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Edited Transcript of RBE.V earnings conference call or presentation 20-May-20 9:00pm GMT

·44 min read

Q1 2020 Harvest Health & Recreation Inc Earnings Call Vancouver Jun 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Harvest Health & Recreation Inc earnings conference call or presentation Wednesday, May 20, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christine Hersey Harvest Health & Recreation Inc. - Director of IR * Leo Jaschke;Chief Financial Officer * Steven Mathew White Harvest Health & Recreation Inc. - Founder, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Aaron Thomas Grey Alliance Global Partners, Research Division - MD & Head of Consumer Research * Gerrel Olivier;Pura Vida Investments;Analyst * Graeme Kreindler Eight Capital, Research Division - Principal * Jesse Pytlak Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research * Kenric Saen Tyghe AltaCorp Capital Inc., Research Division - MD of Consumer & Retail and Analyst * Matt Bottomley Canaccord Genuity Corp., Research Division - Analyst * Pablo Ernesto Zuanic Cantor Fitzgerald & Co., Research Division - Research Analyst * Robert Fagan Stifel GMP Research - Equity Research Analyst of Healthcare * Russell Stanley Beacon Securities Limited, Research Division - MD & Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Harvest Health & Recreation conference call to review first quarter 2020 financial and operating results and discuss the company's performance outlook. (Operator Instructions) Today's conference call is being recorded. 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. -------------------------------------------------------------------------------- Christine Hersey, Harvest Health & Recreation Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone, and welcome to Harvest's First Quarter 2020 Earnings Call. On today's call are, Founder and Chief Executive Officer, Steve White; and Chief Financial Officer, Leo Jaschke. Earlier today, we issued a press release announcing our results for the quarter ended March 31, 2020. The press release and a PowerPoint presentation are 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. 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 the Canadian Securities Exchange and SEDAR. During today's conference call, Harvest 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. 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. -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Christine. Good afternoon, everyone, and thank you for joining us. I appreciate your continued support and interest in Harvest and the opportunity to provide you with an update on our organization. The past few months, it presented a number of opportunities and challenges as is always the case in our exciting and rapidly evolving industry. On our last call, I referenced a number of times that we have a plan to return to profitability and that we would execute that plan. Like everyone else, as a company, we have been tested by a pandemic. We had the -- to modify our operating plans to ensure employee safety while maintaining business continuity and providing continued service to the patients and customers who rely on Harvest as an essential service provider. All of this comes at a time when capital market conditions remain tight, and we deal with the host of obstacles that we've come to accept as normal course of business for the U.S. cannabis industry. Once again, I would like to thank our employees for their continued dedication as we navigate various challenges that we face operating in an emerging industry and in the wake of the COVID-19 outbreak. As they always do, our team has met the challenges while forging ahead, working tirelessly while moving toward our primary organizational goal of returning to profitability. I'm very proud of the way our organization has performed in the past few months, and I remain highly confident that our team will continue to step up and rise to any occasion as we continue to build a profitable company. Our people are a critical component of our success and essential to profitability. In addition to talent, successful execution of our plan requires balancing revenue growth and cost reduction efforts while managing liquidity. During this call, we'll address: first, revenue; second, costs; third, liquidity; and fourth, briefly touch upon development since our last call in April. Overall, I am pleased to report that our recent performance is tracking according to our plan despite all of the disruptions that have come up in the past few months. So let's first talk about revenue. Our first quarter sales of $45 million represent 134% year-over-year increase and a 19% increase from last quarter. Higher revenue was driven by growth in existing and newly acquired operations. So let's talk for a minute about growth from existing stores. For the 10 stores that were opened in Q1 of 2019, same-store sales growth year-over-year increased by more than 30%. As one of the oldest operators in the U.S. cannabis industry, some of our comp stores have been operating for many years. Despite the long operating history for our stores, we are still realizing growth in our retail base. First quarter revenue included partial quarter contributions from newly opened dispensaries in Arkansas and Michigan and 3 acquisitions. Those acquisitions include Arizona Natural Selections, Interurban Capital Group and Franklin Labs. Unless the High Times transaction closes prior to June 30, second quarter results will reflect full contributions from those acquisitions and the Arkansas store. Our dispensary in Little Rock, Arkansas has outperformed our original expectations with stronger-than-expected sales since opening in early February. While we are no longer pursuing large transformational M&A deals, we expect to realize revenue growth through increased sales in existing stores, opening of new stores, cultivation of manufacturing expansion and small opportunistic tuck-in acquisitions. We remain focused on pursuing profitable growth. Let's turn to our second topic, costs. As we detailed in our last call toward the end of 2019, Harvest began to concentrate on operations and expansion in core markets. Streamlining the business for greater efficiency and implementing cost controls designed to realign the expense structure with revenue growth expected from the core business. Last week, as part of our ongoing efforts to rightsize our organization, we took the difficult but necessary steps towards continuing to reduce our ongoing operational expenses, which included the reduction of personnel across all levels of the organization. We estimate that these actions, combined with extensive cuts to operational expenses implemented to this point during 2020, will result in annual cost savings of $24 million. We believe we have the opportunity to further reduce our operational expenses. Our planning calls for the continued examination of organizational and operational footprint adjustments, as necessary, to return to profitability. And as we've said before, we remain committed to rightsizing the infrastructure and expenses to more closely match our near term anticipated growth trajectory. Improving quarterly trends underscore the considerable progress we've already made on our plan to return to profitability over the past few quarters. On an absolute basis, revenue and gross profit are increasing while overhead is decreasing, resulting in improved adjusted EBITDA. We are focused on continuing to deliver improved results as we work to increase scale and efficiencies and realize the benefits of operating leverage in our business model. As such, we are on track to be adjusted EBITDA positive in the second half of 2020. Turning to the third topic, liquidity. Despite challenging capital market conditions, Harvest raised $41.3 million of debt and $59 million in equity during the first quarter. Harvest ended the first quarter of 2020 with approximately $82.5 million in cash and $290 million in debt. As of May 15, after paying down some debt and making cultivation of manufacturing investments in Florida, Maryland and Pennsylvania, we had approximately $70 million in cash. Our capital requirements for the remainder of 2020, include operational expenses, debt service and capital expenditures. Our debt service for the remainder of the year is approximately $40 million, some of which we have optionality to extend and which we expect to be partially offset by incoming capital estimated between $10 million and $30 million, which includes the collection of notes receivable, new and extended financing arrangements and divestitures of noncore assets. Capital expenditures for the remainder of the year are expected to range between $10 million and $30 million, in addition to the $15 million spent during the first quarter. We have the flexibility to accelerate or delay capital expenditures as our capital position changes, and we are actively managing our liquidity, and we will make necessary adjustments to our plan to ensure that we meet our obligations while still continuing to pursue profitable growth. Lastly, we have had a few developments at Harvest since our call in April. Besides the cost reductions -- this cost reduction efforts already discussed, we have started permitting customers to return to select retail stores. And we announced the planned divestiture of select California assets to High Times Holdings. Since our last call in early April, our facilities have remained online with modified operating procedures to safeguard employees, patients and customers. And to this point, we have not experienced any significant disruptions to our supply chain or our operations. Last week, we were able to resume in-store purchases with appropriate social distancing measures in place at our retail dispensaries in Arizona, Florida, North Dakota and in Napa, California. We continue to monitor the impacts of COVID-19 and economic uncertainty on sales trends, and we'll provide updates when it is appropriate. As we focus on our core business and return to profitability, we are exploring divestiture of some noncore assets where practicable. Subsequent to quarter end, we announced the planned divestiture of 13 retail assets in California to High Times Holdings for a total consideration of $80 million, comprised of $5 million in cash million $7.5 million of notes and $67.5 million in preferred stock. The planned divestiture includes a combination of operational retail dispensaries and licenses. As we highlighted on our last call, we believe the targeted investments in our core markets will result in fast and favorable returns. Expanding existing operations in key states allows us to achieve scale within those markets, resulting in greater efficiencies and improved financial performance. As such, capital expenditures in 2020 are primarily slated for our 4 key markets, with approximately 80% of scheduled investments occurring in Arizona, Florida, Maryland and Pennsylvania. Each of our core markets are medical markets with limited license regulatory structure -- structures, continued patient growth and future potential upside from adult-use consumption when it is permitted. Our home state of Arizona is 1 of the fastest-growing medical markets in the U.S. The number of qualified patients is over 3% of the population and still growing, surpassing all original market projections. We have the largest retail presence in the state with 14 open retail dispensaries, which are supported by cultivation facilities in Camp Verde, Phoenix and Willcox and processing and manufacturing facilities in Phoenix and Flagstaff. We are expanding cultivation and processing operations in Arizona to supply our retail stores with more internally produced product, which will enhance our margins and improve financial performance in the state. We could potentially add additional retail locations given the strength in the current market and potential upside from the expected rollout of adult-use cannabis consumption in 2021. The Florida market has been particularly strong since the start of flower sales in the first quarter of 2019. Patient growth year-to-date is over 13%. In Florida, we operate 6 open retail dispensaries, an indoor cultivation and processing facility and a secure outdoor cultivation and processing facility. Product from cultivation expansion at the end of 2019 continues to ramp, resulting in higher sales and margins at our retail locations. We plan to begin another cultivation expansion in 2020 with new product and store openings coming into the market in 2021. Maryland has been a solid limited license medical market for several years. In Maryland, we currently have 3 open retail dispensaries and a cultivation and processing facility. Harvest is a net wholesaler in the state of Maryland with strong sales outside of our retail operations. We anticipate further expansion of our cultivation and processing operations in 2020 to supply our own retail locations and support overall continued market growth. Given the strength of the market, we would potentially add another retail location in Maryland, reaching the maximum of 4 dispensaries allowed by state regulations. The Pennsylvania market has experienced rapid growth in a supply constraint. Harvest currently operates 5 open retail dispensaries in Pennsylvania and the recently acquired cultivation and processing facility in Reading. Harvest has 5 retail licenses -- Harvest or Harvest affiliates have 5 retail licenses allowing for up to 15 potential retail locations. We are expanding cultivation and manufacturing operations to alleviate product supply constraints, enhance margins and support the opening of additional retail locations in '20 and 2021. We remain confident in our belief that investing in markets with favorable regulatory frameworks and limited licenses to operate afford the company the best opportunity to return to profitability in the near term. We are on track with our plan to pursue profitable revenue while rightsizing our business. We look forward to demonstrating further progress with respect to our overall plan to return to profitability. As our business scales, we plan to provide additional disclosures, which we believe will further inform our stakeholders about our ongoing operations and future prospects. We value and appreciate your support of Harvest. We remain very confident about the long-term trajectory of the industry, and we believe Harvest will continue to navigate near-term challenges as they present and continue to be a strong and focused operator in the U.S. cannabis industry. With that, I'd now like to turn the call over to Leo, who will discuss our financial results and guidance. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [4] -------------------------------------------------------------------------------- Thank you, Steve. For the first quarter, revenue was $45 million, representing an increase of 134% year-over-year and 19% sequentially. Revenue growth was driven by the addition of new and acquired dispensaries as well as growth in our existing operations. Approximately 80% of our first quarter revenue was derived from our core markets of Arizona, Florida, Maryland and Pennsylvania. Revenue mix during the first quarter was 68% retail, 14% wholesale and 18% licensing and other. Gross margin, before biological asset adjustments during the first quarter, was 40.6% compared to 42.3% during the fourth quarter. Gross margin is an important component of our return to profitability. So I'll add additional color on our margin performance. Consistent with the revenue mix results for Q1, we have 3 lines of business, which each contribute differently to our margins. Our largest and most consistent component of revenue is our retail business. Margins in our retail business are in the range of upper 40% to lower 50%, and we expect those margins to improve over time as we increase our retail presence in states with higher-margin opportunities as we leverage more of our internally produced product and as we continue to focus on reducing costs. Our licensing margins can vary significantly depending on the nature of the contract. Our wholesale business margins vary based on product mix and market. The Q1 margin change from Q4 was driven by less favorable wholesale mix, partly offset by improved retail margins. We remain focused on expanding the most profitable components of our business. And we expect our margins will continue to trend upwards overall with some quarterly fluctuations due to mix and market changes. Net loss for the quarter was $20 million compared to a loss of $88.9 million during the fourth quarter of 2019. First quarter adjusted EBITDA, excluding the impact of biological asset adjustments, was negative $3.9 million, an improvement compared to fourth quarter adjusted EBITDA of negative $6.8 million. The sequential improvement was due to a combination of revenue growth and additional reductions in operating expenses. Harvest ended the quarter with 36 open dispensaries, up from 31 at the end of fourth quarter. Subsequent to quarter end, the retail location of Michigan was closed. As of May 15, 2020, Harvest open -- owned, operated or managed 35 retail locations in 7 states, including 14 open dispensaries in Arizona. Harvest owned, operated or managed dispensaries exclude licensing arrangements, other service agreements and select assets held for sale. Turning now to guidance. We are targeting full year revenue of approximately $200 million in 2020. The revenue forecast includes continued growth driven by retail dispensary openings, same-store sales growth and new and expanded cultivation and manufacturing operations. We expect continued adjusted EBITDA margin improvement due to increased scale and overhead absorption as well as ongoing cost reductions. We are on track to achieve positive adjusted EBITDA in the second half of 2020. Forecast for 2020 assume no meaningful impacts or disruptions to our operation as a result of COVID-19 pandemic beyond the new protocols and safeguards already implemented throughout the company. In some areas, regulatory approvals, permitting and inspections may be delayed due to additional burdens placed on regulatory bodies by COVID-19 pandemic. As Steve indicated earlier in the call, we are committed to returning to profitability through a combination of targeted investments, cost-reduction measures and divestitures of non-core assets. We remain optimistic about the long-term prospects for the industry and our company. We believe Harvest is well positioned to weather the short-term market challenges and will emerge as a stronger company. With that, let's open the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Aaron Grey with Alliance Global Partners. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [2] -------------------------------------------------------------------------------- Congrats on the improvement in the quarter. So first question for me is just on the overall guidance. Just could you offer some of the underlying assumptions within that? First of all, does that include some of the sale that you're going to have in terms of the California divestiture, is that within the $200 million? And then how best to think about expectations in terms of incremental store openings within that $200 million guidance? And then how to think about the sequence of that quarter-over-quarter? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [3] -------------------------------------------------------------------------------- The $200 million revenue is our target for the entire year of 2020. That does include all of the existing operations that we have in place today. We do acknowledge that there are a degree of uncertainty with the economic impact in consumer behavior. That being said, we do have a handful of stores that we do expect to open in the second half of this year, and that is included in the $200 million. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [4] -------------------------------------------------------------------------------- Okay. Great. That's helpful. And then just another question on Florida specifically. Steve, you mentioned earlier in terms of expected -- expanding cultivation, both in 2020 as well as 2021. Could you talk about the degree of that cultivated expansion relative to what you have today? And some more color when you expect that to hit the P&L? Would that be more of a 4Q in terms of 2020? Or when do you expect that to kind of come in and hit the P&L? That would be helpful. -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [5] -------------------------------------------------------------------------------- Leo? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [6] -------------------------------------------------------------------------------- Yes. I'm happy to help on that, Aaron. So with Florida specifically, what I would recommend is the PowerPoint presentation that's available on our investor presentation site has specifics around each of our core markets, specifically in Florida. We have total capacity, our total square footage of 115,000 square feet. In addition to that, in our Gainesville property, we have 0.2 acres of secure outdoor and 1,000 of square feet of processing facility. The Alachua facility is being built out. We have our first phase of growth that is contributing flower to our stores this year. The next phase of growth will primarily contribute to additional flower and additional store growth starting in 2021. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from the line of Kenric Tyghe with AltaCorp. -------------------------------------------------------------------------------- Kenric Saen Tyghe, AltaCorp Capital Inc., Research Division - MD of Consumer & Retail and Analyst [8] -------------------------------------------------------------------------------- If I could just follow up on the revenue outlook of some $200 million. Could you provide some indication of how we should think about the sensitivity given your range of capital expenditures for the rest of the year of $10 million to $30 million? If you could just give us some indication on potential sensitivities or how to better handicap the revenue guidance in the context of the capital expenditure guide. That'd be useful? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [9] -------------------------------------------------------------------------------- Yes. A couple of key points around our capital expenditures. First, about 80% of those capital expenditures are targeted towards our 4 key markets: Arizona; Florida; Maryland; and Pennsylvania. In addition to that, although we have -- we -- our capital investments will depend, in part, on the projects and the state's reopening post-COVID and the permitting associated to that. We expect roughly 50% or more to be in cultivation assets. So in total, the majority of our CapEx, there will be some benefit to 2020. But really, it sets us to -- we believe it sets us well to 2021 and beyond to reap most of those cultivation rewards. -------------------------------------------------------------------------------- Kenric Saen Tyghe, AltaCorp Capital Inc., Research Division - MD of Consumer & Retail and Analyst [10] -------------------------------------------------------------------------------- That's great. And just on the Q2 sort of outlook you highlighted as well sort of full revenue contributions from Arizona Natural, Interurban, Franklin, et cetera. Is there any way you could also help us handicap the materiality of those contributions? Or even just provide some color as to the sort of evolution through 2020? How you expect those to either sort of roll or ramp? That could also be useful. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [11] -------------------------------------------------------------------------------- Yes. So 2 key concepts there. First, we won't comment on a specific store or a specific acquisition. That being said, in total for Q1, approximately $4 million of revenue came from the completed M&A transactions and the new organic stores that came online. The second key piece of that is a portion of that revenue could potentially go away with the successful closing of the High Times deal. -------------------------------------------------------------------------------- Kenric Saen Tyghe, AltaCorp Capital Inc., Research Division - MD of Consumer & Retail and Analyst [12] -------------------------------------------------------------------------------- And just on that High Times deal, a quick final one for me. We saw the extension to 30 June on that potential capital raise from May 15. We've seen multiple extensions on this. Has that extension impacted any of your thinking there? Has it changed the risk profile of this transaction? How comfortable are you with it? Any color there would be very useful, and I'll get back in queue after that. -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [13] -------------------------------------------------------------------------------- Yes. The extension of their Reg A offering does not affect the closure of the transaction. Both teams from both organizations have been working diligently to actually wrap that transaction up and the extension should have no impact on it. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from the line of Graeme Kreindler with Eight Capital. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [15] -------------------------------------------------------------------------------- I just wanted to follow up regarding the question that was asked earlier on the 2020 revenue outlook. I just wanted to confirm whether that does or does not include any contribution from assets that are expected to be divested in California to High Times? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [16] -------------------------------------------------------------------------------- Graeme, it's a great question. And I want to reiterate that the $200 million total revenue is our target for the year. And we looked at multiple scenarios on that. And there is a degree of uncertainty, again, around the economic impact in consumer behavior and specifically the potential closing of the High Times transaction. That being said, we believe that $200 million is a good target given those variables, and we'll be able to provide more direction once 1 or more of those transactions close. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [17] -------------------------------------------------------------------------------- Okay. So is it fair to say, in other words, that there's a potential scenario where if High Times doesn't close within 2020, there's a pathway to $200 million. If it does, you can take the capital that comes in there, direct that to other states, and that fuels the pathway to $200 million. Am I capturing that in a fair way? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [18] -------------------------------------------------------------------------------- That is fair. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [19] -------------------------------------------------------------------------------- Okay. Then the other question I had is seeing some of the other earnings reports roll-off here, it seems like there's looking generally like strong sequential growth into Q2 despite the operational challenges you might have had in terms of adapting things for COVID-19. So I was wondering if you could give any sort of color on how things have trended to date in your core markets into Q2. And if you thought of any sort of quantification of where things might have been potentially if we didn't see an impact from COVID? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [20] -------------------------------------------------------------------------------- Steve, do you want to take that one or should I take that one? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [21] -------------------------------------------------------------------------------- Yes, I can. Graeme, good question. The -- so first of all, we haven't seen any supply chain or significant disruptions to our operations due to the COVID pandemic. We did see -- I think we outlined previously, we did see a sales spike in mid-March. In April, what we saw was an impact -- as has been widely reported by our peers, the arrival of stimulus checks did have an impact on sales as did the normal expected bump in sales that you get from 4/20 in April. We haven't done any analysis about whether or not comparing COVID to non-COVID, but that's what we've seen thus far. But otherwise, we have seen a consistent demand for the product. We have seen some increase in basket size, and a slight decrease in the amount of times that people actually show up to the store. We're waiting to see the impact on opening -- as we open some of the retail stores and allow foot traffic back into them. We don't have enough data yet to draw any conclusions about the impact of that. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [22] -------------------------------------------------------------------------------- Okay. Appreciate that color there. And then my last question. You mentioned potential divestiture of noncore assets. So just with respect to those potential transactions, can you give any color or context in terms of how robust the market for those assets is looking right now given the uncertain outlook because of COVID-19? And just generally, we've seen a narrowing of the focus of many operators in the space to focus on some core markets. So just wondering what the discussions have been like in potential pathways to actually crystallizing the transaction there? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [23] -------------------------------------------------------------------------------- Graeme, it's a great question. It's a hard one for us to answer because we've never been in a situation where we are fielding offers for an asset. And so we don't have a lot of historical context about what that looks like. I can tell you, we've identified our core markets. We do have assets that lie outside of those core markets and we have had what we would consider a healthy number of conversations about some assets that we would be open to divesting at the right price. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Your next question comes from the line of Matt Bottomley with Canaccord Genuity. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [25] -------------------------------------------------------------------------------- Congrats on the quarter. First question, I just want to get a bit of a reconciliation on the dispensary count going forward given some of the announced deals previously and their closing. So you had 35 in the quarter. How many of those are in California that will be disposed of? I have the number at about 4. And then what exactly, with respect to Have a Heart, currently exists in California and Iowa as well? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [26] -------------------------------------------------------------------------------- I can take that one. -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [27] -------------------------------------------------------------------------------- Okay. Go ahead, Leo. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [28] -------------------------------------------------------------------------------- All right. So with the 35 that we have -- that we reported, that excludes the Have a Heart locations, of which there's 3 in California. So that the -- so we want to clarify that. Second, of that 35, there are 2 operating stores today within that number that are operating in California under the Harvest brand that would be part of the transaction with High Times. The Iowa stores specifically, there were 2 stores in Iowa that were operational at the time we closed the Interurban Capital Group transaction. Those stores were underperforming. We recommend their closure and the ICG team executed on that. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [29] -------------------------------------------------------------------------------- Okay. That helps tie it all together. Can you also give a little bit of color, as much as you can, on how those 3 or 4, apologies, aren't in front of me, ANS stores contributed versus sort of your average portfolio of the other 10 or 11 you had before? Are they -- do they outperform? Do they underperform? Is everything kind of grouped together in an average that way? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [30] -------------------------------------------------------------------------------- Yes. Those 8 -- now what I can share is those operational, the 3 AZNS stores are consistent with our Arizona market. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [31] -------------------------------------------------------------------------------- Okay. Great. And then lastly, just with respect to the deal with High Times, just any more color on the actual plan for those press talks, what their liquidity are -- is? And what that might sort of turn into in the next 6 months to a year? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [32] -------------------------------------------------------------------------------- Sorry. I just want to make sure I understand the question. Was that a question on the deal itself? Or what those assets are doing? I just want to make sure I understood the question. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [33] -------------------------------------------------------------------------------- Yes, more on the asset side with respect to the component, the consideration that was in the press shares. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [34] -------------------------------------------------------------------------------- Yes. So we're not going to comment, again, on any specific M&A transaction or any specific store. What I have shared though is in Q1, between all of the M&A activity and the additional store, the organic stores that we brought online, a total of $4 million was contributing in revenue in Q1. A portion of that is related to the assets that are part of the High Times proposed transaction. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Your next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [36] -------------------------------------------------------------------------------- Look, I have a bit of a general question, but when you talk about your 4 strategic states, I find that -- in relative terms, you don't have a lot of scale, like even Arizona, right, half of your business, it's I understand 5%, 6% of total cultivation. Yes, you have more stores. Then we go to Florida, Maryland, Pennsylvania, you don't have a lot of scale either versus your competitors. So how should we think about that? And yes, you get the positive EBITDA in the back half, but how high can margins be if you're at a scale disadvantage? Or that's the wrong way to think about it and because it's 4 markets maybe are short of supply and demand on street supply margins will continue to be pretty good? Just let me understand that because when we try to think of how stocks should trade and valuation and things like that, relative scale matters, and I would argue that you lack scale in your 4 strategic markets. If you can help with that? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [37] -------------------------------------------------------------------------------- Steve, do you want to maybe to take that one? Or would you like to? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [38] -------------------------------------------------------------------------------- No. go ahead, Leo, yes. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [39] -------------------------------------------------------------------------------- Yes. All right. So as we laid out in our investor presentation, again, when we look at our 4 key markets. First of all, in Arizona, we have 14 stores. In Pennsylvania, we have 5 stores. In Florida, we have 6. And in Maryland, we have 3 today, and we have the rights to open 1 more if we choose to do so. Within Pennsylvania, the 5 stores, we have the rights to increase that to a total of 15. And in Florida, it's effectively unlimited. And within Arizona, we have the option to open, within our existing licenses, at least an additional store, if we choose to. And then there's some M&A tuck in transactions that still remain. On in terms of scale, it's really more of, I would argue about, having access in Pennsylvania and Florida to cultivated flower product. There is a limited supply, or in the case of Florida, there is no wholesale supply under current state rules. So you have to produce it yourself to be able to support the stores. We are making those investments. We have made those investments in Florida and are already producing quality indoor flower that started to be for sale in our stores towards the end of Q1. And we're increasing that capacity. In Pennsylvania, we closed our transaction for Franklin Labs. And we now have that cultivation facility under our umbrella and are able to support our stores with higher and more quality flower. In Maryland, it's a little bit different because of the cap on stores there. But it is a very strong wholesale market, and we've been successful in that market on a wholesale basis. In terms of scale, I would argue that on a store-by-store basis, we are able to capture the margins assuming that we have access to that flower, and we do not expect there to be a material variance based on whether there is the existing 5 stores in Pennsylvania or until it's built out to 15. The primary driver is going to be access to flower to be able to support those stores with additional higher margins based on the internal sales of homegrown product. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [40] -------------------------------------------------------------------------------- That's very helpful. And just a quick follow-up. Is there any significant difference between the 4 strategic states in terms of how the authorities are reacted to COVID in terms of restrictions or regulations? Just to understand what's been the change? And how that could evolve over the next few months for those 4 key states, if there's any big difference? And the second question, unrelated, in the case of the ICG transaction, why the revenue from that transaction will not be reported on the top line? I believe it will be as fee income? If you can just give some color about that. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [41] -------------------------------------------------------------------------------- Sure. Steve, you want to take that on the COVID piece? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [42] -------------------------------------------------------------------------------- Yes, I'll take the COVID piece, and then Leo can respond to the second question. For those key markets, we haven't seen any material differences in how the regulators have reacted to the COVID crisis. In each and every instance, regulators have responded quickly with efforts to attempt to allow businesses to continue operating while keeping employees, patients and customers and the community safe. So all of them have done a very good job within the legal frameworks with that they have been provided. You haven't seen in those cases things where you had actual shutdowns or anything like that. So those cases, in those 4 states, they've responded similarly. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [43] -------------------------------------------------------------------------------- Got it. Okay. Then the other thing? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [44] -------------------------------------------------------------------------------- Right. And then -- yes. And let me follow-up then with the Interurban Capital and then revenue recognition there. So revenue from dispensaries we operate, which include the 3 in California, is fully consolidated. In addition to that, we provide services to the 5 Washington dispensaries and we received service fee revenue, which is included in our licensing and other revenue. Our licensing and other revenue is about 18% of our total sales and is a material component and is recognized as revenue as such. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from the line of Robert Fagan with Stifel. -------------------------------------------------------------------------------- Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [46] -------------------------------------------------------------------------------- Look, I got to ask this on the guidance. I mean, look, your Q1 revenue run rate is $180 million. If I back out some number closer to the $4 million for the contribution of new stores and acquisitions, it looks like roughly 9% to 10% organic growth in the quarter. And you mentioned, I think in the beginning, same-store sales for legacy stores 30%. Like why is this the $200 million number not higher? It seems that organically, you're growing better than that. And then you have some contribution from acquisitions likely coming in. Can you just give a bit of explanation there? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [47] -------------------------------------------------------------------------------- Rob, it's a great question, and thank you for asking that. Again, for the -- our full year revenue target of $200 million, first, it's important that we are acknowledging that there are uncertainties, primarily from the economic impact of COVID. And then -- and honestly, the consumer behavior, given unemployment rates. To date, I would say we have not seen material negative impact. Steve talked through kind of the puts and the takes. But overall, we're on track. We don't know with certainty whether that'll continue to be the case for the balance of the year. We do have healthy comp store growth, as Steve mentioned, our 10 stores that were open for the entire quarter were in excess of 30%. We do anticipate having additional stores, a handful of stores come online in the second half of this year. And then we may -- some of that revenue that we had in Q1, if we're successful with the High Times transaction or any other potential divestiture of noncore assets, may decrease the revenue a bit. But we feel confident, given all of those variables, that $200 million is the best information that we can provide to you and to other stakeholders. -------------------------------------------------------------------------------- Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [48] -------------------------------------------------------------------------------- Okay. Fair enough. Maybe if you can give us an update on how you're looking about the rollout of stores in Pennsylvania, clearly, a very good market to be in with -- and now your vertical there. How quickly can you make use of those 15 licenses that you have? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [49] -------------------------------------------------------------------------------- Yes. Great question. So when I mentioned that handful of stores that we plan to open this year, Pennsylvania is one of the markets where we have the rights to total of 15 or 3 per each of the 5 licenses. And we -- and some of the stores that are in our queue are in that market. -------------------------------------------------------------------------------- Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [50] -------------------------------------------------------------------------------- Okay. But you guys can't give us any kind of cadence or maybe some target for end of year in PA? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [51] -------------------------------------------------------------------------------- Well, again, I think the -- we're at 35 today, and we have plans to open a handful is how best I would say it. I think from our prior earnings call, we're hesitant to be shooting for an objective of store count when at the end of the day, profitability and cash flow are the things that we need to be focused on and we are focused on. And we don't want a store count number to take priority in that ranking. -------------------------------------------------------------------------------- Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [52] -------------------------------------------------------------------------------- Okay. Another one I'm interested in is the partnership with Cookies in Arizona. How has that gone so far? Is it getting significant traction? And are you maybe enticing some customers in that state to come into Harvest stores to get that product? I think it's exclusive, right? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [53] -------------------------------------------------------------------------------- Steve, do you want to take this? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [54] -------------------------------------------------------------------------------- There products -- sure. So the relationship with Cookies in Arizona has been one that we've been pleased with today. The -- as you can imagine, the genetics that they produce are desirable and we have, in some instances, seeing, particularly when you hold events, right? So we had an event, for example, in our Tempe store, where one of the -- kind of the Principal of Cookies appeared, ended and shook hands, signed autographs, took pictures. We certainly saw lines around the building when he was there. And so we've been overall very pleased with the relationship. It's one that we like. It's also one if you're familiar with that brand, it is -- they also have a relationship with some of the Have a Heart stores in the state of Washington. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Russell Stanley with Beacon Securities. -------------------------------------------------------------------------------- Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [56] -------------------------------------------------------------------------------- First, around the same-store sales number, thanks for providing that. Just wondering if you could break down the drivers as to whether it was more transaction volume or an increase in ticket sizes that drove that number year-over-year? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [57] -------------------------------------------------------------------------------- Yes. The same-store sales... -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [58] -------------------------------------------------------------------------------- The year-over-year -- okay. Go ahead, Leo. Sorry. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [59] -------------------------------------------------------------------------------- All right. Yes. So the same-store sales of 30 -- of greater than 30%. And that again, that's the 10 stores that were open for the entire quarter this year versus last year in Q1. It's actually a very even and healthy split between both. We're seeing increases in average order size, and we're seeing increases in transactions. -------------------------------------------------------------------------------- Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [60] -------------------------------------------------------------------------------- Great. And just wondering on Arizona. I think it was in the last week, the Supreme Court, I guess, decided against allowing the use of the digital signature gathering. But I believe the initiative has something like 100,000 more signatures than the actual threshold. I guess those need to be validated. So I'm just -- I'm wondering, do you feel comfortable that, that's enough of a buffer to secure a spot? Or where are you at there? Are you still pursuing additional signatures at this point? -------------------------------------------------------------------------------- Steven Mathew White, Harvest Health & Recreation Inc. - Founder, CEO & Director [61] -------------------------------------------------------------------------------- So it's a great question. And the initiative in Arizona is really critical for Harvest and something that we are very much looking forward to. And we've spent significant time and resources ensuring as that passes. As you know, there -- the COVID pandemic caused an issue with social distancing, and so it made it very difficult to collect signatures from petition gatherers. We joined the lawsuit with a couple of other initiatives. That lawsuit was intended to seek the ability, like candidates do, to get signatures collected in online rather than actually going out into the community. Recently, the Supreme Court rule that we were not entitled to do that. In the time since we filed that case, then the reason that we were involved or agreed to be a plaintiff is because we did see a decrease in how quickly we're gathering signatures. Now understand that we were well over the limit that we need. We want to be well, well over that limit to withstand any challenges to the validity of some of those signatures. Since the time of that ruling or since the time of the filing of that lawsuit, Arizona has started to open back up, and we have seen a dramatic increase in the pace at which signatures are being gathered. So we are very comfortable that we will have more than enough signatures well before the deadline to turn those in. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Your next question comes from the line of Jesse Pytlak with Cormark Securities. -------------------------------------------------------------------------------- Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [63] -------------------------------------------------------------------------------- Just to follow-up on the commentary about the same-store sales growth. First, I'm just wondering if you would have that number on a sequential basis. And if you don't or can't provide that, can you maybe just kind of comment on the drivers quarter-over-quarter in terms of just kind of basket size and traffic trends? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [64] -------------------------------------------------------------------------------- Yes. So we haven't provided the quarter-over-quarter. But the 30% year-over-year is consistent and we're seeing that. If you take that annual number and do the math, you're going to zero in on the quarter-over-quarter pretty quickly. And we are consistently seeing the growth for both the average order size and transactions. So that's going to be similar. -------------------------------------------------------------------------------- Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [65] -------------------------------------------------------------------------------- Okay. And then just on the $24 million of annual cost savings and the initiatives that you've kind of done to achieve that, should we expect to see kind of the bulk of all that work kind of a surface in Q3? Or are there other puts and takes that might delay some of that or pull some of it more forward? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [66] -------------------------------------------------------------------------------- Yes. Great question. So with the cost reductions. So first of all, I want to clarify that, that is what has been implemented on a year-to-date basis. So some of that is reflected in Q1. I would say, the vast majority of it, however, was effective as of just about a week ago with the changes. And that will effectively take hold. I would say, some of it in partial month of May and June and beyond. There are some components of it for contractual reasons or other. Won't take effect until later this year. But in aggregate, the $24 million of annualized savings is the number. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Your next question comes from the line of Gerrel Olivier with Pura Vida. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [68] -------------------------------------------------------------------------------- It's Gerrel here. Sorry, go ahead. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [69] -------------------------------------------------------------------------------- No, go ahead. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [70] -------------------------------------------------------------------------------- I just wanted to get a little bit more color. Yes -- sorry, we are both talking at the same time. Just -- can you guys just tell us what -- like any -- why the growth rate sequentially would change much between Q4 to Q1 versus Q1 to Q2? What reason it would change significantly? Given you've highlighted stimulus checks and other stores reopening? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [71] -------------------------------------------------------------------------------- Yes. I think the key changes from Q4 to Q1 and then Q1 to Q2 is that in Q1, we had roughly about $4 million of contribution from M&A activity and organic sites coming online. And so that's definitely a step up versus the core quarter-over-quarter. What we do not expect to have at this time any additional openings in Q2, from either M&A or organic. I think the other piece to keep in mind is if the transaction with High Times closes before the end of June, a portion of that revenue that was already recognized in Q1 will not exist for the entire quarter of Q2. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [72] -------------------------------------------------------------------------------- So what's the right way to think about sequential growth of the business? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [73] -------------------------------------------------------------------------------- Yes. So we're at $45 million in Q1, and we're targeting $200 million for the full year... -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [74] -------------------------------------------------------------------------------- I am asking about the second quarter. I am not asking -- I read your numbers. I'm asking about the second quarter. -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [75] -------------------------------------------------------------------------------- Yes. And our guidance is for the full year. We're not providing guidance on a specific quarter. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [76] -------------------------------------------------------------------------------- Do you expect the business to grow in the second quarter? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [77] -------------------------------------------------------------------------------- We expect our business to continue to grow for the balance of the year, yes. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [78] -------------------------------------------------------------------------------- Got it. And then of the incremental growth, can you just talk about -- I know you guys highlighted getting EBITDA positive in the near term, just curious to incremental revenue growth from Q1 to Q2 or throughout the rest of the year, what the incremental drop down to the EBITDA line is to even grow $5 million or $10 million sequentially, what that means for EBITDA? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [79] -------------------------------------------------------------------------------- Yes. So we're not giving specific guidance on EBITDA other than we do anticipate that we are -- will be positive EBITDA, we will transition to positive EBITDA in the second half of this year. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [80] -------------------------------------------------------------------------------- Okay. That doesn't really answer my question. Just the incremental EBITDA drop down on incremental dollars of revenue is what? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [81] -------------------------------------------------------------------------------- It varies by business segment. So what we have disclosed is our margins on retail are generally in the high 40s to the low 50s. And so the incremental revenue generated from our retail segment will have a higher flow through than revenue generated from the other business segments. -------------------------------------------------------------------------------- Gerrel Olivier;Pura Vida Investments;Analyst, [82] -------------------------------------------------------------------------------- Okay. So the incremental EBITDA contribution goes up as the revenue goes up from here? -------------------------------------------------------------------------------- Leo Jaschke;Chief Financial Officer, [83] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.