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Edited Transcript of CCHW.NLB earnings conference call or presentation 12-Nov-20 9:30pm GMT

·49 min read

Q3 2020 Columbia Care Inc Earnings Call Nov 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Columbia Care Inc earnings conference call or presentation Thursday, November 12, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Cristina De Tomasi Columbia Care Inc. - IR Officer * David J. Hart Columbia Care Inc. - COO * Lars Robert Boesgaard Columbia Care Inc. - CFO * Nicholas Keane Vita Columbia Care Inc. - Vice Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Aaron Thomas Grey Alliance Global Partners, Research Division - MD & Head of Consumer Research * Andrew Semple Echelon Wealth Partners Inc., Research Division - Special Situations Associate * Gerald John Pascarelli Cowen and Company, LLC, Research Division - Associate * Glenn George Mattson Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research * Graeme Kreindler Eight Capital, Research Division - Principal * Jason Zandberg PI Financial Corp., Research Division - Special Situations Analyst * Matt Bottomley Canaccord Genuity Corp., Research Division - Analyst * Matthew Robert McGinley Needham & Company, LLC, Research Division - Senior Analyst * Russell Stanley Beacon Securities Limited, Research Division - MD & Research Analyst * Scott Thomas Fortune ROTH Capital Partners, LLC, Research Division - Director & Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for participating in today's conference call to discuss Columbia Care's financial results for the third quarter ended September 30, 2020. This call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately 2 hours after completion of the call and will be archived for 30 days. I would now like to turn the conference call over to today's host, Cristina De Tomasi, Investor Relations representative for Columbia Care. -------------------------------------------------------------------------------- Cristina De Tomasi, Columbia Care Inc. - IR Officer [2] -------------------------------------------------------------------------------- Thank you, Kevin. Good afternoon, everyone, and thank you for joining Columbia Care's Third Quarter 2020 Earnings Conference Call. With me today is Nick Vita, Chief Executive Officer; Lars Boesgaard, Chief Financial Officer; and David Hart, Chief Operating Officer. Earlier this afternoon, we issued a press release reporting our third quarter results, which we have also filed with the applicable Canadian securities regulatory authorities on SEDAR. A copy of this release is available in the Investors section of our corporate website at col-care.com, where you can also access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risks section of our annual information form dated March 31, 2020, filed with the applicable Canadian securities regulatory authorities and also found on sedar.com. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-IFRS measures, such as adjusted EBITDA and gross profit margin, excluding changes in fair value of biological assets. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Columbia Care considers certain non-IFRS measures to be meaningful indicators of the performance of its business, in addition to, but not as a substitute for our IFRS results. A reconciliation of such non-IFRS financial measures to their nearest comparable IFRS measure is included in our press release issued earlier today. Nick will begin his comments today with a high-level review of our accomplishments during the third quarter, followed by Lars, who will provide an overview of our financial performance. Nick will then discuss state-level market updates and highlights, after which the team will take questions. With that, I will turn the call over to you, Nick. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Cristina, and good afternoon, everyone. We generated another quarter of record results as we continue to execute on our growth strategy while maintaining our operational discipline. Although we are pleased to report that revenue, gross margin and EBITDA improved significantly on a sequential and year-over-year basis, we were most proud of transitioning to an EBITDA positive business this quarter, which is a milestone we have been eager to surpass. These results demonstrate our team's deep and unwavering focus on day-to-day execution, quality, customer care and community service across all our markets. Another milestone we reached during the quarter was the completion of our acquisition of The Green Solution, or TGS. The transaction officially closed on September 1 and provides us with a fully integrated operating portfolio that spans 23 dispensaries and 6 cultivation and manufacturing facilities in Colorado. This, in turn, allows us to add profitable scale to our national portfolio of brands and further ensure that our transition to adult-use market frameworks enables us to keep pressing our leadership position and leveraging our experience and know-how across markets nationally. Lars will be on later on in the call to provide additional details on the transaction, but I am proud to say that we have now become the largest operator in Colorado, the world's largest -- second largest cannabis market. We are also establishing a strong foothold in the world's #1 cannabis market, California. On September 8, we announced our definitive agreement to acquire a Los Angeles-based Project Cannabis. Adding this award-winning operator to our portfolio strengthens our retail and cultivation presence in the L.A. and San Francisco markets with 4 adult-use dispensaries and one 36,000 square foot indoor cultivation facility. Project Cannabis is also one of the leading cannabis cultivators, wholesalers and retailers of highly recognized branded products in the state of California. The acquisition of Project Cannabis will enable us to materially increase our scale throughout California and enhance our current wholesale and manufacturing operations as one of the state's leading suppliers. Going forward, our state-of-the-art 45,000 square foot manufacturing facility in San Diego will manufacture and package all of Project Cannabis extracted products and concentrates. On the retail level, the acquisition will also significantly expand our portfolio of unique products and nationally recognized premium brands. Project Cannabis will continue selling its entire brand portfolio while we simultaneously cross-sell our medically focused products as we -- as several new adult-oriented lines are launched. This acquisition perfects our operating model in California, enabling us to maintain supply chain continuity, optimize profitability and further position Columbia Care to become a market leader in that state. In addition to these key acquisitions, we continue to deepen our geographic footprint within our existing markets. At the end of September, we announced the opening of our new retail dispensary in Villa Park, Illinois, a suburb of Chicago, which is our second adult-use dispensary in the state and the second in the Chicagoland area. Since its grand opening at the beginning of October, we've generated strong week-over-week revenue growth, and we look forward to further improving our trajectory in this market. At the end of the third quarter, we also opened 2 additional dispensaries in Florida, in Miami Pinelake and Brandon, with our Longwood location set to open this coming Monday. With our Lakeland cultivation facility now producing at 100% bloom capacity, we are well positioned to provide high-quality flower and products to patients throughout Florida. We will further expand our production capacity and market presence through a new cultivation license we were awarded in West Virginia. Columbia Care was 1 of 44 applicants to apply for 1 of 10 licenses awarded by the West Virginia Office of Medical Cannabis. So this marks an exciting victory for us, and we are pleased to add another state to our portfolio and expand our ability to serve West Virginia's medical community. The addition of West Virginia assures us the scale and footprint to be the leader in the mid-Atlantic region. Across our new and existing markets, we have consistently offered industry-leading services and a full suite of premium cannabis products that are known for their high quality and consistency. In October, we further expanded that advantage through the introduction of our Seed & Strain line, our first national lifestyle cannabis brand. Marking our inaugural venture into the national brand launches, Seed & Strain was created to provide customers with a credible consistent suite of potent, high-quality adult-use products. Seed & Strain's flower products have already been launched in Massachusetts, Illinois and Delaware. And we plan to quickly expand the brand rollout to markets in Arizona, California, Florida and New York. With today's cannabis consumer looking for the same attention to detail and quality in adult-use products that are present in medical products, our scaled national operations and reputation for product quality allows us to thoughtfully and readily address this need. Through these state level and nationwide initiatives, we are growing our market and product portfolio, while continuing to invest in our core high-growth markets. We remain well capitalized to do so, as demonstrated by our recently completed $20 million add-on debt financing. This additional capital further bolsters our liquidity and demonstrates the continued confidence in support of institutional investors. We remain committed to being disciplined towards capital and carefully managing our overall cost of capital, while executing on our growth and profitability initiatives. As we work to further position Columbia Care as one of the leading nationwide cannabis operators, we are optimizing not only our national scale and product quality, but also the dedication, ethical leadership and growth-oriented mindset of our team. Our recent appointment of seasoned marketing executive, Alison Worthington, to our Board of Directors further strengthens this advantage. Her nearly 3 decades of experience in marketing consumer products bring deep expertise to our Board at a pivotal time for our company, and we are honored to welcome her to Columbia Care. Taking together the growth and expansion initiatives we've put in place, both during and subsequent to the third quarter, have demonstrated the strength of our strategy, performance across our market portfolio. With our ongoing market and product developments, we are becoming much more than a medical cannabis company. We are offering premium consumer brands to go alongside our growing adult-use retail footprint. Further, as we integrate and leverage our pipeline of acquisitions, we expect the power and uniqueness of our operating platform to further distinguish Columbia Care across all of our core functional areas. I will provide more detail on our business developments and market highlights later in the call. But first, I'll turn it over to Lars to review our Q3 financial results. Lars? -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Nick, and good afternoon, everyone. I'll now proceed to provide a summary of the key financials for the third quarter. Please note that combined metrics include our reported financials as well as the results from our 4 dispensaries operated by our partner in Ohio. Both our combined and reported results also include 1 month of contribution from TGS, which we acquired on September 1. Starting with the revenue. Combined revenue in the third quarter was $54.2 million, a significant year-over-year increase and up 64% quarter-over-quarter. From a sequential perspective, the increase was primarily driven by the addition of TGS in September as well as strong organic growth in Massachusetts, Pennsylvania and Ohio. Excluding the approximately $5.5 million of sales revenue realized from 4 dispensaries in Ohio, we reported total revenues in the third quarter of $48.7 million, which represents another significant increase compared to last year and an increase of 71% sequentially, primarily driven by acquisition of TGS and expansion of our dispensary network as well as stronger sales at our existing dispensaries. Combined adjusted gross profit for the third quarter was $21.2 million, resulting in a gross margin of 39%. In addition to excluding charges in the fair value of biological assets and inventory, this gross profit and margin excludes $1.8 million related to a write-up of inventory acquired in the TGS acquisition, and it is a sequential increase of about 300 basis points from the previous quarter. And that is driven by volume growth in our business. Our reported gross profit before fair value adjustments was $17.2 million, an increase of 70% on a quarter-over-quarter basis and a significant increase on a year-over-year basis. Reported operating expenses for the quarter were $33.6 million compared to $29.6 million last quarter and $33.8 million in the year ago period. The sequential increase was primarily driven by the addition of TGS for the month of September, and the year-over-year decrease was driven by a $5.9 million reduction in share-based compensation expense, which was partially offset by a $4.7 million increase in salary and benefits costs and facilities due to expanded operations as well as $1.3 million increase in depreciation and amortization expense. As Nick mentioned earlier, we achieved a key milestone this quarter in generating positive adjusted EBITDA. Combined adjusted EBITDA, including the Ohio dispensaries and TGS, came in at $4.2 million compared to negative $4.7 million last quarter and negative $11.8 million in the year ago period. While our acquisition of TGS accelerated our ability to reach this benchmark, our continued strong performance across several key existing markets also drove the improved profitability. Reported adjusted EBITDA for the third quarter was also positive coming in at $3.1 million compared to a negative $5.5 million last quarter and a negative $11.3 million in the prior year period. Capital expenditures for the quarter were $9.3 million and $39.7 million for the first 9 months of 2020. We are reiterating our revised estimate from last quarter for full year capital expenditures to be in the range of $45 million to $50 million, which includes funds received in 2020 related to the $20 million sale-leaseback transaction concerning our cultivation and dispensary properties in New Jersey. As of September 30, our cash balance was $42.1 million compared to $47.5 million at December 31, 2019. But this figure does not include approximately $20.4 million in aggregate growth proceeds raised in our recent add-on debt financing, which closed on October 29. As I mentioned earlier, we completed our acquisition of TGS on September 1. The combination is immediately accretive to adjusted EBITDA, with total transaction consideration comprising approximately 33.2 million shares of Columbia Care stock, $15 million in secured debt issued to TGS at signing of the agreement and an approximately $9 million seller's note, which is due to be paid in 2021. Completing this transaction helped accelerate our path to adjusted EBITDA profitability this quarter, and we look forward to continuing our integration of TGS over the coming quarters. With the strong momentum we have sustained this quarter, we are reiterating our previously stated revenue, gross margin and adjusted EBITDA guidance in addition to the reiterated CapEx expectations I mentioned earlier. This concludes my prepared remarks. I'll turn the call back over to Nick. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [5] -------------------------------------------------------------------------------- Thank you, Lars. The work we have done to sustain our robust financial and operational momentum across our markets and expand our geographic footprint has further strengthened our position as a nationwide industry leader. We expect to maintain this trajectory through the coming quarters as we continue to operate at adjusted EBITDA positive levels while working to turn additional markets to positive as well. Moving into our state-level market highlights, starting with our top 5 revenue markets as of the third quarter end: Colorado, Pennsylvania, Massachusetts, Ohio and Arizona. Across all of these markets, we are generating strong growth and are adjusted EBITDA positive. In Colorado, assuming full quarterly results from TGS for Q3 and Q2 for reference purposes, we generated 19% revenue growth, 19% gross profit growth and 45% adjusted EBITDA growth sequentially, driven by same-store sales and a significant increase in wholesale revenue. We initiated a harvest in our Trinidad cultivation facility in September, and we successfully completed that harvest earlier this month. Trinidad remains one of the largest and lowest-cost cannabis growing facilities in the state of Colorado. We also achieved nearly 20% sequential revenue growth in Pennsylvania for the third quarter and sustained record productivity metrics within our dispensaries, continuing our trajectory of outperformance in the state. In addition, we are pursuing retail expansion opportunities to meet increased transaction volumes. Our Massachusetts market is generating exceptional growth with revenue up more than 50% sequentially and strong gross margin and adjusted EBITDA margin expansion. Along with this financial momentum, we are making several key operational improvements to improve our retail customer experience, including expanding dispensary menus to include more internally sourced products and extending hours of operations across our dispensaries. After experiencing several delays, we have also been approved by the Boston Cannabis Commission for adult-use co-location and are scheduled to have our final zoning board of appeals meeting next month. In addition, we are on track to expand our wholesale presence in Q4. In Ohio, we generated significant gross margin and adjusted EBITDA margin expansion in Q3. In addition to more than 30% sequential revenue growth, at the end of July, we reached full canopy in our Mt. Orab cultivation facility, and we are actively pursuing additional canopy expansion options. Further, our cultivation and manufacturing processes have continued to progress well through Q3 and into Q4. We generated record flower production and wholesale revenue in Q3 and are selling products to nearly 80% of Ohio's dispensaries. We have commenced vaporization and tincture commercialization activities in our Columbus manufacturing facility. As we think about our company-wide operational strategy for 2021, we have closely monitored the evolving statuses of state-level adult-use approvals coming out of last week's election. With the adult-use -- with adult-use sales now approved in Arizona, our top operational priority is preparing our business for the market's conversion in April 2021 by expanding our cultivation, manufacturing and wholesale supply capabilities. We increased plant count by over 40% during Q3 and have been building inventory since July, but we are targeting gross margin expansion through new product introductions and improving both yield and harvest size. To this end, we are accelerating the development plans for the introduction of branded edible lines into Arizona's wholesale market in Q2 2021 as well as for additional cultivation capacity and manufacturing capacity. We have already secured the right to build a high-quality indoor cultivation facility co-located with our Tempe dispensary. Within this dispensary, we have also operationalized a boutique bloom room for our exotic strains for customers to be able to view our plants, providing unique opportunity for enhanced customer engagement and loyalty. Adult-use sales have also been approved in -- for 2021 in New Jersey, and we are materially expanding canopy and manufacturing throughput to prepare for this upcoming conversion and to supply the wholesale medical and adult-use market demand. We completed a second harvest out of our cultivation facility in October, and we are on track to complete a third by November. From a wholesale perspective, we have established several new partnerships to make our medical products available for patients. To further expand patients' access to our products, we have the development of our second and third dispensary locations in process. In New York, wholesale momentum remains strong with wholesale revenue serving as a significant contributor to our growth. We are pursuing cultivation expansion options to further enhance our production capabilities. On a retail level, our overall third quarter revenue in the state is up nearly 25% sequentially, with our growth primarily driven by our continued introductions of new product formats and formulations across the market. Excluding the onetime impact of development costs for new initiatives, New York was adjusted EBITDA positive. In Florida, we commenced the local marketing initiatives during the third quarter that have already led to increased foot traffic and sales among our current dispensaries. While we generated quarter-over-quarter revenue growth, new testing requirements and a shortage of approved labs caused a state-wide product approval backlog. Consistent with what we shared on our last quarter's call, we remain on track to open 4 additional dispensaries throughout the state in the second half of 2020. Our Miami and Brandon dispensaries are now open. And our dispensaries in Longwood -- our dispensary in Longwood is open -- is set to open next week on November 16, with our Delray dispensary expected to open later this month. We also worked to deepen our market presence in Illinois through the opening of our new adult-use Villa Park dispensary that I mentioned earlier. Statewide third quarter revenue more than doubled sequentially, and we have continued to generate positive adjusted EBITDA. Canopy in our Aurora cultivation facility is at capacity with record wholesale revenue, flower production and potency. Our current Illinois cannabinoid profile stands at an average record of about 39.8%. And our second place Illinois Cannabis Cup award for our indica flower exemplifies the strong customer reception to our products. In Delaware, we drove significant sequential increases across revenue, gross margin, adjusted EBITDA, and we continue to operate at adjusted EBITDA positive levels. Amid increasing market demand throughout the state, we have received approval for canopy expansion and have already added approximately 20% in incremental canopy. Given that we are the only operator in the state with more than one dispensary as well as home delivery options, we remain well positioned to meet our customers' needs and build upon our leading market share position in the state. Our California market is also experiencing -- also experienced substantial growth during the quarter, as we more than doubled our revenue and significantly expanded gross margin on a sequential organic basis. As part of our broader wholesale strategy, we launched our Amber Live Resin and Press Tablets in our San Diego dispensary and secured third-party distribution partner for our Amber, Press and Ceeds brands in LA County dispensaries. In terms of production, our extraction and distillation facility commenced operations in July with 20 liters of extract currently on the shelf and weekly inventory building for production and wholesale revenue. These initiatives, along with our agreement to buy Project Cannabis will allow us continue expand -- continue expanding our critical mass and scale throughout the state. Pro forma the close of the Project Cannabis acquisition, California will be one of our top 5 markets by revenue, generating positive adjusted EBITDA. Our performance this quarter validates the resilience of our business as we expand market footprint and continue to scale our operations in key markets. Through the fourth quarter and into 2021, we will continue to focus on driving growth and profitability while capitalizing on opportunistic M&A opportunities, especially as additional markets on our portfolio convert to adult-use sales. We will also continue executing on our organic growth strategy, as reflected by our recent West Virginia medical cultivation license award and expansion programs in New York, New Jersey, Virginia, Arizona and Massachusetts. As Lars mentioned, we are reiterating our previously stated revenue, gross margin, CapEx and adjusted EBITDA guidance for 2020 based on the operational momentum we've sustained throughout the year, along with the recent political tailwinds. I'm proud of our team's strong execution across our business and commitment to our long-term growth strategy. With that, I'll turn it over to the operator. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today is coming from Aaron Grey from Alliance Global Partners. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [2] -------------------------------------------------------------------------------- Congrats on the quarter and inflection to profitability. So I guess for my question, I'm just speaking more, I guess, I'll focus right now first on the Arizona market, right? Because that's more near term and we'll now be able to see adult-use sales start. So you mentioned you're going to look to expand your wholesale capabilities there. So I'm just curious, we had one of your competitors kind of talk about the wholesale market in Arizona, medical being lower than some of the other medical markets, kind of given the license structure. So curious to kind of your outlook on that given you are looking to be -- what -- will be more of a net wholesaler there? And how you think the wholesale pricing might be as adult-use comes online and you might see some supply demand constraints there? -------------------------------------------------------------------------------- David J. Hart, Columbia Care Inc. - COO [3] -------------------------------------------------------------------------------- Sure. This is David Hart. Happy to answer that question. I think there are a number of components to the planning process for the Arizona market heading into adult-use. We do think that there is going to be a supply demand potential imbalance. What we don't know is how long that imbalance will last. I think the demand for high-quality, high-tacky flower will outpace the supply in the marketplace for a period of time. And so there are new testing protocols that are coming into the market for both adult-use and the medical program, which I think will require a lifting of everyone's QA/QC on the cultivation side. So we're planning on a shift in the supply demand heading into adult-use where we think high-quality products, in particular, high-quality flower and flower-derivative products, will be able to command a strong pricing, a pricing scheme relative to the medical program for a period of time. So we want to be well positioned for that. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [4] -------------------------------------------------------------------------------- Yes. The only thing I would add to that, Aaron, is the -- although you can be fully integrated in Arizona, many participants are not. And they are not scaled in the same way that some of the larger players are. We chose to really focus on having a handful of retail distribution points and then building our capabilities to the wholesale channel. And we, frankly, have always found that to be a good channel for us, especially as we start rolling out new products and new brands that are going to be nationally recognized. So the timing couldn't be better from the standpoint of what we have already in the pipeline and what we've been rolling out. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Our next question is coming from Glenn Mattson from Ladenburg Thalman. -------------------------------------------------------------------------------- Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [6] -------------------------------------------------------------------------------- Nice results in the quarter. Curious a little bit, a little more detail on the California strategy with Project Cannabis. It's a little bit different from your typical strategy, which is to get into markets early and be there for when they convert to adult rec or whatever. So just kind of give us a sense on how you're thinking about it? Is this kind of a foothold that you tend to use to gross in the state? Or is this something a kind of a nice business that you can kind of watch and learn and earn in the process? So just some color there would be great. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [7] -------------------------------------------------------------------------------- So Project Cannabis was, I think, both tactical -- tactically valuable and strategically valuable. It's very hard to make the argument that you're a national leader if you don't have a leading footprint in the largest cannabis market in the country or the world. We've actually been operating in Southern California for the better part of 2 years now. So we've actually been there in San Diego. We built that infrastructure, and we took that time to really study and understand the dynamics of that market. We've always had the view that being a capital-intensive sort of business model did not make sense long term. And so one of the ways we've been sort of leveraging our infrastructure is by moving into the wholesale market. So what Project Cannabis did is it allowed us to complete the sort of the loop of licensing. So we don't have to use third-party distributors. We don't have to use third-party suppliers. We're basically able to manufacture branded products that are very, very recognized throughout the wholesale and regional markets in California almost overnight. We can take those brands, we can export them to the rest of the country and actually now really incorporate that into our brand rollout strategy nationally. And so having acquired one of the most notable cultivation operators in the state of California was great, but being able to leverage their -- the manufacture of all of their concentrate products and leverage the existing infrastructure we had in San Diego will actually enable us to drive gross margin substantially higher, not only because we can sort of use existing infrastructure more efficiently but because we don't have to use other distributors. Third, it's a free cash flow generating business. So the fact is that it's very unique to find operators know how to successfully navigate the complexity of the California market. These guys happen to be right in the middle of that sweet spot. So overnight, we become one of the most scaled manufacturers, one of the most scaled sort of distributors because they have a network of over 100 dispensaries through which they're distributing them on a wholesale basis. And then we have all of the infrastructure basically that Columbia Care had invested in that completed the sort of, let's call it, the continuity of supply chain loop that we wanted to perfect. And so everything about it, I think, is incredibly valuable and affects not only the California market and it allows us to become a consolidator of choice, but it also is a financial driver and a strategic driver through the introduction of brands, introduction of new strains and capabilities and, frankly, introduction of know-how that we can loop into all of the markets that are now converting from medical to adult-use. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question is coming from Scott Fortune from ROTH Capital Partners. -------------------------------------------------------------------------------- Scott Thomas Fortune, ROTH Capital Partners, LLC, Research Division - Director & Research Analyst [9] -------------------------------------------------------------------------------- Congrats on the quarter. Real quick update, Nick, on the New Jersey market and kind of the timing there as far as able to supply the medical side and then to the adult-use side from that standpoint? And then your thoughts around New York coming on board here for 2021? -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [10] -------------------------------------------------------------------------------- So I think that the timing for the rollout of a New Jersey sort of adult-use program is probably second half next year, potentially fourth quarter. If it happens sooner, wonderful. We are building infrastructure today to not only accommodate this, what we predict to be a fairly significant supply demand and balance on the adult-use side, but to satisfy the supply demand and the balance that exists today in the medical market. So not only do we have 2 more dispensaries coming online, but based on pricing, based on selection, based on quality, based on availability of products, our view is that we could build an extraordinary amount of additional canopy capacity and manufacturing capacity, and we would still scratch the surface barely for the medical market. So that's going to be a very strong environment for us, even if there are delays in the rollout of adult use. And frankly, we've seen that demand firsthand now that we're not only a manufacturer, but also a distributor, both through the retail and wholesale channel. Now separately, New York, the governor has come out again very strongly and sort of given a leading indicator that adult-use is something that is a priority for his administration. It's being driven by the financial requirements for the budgeting process in New York. It's a complicated state. It's a big state. There are a lot of different people with different competing interests. I think that the election shook out in a way at the local level that some people may not have predicted, right, the Republicans actually gained some seats in the Senate. And that -- we'll see how that pressures the Speaker of the Assembly and how that pressures the President of the Senate. But ultimately, Governor Cuomo is a very strong-willed, very powerful governor. And when he says something is going to happen, it usually happens. And that's precisely the reason why we've been investing and looking at and preparing for a way to really expand our manufacturing capacity, so that to the extent that there is a regulatory or legal or legislative move, we're able to sort of satisfy the demands of the marketplace. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question is coming from Matt Bottomley from Canaccord Genuity. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [12] -------------------------------------------------------------------------------- Great quarter. I have a question on trying to frame where your revenues are sort of all in right now and then where we're seeing a lot of growth or expected growth into Q4 and Q1 2021. So I'll just ask them both upfront, and then you can answer them. So just looking at what we're expecting to see from Project Cannabis. Obviously, you guys gave a sort of range of multiples when that deal was acquired. So it seems like that's sort of a $10 million business per quarter. So is it fair? I won't hold you to this number, but is it a fair rationale to say that if you take the $54 million that you reported, add in another 2 months of TGS and then, let's say, $10 million for Project Cannabis, that Columbia Care is a low $80 million revenue business currently as of Q3. So that's the first question. And again, I won't hold you to it, but just if you can maybe comment on the rationality of that. And the second is, if you exclude TGS from the quarter, looks like you did about close to $45 million of revenue. So still up 35%. And you gave very good color on a state-by-state basis. So I don't have too many questions on where it came from. But the question on -- I have on that growth rate is, how much of that is market dynamics versus Columbia Care opening up new production capacities and sort of increase penetration and where can we expect that level of growth into the next quarter or 2, given that 35% is pretty lofty sort of into perpetuity. So I'll leave it there. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [13] -------------------------------------------------------------------------------- So Matt, let me try to address those, but I'm going to ask Lars and David to chime in as well, because I'm sure -- I tried to write down a lot of the things that you were asking as you were speaking. Let me just first kind of level set. We are not -- we are hopeful that we're able to get through the regulatory approval process for Project Cannabis before the end of the year. But we're not sort of -- obviously, we're not sort of providing pro forma numbers that include Project Cannabis. But your logic seems reasonable, meaning if you sort of walk through the process that you just walked us through, that kind of triangulates with what one could reasonably look for if you look at everything on a pro forma basis, but the company is not providing pro forma guidance because we just -- we simply can't right now because we just don't know when that regulatory approval process will come. We're hopeful that it's in the fourth quarter. As far as the growth is concerned, look, every single market has been showing growth. I'm hesitant to say it's one market over another. You always have some standouts that we tried to highlight in sort of the written disclosure we provided the investment community. But the fact is, I think that it's -- it was a combination of having additional capacity coming online from a manufacturing perspective, which allowed us to tap into more of a wholesale revenue stream. And it was also sort of the improvements and the continued improvement within our retail setting of just driving that 4-wall analysis and that same-store growth. And so it's a very, very balanced sort of portfolio. But what's great, and I think what's really been encouraging, is that, that growth rate is not really kind of sensitive to any one particular sort of variable. We did not perform in Florida the way we had wanted to, right? It's just that simple. Now I am actually very excited about Florida because we have so many things that are actually moving in the right direction, but we haven't hit our stride right yet. But that didn't really affect our top line growth rate or margin expansion strategy because the rest of our markets continued to improve. And so I think that the key here is that the multistate operator, the benefit of the multistate operator is that I worry less about the one thing really hitting my markets because we have so many other things hitting our markets. And I think that was also evident in the second quarter when Massachusetts had that hiccup because the governor shutdown adult-use for a period of time. So let me -- with that as kind of a very high-level overview, let me turn it over to David and Lars and see if they have some additional commentary. -------------------------------------------------------------------------------- David J. Hart, Columbia Care Inc. - COO [14] -------------------------------------------------------------------------------- Yes. Lars, I'll jump and then you can jump in after me. But I think I would just echo what Nick said. There were a number of markets that performed well in Q3 and continue to trend in Q4. Many of our markets were medicinally licensed facilities that did not have a slowdown in Q2 heading into Q3 as some of maybe our competitors did, if they had adult-use licenses suspended, like we did in Massachusetts, which was just one of our markets primarily. So continue to try to look at it as a portfolio approach. And to Nick's point, we have underperformed relative to our expectations in Florida, but we remain optimistic about the upcoming quarters for Florida. But it's really about finding ways to continue to take market share at the retail level and to build out our wholesale relationships, which we've -- we started to, in earnest, in markets like Ohio and Illinois and New York and soon, hopefully, starting in 2021 in New Jersey and other markets. -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [15] -------------------------------------------------------------------------------- Yes, this is Lars, Matt. And not much to add. I think your math does make sense as you tallied it up. We don't report, of course, on that pro forma level. But I see no real issues with the way you went through the numbers. The only thing I just want to add, and I think we have discussed this before. We continue to be very positive about the performance of TGS in Colorado. So in addition to the markets mentioned by Nick and Dave, really the Colorado market has been great both before and after the closing of the acquisition. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [16] -------------------------------------------------------------------------------- The only thing I would add, and just this is -- now that we have so many markets and so many markets are contributing materially. I think it's worth highlighting that historically, Colorado has had a bit of seasonality, where the middle 2 quarters have been the historically strongest quarters and the first and fourth quarter have been historically somewhat weaker. And so I think we're too early in the fourth quarter to really comment on it. But I think that this -- when you're thinking about that type of extrapolative sort of logic chain, I just want to make sure that you're aware that, that cyclicality exists in a market like Colorado. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question is coming from Graeme Kreindler from Eight Capital. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [18] -------------------------------------------------------------------------------- I wanted to ask about the gross margins and seeing outperformance on the combined gross margin versus the as-reported gross margin. So I just wanted to get an idea from the core portfolio on the as-reported basis. How does that gross margin start trending towards 40% plus? What steps need to be done in order to take it there and perhaps even higher to maybe 50% or more? -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [19] -------------------------------------------------------------------------------- So let me just sort of make sure that there's no miscommunication. The 39% was actually much more reflective of the gross margin of the overall portfolio. And we've been improving our gross margin somewhere in the neighborhood of 200 to 400 basis points a quarter sequentially. So the add-back that we referred to was a byproduct of our acquisition of TGS. And the way it works, for those of you who aren't familiar with it, it's a required accounting standard. So you actually have to take the inventory that is on the books at the acquisition target, you have to capitalize it and basically accept it at fair market value. So as you burn it off, there is no -- there is -- it's an estimate, but there's no gross margin associated with it. So there was about $1.7 million impact because of the rapidity of our inventory turns, right? It just -- it hits you very, very quickly. Other companies, I think, have more creative strategies to try to isolate this phenomenon, but this is something that every company that makes an acquisition has to deal with, and it's very typical. So I -- actually, I think that -- I think it would be a mistake not to look at that 39% gross margin number because if you handicap the gross margin number with that accounting convention, it doesn't actually impact the income statement from a cash perspective. So it doesn't really reflect real operations. But let me turn it over to Lars. And Lars, maybe you can add a bit more color there just to provide some context on sort of the trend line to getting to north of 40% because I feel like at 39%, we're kind of there. -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [20] -------------------------------------------------------------------------------- Yes. I agree. And Graeme, also just to point out, there actually isn't a material difference between what we would report as combined and what we report as reported under IFRS. So in other words, that 3%-or-so adjustment that was resulting from the markup of inventory, that applies both to as-reported as well as to combined. So we're not seeing a big discrepancy there, quite frankly. And I agree with Nick, I think the trend line has been intact over the past 3 quarters, and we don't really see the trend line being broken, and we feel good about the guidance provided about getting to 40% and above in the fourth quarter and continue to see the trend line intact, like I said. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is coming from Matt McGinley from Needham. -------------------------------------------------------------------------------- Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [22] -------------------------------------------------------------------------------- So on investment areas into 2021, where do you expect to put incremental capital into the business in the next year? Is it -- were the highest-return projects being more on bolt-on, M&A to gain scale or do you think that investing for growth in some of these key markets on the East Coast is going to drive the most sense? I know you mentioned Arizona, but if you can give some color on what other markets you would be investing in, in next year, that would be helpful. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [23] -------------------------------------------------------------------------------- Well, I think that the -- every project is going to be assessed independent of one another. So I wouldn't say, with a broad brush, our best use of capital is either M&A or CapEx. I'll give you examples of all 3. Obviously, the return characteristics we're able to take advantage of by leveraging an acquisition that's free cash flow positive is obviously quite attractive. But when I compare that against the potential upside that we have by investing in New Jersey for an expansion of our cultivation capacity, right, that's going to be one of the highest rate sort of returns that we can make that -- in sort of the investment of capital. So I think that the -- we have a very kind of rigid criteria that we use to sort of priority rank each different project, whether it's an acquisition or it's a capital expenditure. And we also have different levers in our toolkit that we can pull to sort of optimize that. So for example, if we make a smaller acquisition in a market that's generating free cash flow, that's basically redeploying existing cash flow to make that acquisition in some cases. We don't have to -- that's a non-dilutive event, right? So that's -- you're starting to leverage dollars on dollars. And that's obviously very high rate of return, especially if you can do that frequently. And that's one of the reasons why we like some of the unlimited license markets that we're in, where we're establishing kind of the consolidating positions. When you're looking at CapEx, right, driving incremental margin and scale in a market is going to have a very significant impact. And we've seen that in a number of markets in our own portfolio and our competitors' portfolio. So it's -- I don't think that we're -- we haven't given specific guidance on sort of which projects go first, but we have certainly spoken about how we think about M&A. We've certainly spoken about how we think about sort of CapEx dollars, in which markets we would put in -- put those dollars into first. But Lars, I'm not sure if you have -- and David, if you have anything to add to that. -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [24] -------------------------------------------------------------------------------- No, I have nothing to add, specifically. Maybe you have, David. -------------------------------------------------------------------------------- David J. Hart, Columbia Care Inc. - COO [25] -------------------------------------------------------------------------------- No, nothing for me. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Our next question is coming from Andrew Semple from Echelon Capital. -------------------------------------------------------------------------------- Andrew Semple, Echelon Wealth Partners Inc., Research Division - Special Situations Associate [27] -------------------------------------------------------------------------------- Congrats on the solid quarter. So I'm just -- I want to focus on CapEx with my question. Your comments would seem to indicate an acceleration of CapEx and investments into your production capacity in several states. You mentioned accelerating some work being done in Arizona; new Jersey, certainly, I imagine a target market; and several other states. But then I also see that you maintain your CapEx guidance for the year. So I guess I'm just trying to reconcile those 2 comments. And I guess when looking ahead to 2021 directionally, would that be a year where we potentially see higher CapEx spend in 2020 given the number of organic opportunities you have in front of you? -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [28] -------------------------------------------------------------------------------- Yes. I mean -- I think that one of the pieces to the puzzle that may be missing is that we're able to use our sale-leaseback partners and sort of alternative financing methods to pay for a lot of that CapEx. We haven't given guidance for 2021 yet. We will, once we've gone through the budgeting process with the Board, and we've gotten approval to convey that budget to the Street. But I would not anticipate sort of a bump in CapEx year-over-year. I don't think it's necessary relative to the infrastructure we've already built out. And recall, we've seen -- we've spent 100 -- we spent a considerable amount of money in the 4 quarters beginning from the time we went public until kind of middle of this year. And that has put us on a very productive pathway. So many of the projects we're talking about are incremental, not de novo. And we have a lot of sort of smart ways to finance those and alternatives that we didn't necessarily have before. But let me turn it over to Lars and see, Lars, if you have any additional insights. -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [29] -------------------------------------------------------------------------------- The only thing I would add, Andrew, is the nature typically of CapEx projects tend to be relatively slow burn to begin with when you're looking at design and engineering phases and then as they ramp up, you start seeing a larger burn in individual projects, right? So as Nick said, we're not guiding for 2021. If and when we do, we're going to try and be as granular as we can in order to give you a better insight into timing of CapEx spend. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our next question today is coming from Jason Zandberg from PI Financial. -------------------------------------------------------------------------------- Jason Zandberg, PI Financial Corp., Research Division - Special Situations Analyst [31] -------------------------------------------------------------------------------- Great. I just wanted to find out whether you have at your fingertips, what the same-store sales growth would be on your dispensaries on a quarter-over-quarter basis? Obviously, there's a lot of dispensaries that were added, especially in Colorado. But I'm wondering, just on an absolute same-store sales growth, what that growth looks like, if you have those numbers. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [32] -------------------------------------------------------------------------------- We haven't given that level of granularity to the Street. But I think on this call, we did kind of provide enough detail to sort of give you an idea of what the core Columbia Care business, excluding TGS, looked like. And I think -- I mean, David and Lars, I would ask you guys. The growth rates in our retail dispensaries are still a primary driver for our organic growth rates. You're not going to see huge distinction between the 2. But the 4-wall analysis for our individual facilities has been very encouraging. So Lars, let me turn it over to you, see if you have sort of any additional information to share. -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [33] -------------------------------------------------------------------------------- Yes, sure. I mean I can confirm what you said, Nick. The significant, if not most of our growth really was organic, and although we had some very positive developments in our wholesale business as well, the bulk of the organic growth still came from our existing retail network. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Our next question is coming from Russell Stanley from Beacon Securities. -------------------------------------------------------------------------------- Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [35] -------------------------------------------------------------------------------- With respect to Illinois and the growth of that wholesale business, can you talk to, I guess, the extent of your penetration into third-party dispensaries there? And any targets on that front that you can share? -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [36] -------------------------------------------------------------------------------- Russell, I apologize, which states -- state or states were you referring to? -------------------------------------------------------------------------------- Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [37] -------------------------------------------------------------------------------- Illinois. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [38] -------------------------------------------------------------------------------- Illinois. We haven't given that information. But I -- what I can tell you is that from -- and we made this comment in the written disclosure. We've seen significant increases in revenue, driven primarily by our wholesale business in the state of Illinois. And I think that that's just a -- it's a market that really is clamoring for the products we manufacture. But again, Lars and David, let me turn it over to you guys to see if you can provide any additional color. -------------------------------------------------------------------------------- David J. Hart, Columbia Care Inc. - COO [39] -------------------------------------------------------------------------------- Yes. This is David. The only thing I would add there is our branded products are the #1 sellers in our store since we've introduced them. And we are selling every available amount of biomass that's coming out of our Aurora facility to third-party partners throughout the state. So continue to build what we think is a robust, diversified wholesale business across the market with our brands. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [40] -------------------------------------------------------------------------------- Lars, anything to add? -------------------------------------------------------------------------------- Lars Robert Boesgaard, Columbia Care Inc. - CFO [41] -------------------------------------------------------------------------------- I can't add to David's comments there. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Our next question is coming from Vivien Azer from Cowen. -------------------------------------------------------------------------------- Gerald John Pascarelli, Cowen and Company, LLC, Research Division - Associate [43] -------------------------------------------------------------------------------- This is Gerald Pascarelli on for Vivien. So Nick, would love to get your thoughts on the Colorado market, broadly speaking. Obviously, it's an important state. But just from like an industry perspective, it's kind of been seeing this robust growth and, call it, year 6 since adult-use legalization. So just curious how you'd view this market in terms of its maturity and the white space going forward? -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [44] -------------------------------------------------------------------------------- So I'll give you some very high-level thoughts, and then I'll ask David to share his insights as well. Colorado has been stronger than I think people had expected. It's being driven by a number of reasons. In our case, what has sort of given us the ability to really accelerate our position in Colorado is the fact that we have one of the best automated and most automated manufacturing platforms in the industry in Colorado. We have one of the lowest cost manufacturing bases in Colorado and one of the most efficient and productive manufacturing bases in the state. And then we also have one of the best sort of distribution channels, the proprietary distribution channels. And that allows us to sort of remain relevant in all of the key markets that we want to participate in. But what also -- I think Colorado, very much like California, has a supply shortage. And one never really thinks of Colorado as being short of supply, but it is. And so the fact that we have -- we timed the sort of the rollout of our wholesale supply just as some of our competitors and the market began to sort of show real softness from the standpoint of supply chain continuity, we've been able to use that as an opportunity to not only expand margins but also lean in and capture market share profitably. So it's a combination of things, but it comes down to scale and it comes down to market dynamics and it comes down to our ability to really deliver to the wholesale market what the wholesale market is looking for. And that covers not just smokable flower, but a variety of other products that we can manufacture and distribute at a very cost and margin effective level. -------------------------------------------------------------------------------- David J. Hart, Columbia Care Inc. - COO [45] -------------------------------------------------------------------------------- And this is David. The only thing I would add is we continue to think that Colorado is going to experience, from an industry perspective, strong growth year-over-year heading into 2021. We think the assets we have in Colorado are well positioned around some of the markets that are not as dependent on tourism. We had a very successful outdoor harvest in Trinidad, which is down in the New Mexico border. So as Nick mentioned, we started to -- the team has done a terrific job this year building out there, for the first time, a real market presence in the wholesale side of the business, and we expect to continue to lean into that into 2021 through the successful harvest and the continued expansion of that canopy down in Southern Colorado. So I think, to Nick's point, there's been a working capital imbalance in the industry, broadly speaking, price -- from a supply demand perspective and the price volatility in the market. And we want to make sure that the team in Colorado that we are well positioned to take advantage of those price fluctuations as opposed to being a buyer when you shouldn't be and a seller when you shouldn't be. So I think that has an impact on our growth trajectory relative to the market, which I think we can continue to outpace. But I think maybe, more importantly, we can have some margin improvement occur in the state of Colorado as we use working capital more opportunistically and continue to lean into brand development on the wholesale side. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. -------------------------------------------------------------------------------- Nicholas Keane Vita, Columbia Care Inc. - Vice Chairman & CEO [47] -------------------------------------------------------------------------------- Great. Well, thank you, everybody, for joining us today. We really appreciate your time and support, and we look forward to being in touch with you in short order. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.