just under $80.

We're about $4 higher than what we're seeing in the store. So delivery has been an accretive business model for us.

We're profitable on a cash flow basis through delivery right now from almost all of our California locations. In Nevada, right now, our private label constitutes roughly 10% of our in-store sales.

But as we noted in the press release and MD&A, Mustang will be at full capacity in the next few months. And we're already in the process of putting together our production planning for all of our in-house brands as well as some of the third-party brand that we’ve signed up through the licensing agreements.

I want to go back to the top-line please. Zeeshan, I appreciated your commentary earlier on kind of an absence of new doors perhaps meeting California’s growth at 9% quarter-over-quarter.

My bigger concern is that outside of California, you guys didn’t grow at all sequentially. One of the unfortunate reality is being a leak reporter in the earning season is that we've heard from all of your peers and you guys are going to be the only company that didn't grow double-digits and not all of your peers open doors in new markets to drive that growth.

And I think it begs a bigger question. Cannabis is supposed to be a nascent industry, the absence of new doors in particular, given your updated guidance for 2020, like you guys should be able to grow sequentially without new doors.

So a couple of -- that's kind of high level commentary, and thanks for indulging it. Now my specific questions are, what markets outside of California declined and why?

Thank you.

Let's go market-by-market as it relates to that question, I think it's an important part of kind of what we have going on here. So in California, year-over-year, we're up 51% from our California locations.

As you go into Nevada, our stores there -- store like Paradise is also up over 50% year-over-year. I think what you're referencing based on the overall kind of sequential growth has a lot to do with some of the other markets, and most notably Arizona where we've seen a decline in both wholesale and retail revenue.

Part of that exists us now focusing on growing that market given other markets are a lot more core to the business today. And with New York, that market has been pretty stagnant for us over the last six months also given the same reasons.

We're not giving the same attention there in terms of marketing and other support that we're giving to our California locations. I mean our brand in general is built for recreational.

So, I wouldn't expect any huge increases in any medical markets that we’re in other than Florida where we have a path to hitting 6 million plus per store once we get to supply in the system.

Okay. That's reasonable enough I guess, I'm honestly surprised that revenues came in below what I thought, was a conservative estimate on our part as well as consensus.

So looking ahead, then, as we think about revised kind of aspirations, if you will, I worry a little bit and so help to me comfort on this one that Arizona was weak because you opted to prioritize something else. Now as you look ahead through the next year, there are tons of things that you have to prioritize.

Very few of which have anything to do with like actual revenue realization. It's all about cost cutting, rightsizing, making sure that you're adequately funded.

So how are you guys going to balance out? Thanks.

Is the question balancing growth with cost cutting at corporate?

That's exactly right.

I think part of the rightsizing of the company is scaling back to number of states that we're in is about focusing on markets where we are going to see a lot more growth in the near-term which are California and Nevada. So even though, we are cutting costs at corporate, none of that will affect to growth or the care that we're putting into our California market, it’s doing the reverse, it’s focusing more on markets that are moving the needle today.

Just starting on the preopening expenses, is it fair for me to think that this number is kind of trough now? Or can it expand further from here?

And then can you just maybe just give some type of indication in terms of how many leases you might have to potentially sublease?

I would say the preopening expenses will come down over the next 12 months. We've been signing up fewer and fewer leases for non-operational locations.

I think a lot of those relate to Florida. So we mentioned that we're going to be subleasing non-operating leases.

A few of those are in Florida, a few are in New York and there's also a few in California where we don't see a near-term path to opening up a store.

And then just kind of moving on in terms of the cost savings initiatives in terms of those deals that you locked in with the vendors for, I’m not sure, 60% gross margin, is there a potential to expand that to further brand partners or have you tried and got pushed back or kind of how is how are those conversations progressing?

Can you please repeat that question?

Sure. So just on the vendor relationships with the agreements that you signed into that 60% gross margin level, with those eight brands in California, have you had -- have you tried to expand those conversations with other brand partners and received any pushback or is it potential to expand it with other partners or can you maybe just talk a bit more about the dynamics there?

Yes, the eight we represented, just refers kind of wave of those agreements. There is going to be agreements with most of the brands that we're signing in our stores to get them on these new vendor terms.

That was just step one of this. But eventually we will be across all California locations and other locations and other recreational markets.