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Edited Transcript of CURA.CD earnings conference call or presentation 18-May-20 9:00pm GMT

Q1 2020 Curaleaf Holdings Inc Earnings Call

Jun 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Curaleaf Holdings Inc earnings conference call or presentation Monday, May 18, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Boris Alexis Jordan

Curaleaf Holdings, Inc. - Executive Chairman

* Daniel P. Foley

Curaleaf Holdings, Inc. - VP of Finance & IR

* Joseph Lusardi

Curaleaf Holdings, Inc. - CEO & Director

* Michael J. Carlotti

Curaleaf Holdings, Inc. - CFO

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Conference Call Participants

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* Aaron Thomas Grey

Alliance Global Partners, Research Division - MD & Head of Consumer Research

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Harrison Vivas

Cowen and Company, LLC, Research Division - Research Associate

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Matthew Robert McGinley

Needham & Company, LLC, Research Division - Senior Analyst

* Neal Gilmer

Haywood Securities Inc., Research Division - Research Analyst of Special Situations

* 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

* William Joseph Kirk

MKM Partners LLC, Research Division - Executive Director

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Presentation

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Operator [1]

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Good day, and welcome to Curaleaf Holdings First Quarter 2020 Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead.

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Daniel P. Foley, Curaleaf Holdings, Inc. - VP of Finance & IR [2]

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Thank you. Good afternoon, everyone, and welcome to Curaleaf Holdings First Quarter 2020 Conference Call. Today, I'm joined by Boris Jordan, Executive Chairman; Joe Lusardi, Chief Executive Officer; Joe Bayern, President; Neil Davidson, Chief Operating Officer; and Mike Carlotti, Chief Financial Officer.

Earlier today, we issued a press release announcing our results for the fiscal quarter ended March 31, 2020. These press releases are available on our website under the Investor Relations section and filed on SEDAR. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their nature, involve estimates, projections, plans, goals, forecasts and assumptions, including the successful completion of announced acquisitions and the impact of COVID-19, 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 on certain material factors or assumptions that 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 on SEDAR and the Canadian Securities Exchange. During today's conference call, Curaleaf will refer to non-IFRS measures did not have any standardized meaning prescribed by IFRS such as pro forma revenue, adjusted EBITDA and managed revenue, the definitions of which may be found in our earnings press release.

Please note that all financial information is provided in U.S. dollars unless otherwise indicated.

With that, I'd like to turn the call over to Executive Chairman, Boris Jordan.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [3]

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Thanks, Dan. Before we begin, I would like to officially welcome Mike Carlotti, our new Chief Financial Officer. Mike joined the company in February taking on the CFO role, as Neil Davidson was appointed Chief Operating Officer. Mike is a seasoned financial executive who has already added great depth in leadership to our team and will provide our financial overview and outlook going forward.

I want to begin by highlighting the extraordinary efforts the entire Curaleaf team has expanded in navigating the COVID-19 environment so far. We have successfully kept our employees and customers safe while continuing to serve the communities where we operate. We have been relentlessly focused on taking all necessary steps to adapt our business to this evolving situation and our record results in selector trying time demonstrate our continued emphasis on excellent in execution. I am incredibly proud of the entire team's response and stepping up the challenge, and I'm extremely pleased with our overall performance thus far. Our ability to deliver profitable growth is also a reflection of our diversified portfolio of assets.

Curaleaf has exposure to some of the best cannabis markets in the country, and our portfolio will only strengthen with the inclusion of Grassroots. At this time, the principles have resolved all outstanding matters and are currently working to complete the transaction. We have made substantial progress in regulatory approvals and the transaction is expected to close by the end of the second quarter. Grassroots is a strong market leader throughout the Midwest with an affiliated portfolio of approximately 63 dispensary licenses, including 33 operational today and 23 cultivation and processing licenses.

Importantly, Grassroots has a leading presence in large markets in which Curaleaf does not operate, strategically accelerating our continued expansion across the nation. Illinois and Pennsylvania, which are among the largest and fastest-growing cannabis markets in the U.S. are the most significant immediate opportunities. But Grassroots brings the Curaleaf brand to Arkansas, North Dakota, Vermont as well.

The combination is also complementary to our existing business in 7 other states, giving us more scale and operating leverage in major markets such as Arizona, Maryland, Michigan and Ohio. I am also encouraged by the integration of our recent acquisitions, most notably, Select. We have been working diligently to expand and vertically integrate Select as we look to structure the business for lasting and profitable growth. The brand is seeing an acceleration in legacy markets even as we enter new ones, and Select is now on the shelves in Oklahoma, Michigan, Maryland and Colorado with plans for Connecticut, Florida, Massachusetts, New Jersey and New York.

Select products are already available in approximately 800 independent dispensaries across 6 states and in company-owned stores in 3 additional states. By year-end, consumers will have access to Select in 15 states, including an over 70 Curaleaf-owned dispensaries, and we expect to continue this aggressive rollout in conjunction with the pending Grassroots transaction. Select is the perfect complement to our in-house wellness brand and will allow us to engage a wider spectrum of customers, particularly in limited license markets. Select is rapidly becoming the first true national adult-use brand, yet we are only beginning to see the full potential here.

The white space that exists for brands and cannabis is enormous, and we intend to leverage our industry-leading scale to maximize this opportunity. We have also successfully integrated Arrow Alternative Care, immediately making Curaleaf, the leading cannabis retailer in Connecticut and fulfilling our vertical integration objective in that market. On the regulatory front, the essential designation we received in all markets where we operate has been a welcome validation of our business. We are pleased that many state governments explicitly recognize the vital role that cannabis plays in the health and well-being of our citizens and as a significant economic driver to their states.

I'd like to take this opportunity to once again thank the governors and their hard-working staff for their leadership, commitment and for their tireless efforts during this tough time. Their support has been critical in helping ensure that our customers can access the cannabis products they have come to rely on without interruption.

That said, COVID-19 became a headwind in Nevada and Massachusetts, late in the first quarter and into the second quarter. On March 21, the governor of Nevada limited dispensary sales to delivery-only. In response, we quickly added home delivery capabilities, allowing us to continue to serve our local customers. On May 1, Nevada approved curbside sales, which we immediately implemented successfully. And finally, on May 8, customers were able to reenter dispensaries as part of the state's Phase 1 reopening directive. We continue to service customers through curbside, delivery and pickup operations in Nevada. And given our business as a strong local following, our operations have held up relatively well. However, Nevada's full potential will not be realized until Las Vegas tourism rebounds.

On March 24, the governor of Massachusetts issued an order temporarily closing all adult-use dispensaries due to the coronavirus, while allowing the state's medical dispensaries, including ours, to remain open. Since then, we have seen strong growth in medical sales driven by a 245% increase in patient registrations, but the lack of adult-use sales since March 24 has been significant setback.

Recently, Massachusetts announced that adult-use cannabis stores will reopen, and we believe there is tremendous pent-up demand in this market. With these restrictions behind us, we look forward to very significant profitable growth. Joe Lusardi has been instrumental in these developments, and I want to recognize the extraordinary leadership that Joe and our government affairs team showed in working to ensure adult-use cannabis was included in the first phase of the state's reopening.

At the federal level, the Safe Banking Act was included in the newest coronavirus relief bill, and we are encouraged by the bipartisan support from cannabis reform in the House of Representatives. Curaleaf in the industry are going to fight hard to hold these gains in the Senate, but there is much work to be done. Cannabis is an industry is still only in its early days, yet it employs over 250,000 American workers and generated over $1.9 billion in state and the local tax revenue in 2019.

New frontier estimates that if marijuana were legalized at national level today, roughly 782,000 new jobs would be created, growing to 1.1 million by 2025. Federal legalization, it is estimated, would generate $131.8 billion in total tax revenue between 2017 and 2025. It is time for the Senate to recognize cannabis is here to stay and that the industry warrants the modifications that will allow it to achieve its full potential.

Before reviewing the quarter 1 results, I would also like to highlight how COVID-19 is impacting the way we interact with customers. Curaleaf is responding to patient shifting preferences by further expanding delivery, online and mobile capabilities, moving experiences beyond the traditional brick-and-mortar, enhanced online purchasing, including recent introduction of debit-based transactions in several markets, streamline the in-store transaction process and enhanced basket size even as we socially distance. We are seeing robust growth in online commerce, and we'll continue to invest in improving our online presence.

Turning to our financial results. In quarter 1, we delivered the highest quarterly pro forma managed revenue and adjusted EBITDA in company history. Pro forma revenue of $147 million reflects the power of our platform and leadership position in the sector. Managed revenue, which includes Select as acquired on February 1, 2020, grew 29% sequentially to over $105 million. The $20 million of adjusted EBITDA we delivered in the first quarter represents 77% of total fiscal 2019 adjusted EBITDA, demonstrating the operating leverage present in our business as we rapidly scale. Mike will go into greater detail about our results and future expectations, but I am very pleased with our business. Importantly, these results were delivered despite losing substantially all of our revenue in Massachusetts, in Nevada for the last 2 weeks of March. Not only are we delivering strong profitable growth, but we have a solid balance sheet with over $176 million of cash on hand at the end of quarter 1 to invest in our organic growth and strategic acquisitions.

Looking ahead, we will continue to implement a disciplined capital allocation strategy, focusing on high-return projects that will be most accretive to our diversified position. We are already seeing exciting opportunities to fuel additional growth as the cannabis space continues to consolidate and states announced expanded initiatives. In addition to our cash position, we also have substantial unlevered real estate. And my partners and I remain committed to the funding up to $100 million for any particularly attractive opportunities that may arise in this cash-constrained environment. Many of you know that I have been involved in investing in developing businesses in emerging markets for over 30 years. And I use these experiences as context when I look at the evolving cannabis sector. The road has been bumpy, perhaps more than originally anticipated, but this sector presents a rare opportunity to create significant value, and I'm optimistic as ever on Curaleaf and the industry. I reiterate that I have no plans to sell a single share of Curaleaf and remain fully committed to the growth and success of the company.

I will now turn the call over to Joe.

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [4]

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Thanks, Boris. Before I go into the details of our business, I would like to thank Curaleaf President, Joe Bayern, our management team and all our employees for their leadership in navigating and adapting to the very difficult circumstances of the last few months. I have never been prouder of our people and our purpose. In addition, I want to once again thank our customers across the country for their continued support of Curaleaf.

We remain confident that we will continue to manage our company effectively to the duration of COVID-19, the support of regulators, state leadership, our dedicated employee base and critically, the support of our customers. As Boris mentioned, we redeemed an essential service in almost every state in which we operate and the fundamentals of our business remain strong. By and large, we have maintained consistent velocity through our dispensaries, except in Nevada and Massachusetts, which temporarily provided normal operations. However, the outlook in these states as well as nationwide is now more encouraging as we focus on gradually lifting the restrictions that were put in place in late March.

The Curaleaf's supply chain remains strong. We continue to collaborate with vendors and are confident that we will continue to have access to needed supplies as the global economy begins to restart. We have implemented and maintained guidelines such as social distancing, increased sanitation and hygiene measures and have utilized technology solutions to help minimize unnecessary customer and employee interaction and contact. We continue to employ curbside pickup, delivery, mobile preordering, express pickup and a new way of ordering technology app to protect the health and well-being of our employees and customers, all of which have been become embedded standard technologies in our business with strong future application potential and have served as a leading example, not only for our industry but for other essential service retail environments.

We remain firmly focused on operational excellence to drive both top and bottom line results in 2020. Overall, our operations continue to scale and key states continue to become more self-supporting, yielding increased amounts of operating cash flow. This was demonstrated in the strong first quarter results we posted today that are indicative of the underlying strength of our business. With the continued dedication of our management team and employees, coupled with the gradual relaxation of state restrictions, I have no doubt that Curaleaf will emerge from the situation as a true leader in the cannabis industry.

Organically, we expect to add an additional 17 Curaleaf dispensaries across 5 states and expand our cultivation by approximately 200,000 square feet of canopy all by year-end. When coupled with our strategic acquisitions, including the pending Grassroots deal, our reach would grow to more than 100 dispensaries across 22 states by year-end. Ultimately, we expect to grow our operations to nearly 140 dispensaries and 2.3 million square feet of cultivation space. This will make Curaleaf the most well-diversified, vertically integrated cannabis company in the United States with access to nearly 2/3 of the entire U.S. population.

Turning to a recap of first quarter operations and our significant progress in key states. In Florida, we are intently focused on optimizing and expanding our cultivation capacity to drive market share gains in this key state. Towards that end, we are aggressively expanding capacity at our Mount Dora cultivation facility. Construction on the first indoor expansion of the facility has remained on schedule with the anticipated completion by this July. This new 50,000 square foot indoor building combined with further ongoing expansions within the existing footprint of our 278,000 square foot Dutch glass greenhouse were more than double our canopy. This will allow our supply chain to catch up to the robust flower demand that exists in the market and support new dispensary openings.

In addition to our 28 stores, we offer statewide delivery and cashless debit transaction capabilities. We have 12 new stores in various stages of development. We expect to finish the year with a total of 40 stores in materially for presence in every major population center in Florida. With over 330,000 active registered patients in the state and over 10,000 patients a month registering for the program, Florida remains one of the fastest-growing medical cannabis markets in the country. Given sales trend data seen in the DOH weekly data, we anticipate Florida to be a $1 billion market this year. With substantially increased cultivation capacity and a new wave of store openings, Curaleaf is well positioned to gain market share now and to capitalize on the immense long-term opportunity in Florida.

In Massachusetts, we've implemented cash flow debit transactions, and have continued to serve patients at our 2 medical stores in Hanover and Oxford. We are eager to reestablish our leadership position in the adult-use market, which is expected to open this month. While our operations were impacted by the governor's order to temporarily close all adult-use dispensaries, it is important to highlight the significant opportunity that exists in Curaleaf's home state. During the quarter, we opened 2 adult-use stores Provincetown in January and Ware in March. Combined with our existing adult-use dispensary in Oxford. This means 3 of only 44 adult-use stores in the entire state are Curaleaf stores. Only 1 other operator, Alternative Therapies Group, has opened 3 adult-use stores in Massachusetts.

Beyond our leading retail position, we're perhaps even more enthusiastic on the wholesale market. Despite state-mandated store closures at the end of the quarter, adult-use sales were over $160 million in Q1, almost 50% higher than Q1 adult-use sales in Illinois. Curaleaf is 1 of only 28 companies in Massachusetts with an active cultivation license. We continue to harvest on schedule from our existing 50,000 square foot facility and began construction on an additional 50,000 square feet of indoor space that is expected to come online in July. If we'll give Curaleaf 100,000 square feet of high-quality indoor capacity in the state that, according to cannabis benchmarks, has the highest flower price per pound of any state in the country.

Meanwhile, we continue to work with regulators to close our transaction with Alternative Therapies Group, which for now, has been included in managed revenue, but will ultimately be moved to wholesale revenue once we close on the acquisition of ATG's cultivation and processing assets.

We remain extremely optimistic about our overall prospects for the adult-use market in 2020 and beyond. New Jersey, where Curaleaf has historically held over 35% market share, our team has once again produced record quarterly results. Our 12,000 square foot dispensary has continued to safely and effectively meet strong patient demand. During the first quarter, we completed construction of an additional 7,200 square feet of supplemental cultivation capacity at the Bellmawr facility. We expect our first harvest out of this supplemental facility to be ready in mid-June, fueling further near-term growth.

On both a retail and wholesale front, we remain the largest provider in this state of 9 million residents that crucially seems poised to legalize adult-use on the November 2020 ballot. Last year, the legislature formally approved a ballot measure in a Monmouth University Poll in late April from a measuring of 61% voter support. With strong growth in the medical program and adult-use on the horizon, we are actively building on our market-leading position. We expect to open at least 1 additional dispensary by year-end, for which we've secured a site and are working through regulatory approvals. We have also secured a 100,000 square foot warehouse plus 68 acres of land, which will become a state-of-the-art production facility later this year, creating hundreds of new jobs to the state.

Finally, we are actively working through the process of converting our operations to a for-profit entity and expect to complete this process in June.

Moving on to New York. The first quarter, our retail operations achieved over 25% market share according to state tax Dallas. With 10 licensees in the state, this represents more than double our fair share even before factoring in our significant wholesale volume.

In February, we launched CuraChews into the market, the first chewable gel product in the state. During April, we saw extremely strong demand for our curbside pickup and delivery options, helping drive our 40% retail growth from January to April alone. We've also implemented a cash flow debit offering for our patients.

While the coronavirus slowed momentum for adult-use legalization and the legislature this year, we remain well positioned to service the needs of our medical patients and adult-use customers, should legislation be enacted. While other licensees are reducing operations or helping state residents in New York, Curaleaf, on the other hand, has opened a maximum number of retail locations and a fully built-out 72,000 square foot production facility and remains poised to capture outsized market share as the program expands in the state of 19 million residents.

In Maryland, Curaleaf remains one of the only vertically integrated operators with the statewide maximum 4 dispensaries. We've continued to serve patients in our 4 stores, have implemented cashless debit transactions and have seen significant progress improvements in our production facility since we acquired the asset last year. In fact, first quarter yields more than doubled compared to the prior year. Maryland has a strong medical program that saw statewide Q1 sales of over $90 million, and we are optimistic that our vertical platform and robust retail fleet will allow Curaleaf to continue to drive market share gains.

Moving on to Connecticut. In early April, we closed the acquisition of Arrow Alternative Care. With this acquisition, Curaleaf, overnight, became the leading retailer in Connecticut, with 3 of the state's 18 operational dispensaries in the largest metro areas of the state: Hartford and the Northern tri-state metro corridor, Milford and Stanford. Combined with our existing 60,000 square foot production facility in Simsbury, which is 1 of only 4 production facilities in the state, Arrow helped us achieve our goal of becoming vertically integrated in Connecticut and has been immediately accretive to our margins. On the legislative front, we are seeing growing bipartisan support for adult-use legislation and are optimistic that adult-use cannabis will be a reality in Connecticut at the end of 2022.

In May, we continue to provide management services to 2 of the 8 medical license holders while positioning Curaleaf to be a leader in the adult-use market when it launches later this year. We intend to open the maximum of 4 adult-use retail locations early in the program with locations secured and in development, while expanding production capacity and our current data integrated medical operations. Additionally, we continue to work with regulators to convert our remaining medical entity to for-profit operation after securing our first approval recently. Maine's strong support of cannabis and sizable tourist market bode well for growth in 2020.

In Ohio, we are scheduled for our final inspection later this month for our Johnstown cultivation and processing facility. The facility is fully developed with construction complete and includes the maximum allowable cultivation of 25,000 square feet plus processing square footage that will allow us to deliver nearly 12,000 pounds of flower per year, bringing a full breadth of products to the market. Ohio's medical cannabis industry is still fairly nascent, and we are excited about Ohio, the nation's seventh most populous state with 11.7 million residents.

In Pennsylvania, we were awarded 1 of the first 7 clinical registered license, allowing us to open a total of 6 new dispensaries and 50,000 square feet of cultivation capacity in the state. This award, coupled with our pending Grassroots acquisition will make Curaleaf a leader in one of the fastest growing medical markets in the nation.

Now I want to take some time to touch on our West Coast strategy. In California, we continue to harvest on schedule at our cultivation facility in Salinas and meet our manufacturing targets at the Select processing facility in Sacramento. Given California's robust illicit market, unfavorable tax regime and struggling dispensary operators, we are addressing this market in a thoughtful manner that recognizes its unique challenges. Operational excellence, disciplined pricing and tight receivable management will be our priorities as we expand the Select family of products to include gummies, live resin and tinctures We also just signed HERBL, California's largest cannabis distributor and supply chain cash solution company as the exclusive distributor of Select products in California. This partnership will allow for an increase in deliveries, expanded customer footprint, a more cost-efficient delivery method and opportunity for continued growth, bringing Select to more than 850 license dispensary and delivering partners across the state.

In Nevada, we are pleased that the state reopened retail dispensaries to customers on May 8, while allowing curbside delivery and pickup to continue in parallel. On the cultivation side, we continue to operate on plan on our 3 production facilities in the state. Despite our focus on local residents, the pace at which tourism rebounds over time will be a key sales driver for Curaleaf in Nevada. We closed on the acquisition of Acres Cultivation in late 2019 and are working to increase the productivity of those assets, allowing us to backward integrate Select in our supply chain. We have renewed emphasis on this wholesale market with the upcoming launch of new Select products, including gummies, live resin and tinctures, allow us to achieve the full potential of the brand. In Arizona, where Curaleaf hold more licenses than all but 1 company, our e-stores have seen extremely strong revenue growth in 2020, with monthly retail revenue increasing nearly 35% from January to April.

Since March, we implemented cash flows debit solutions at our stores as well as delivery. In Q1, we also doubled our canopy in our 100,000 square foot facility in Holbrook, with a focus on improving gross margin and free cash flow through vertical integration. Arizona continues to be one of the largest cannabis markets in the U.S., with over 230,000 registered patients or 3.3% of the state's population, and we remain confident residents will vote to approve adult-use in November ballot. Select is already a leading vape brand in Arizona, and we plan to win additional market share by further integrating Select in this market and introducing new products, including gummies, live resin and tinctures.

In Oregon, we are focused on backward integrating Select in our established vertical operations with our 37,000 square feet of cultivation. Select remains a leading vape brand in the market, and we are committed to growing the brand profitably in a way that continues to earn customer and patient trust in Select's home state.

In Colorado, we recently announced the acquisition of BlueKudu, the producer of cannabis chocolates, baked goods and gummies that utilize high-quality ingredients. Upon closing, Curaleaf will obtain an 8,500 square foot cultivation and processing facility that will support the company's planned expansion of the Select brand into Colorado. Select successfully launched there in January, and we view this market as an attractive opportunity to build brand identity and gain market share through a robust market. Colorado is the second largest state in terms of cannabis revenue.

In Utah, we have finalized the design and have started construction on our new 7,500 square foot pharmaceutical-grade processing facility in North Salt Lake City. We have submitted plans for our Curaleaf dispensary located in the city of Lehi in the geographic center of the Salt Lake City, Provo-Orem combined statistical area, which contains 82% of the state's 3.2 million residents. We expect to be fully operational by the end of July.

Finally, I would like to just add some additional color to the Select business. Since closing the acquisition on February 1, we have been laser-focused on integration, pursuing acquisition synergies and expanding the brand across several new states. Much work is left to be done, including the realization of synergies through the sourcing of oil from several of our manufacturing facilities in existing states as well as a rollout of the Select brand in certain key Curaleaf markets.

As part of our initiative to expand Select's presence, we have introduced the brand in Maryland, Oklahoma, Michigan and Colorado, with 7 new state launches planned by year-end. New products, including Curaleaf and Select Nano Gummies and Select Elite Live have launched or are launching in Q2 in several states, including Nevada, Arizona, Massachusetts and California. Nano Gummies made with nano-emulsion technology provide a faster onset and lighter offset by traditional edibles and offer a more predictable experience for the customer. Due to the precise and calibrated effects, nano products are a perfect micro dosing solution and an optimal choice for consumers looking to try cannabis for the first time after those seeking alternative consumption methods.

The nano technology is a game changer for the edibles market, and we are very optimistic about capturing additional share of new cannabis consumers who see this as a more accessible product. Select Elite Live is a broad spectrum oil product, driving fresh frozen flower, capture more essence of the living plant and a higher terpene content, resulting in enhanced flavor. Currently available in Arizona, California, Maryland and Oregon, Select Elite Live will be available across the majority of Curaleaf's network in Q3.

Furthermore, we continue to make progress on expanding the Select brand in the states that Curaleaf does not currently operate in, such as Oklahoma and Colorado. As Boris discussed, we envision Select as a national lifestyle brand, and we are well on the way toward making this a reality.

We continue to believe that over time, we can materially improve both the top line and margin profile of Select as we integrate it into Curaleaf and expand the brand into new markets.

In summary, I am pleased with our progress as we move through 2020. We are poised to deliver strong organic growth in our existing asset base and do targeted acquisitions, such as Select, Arrow Alternative Care and the pending Grassroots deal. We are executing on all fronts, prudently deploying capital to key markets, expanding both our brick-and-mortar and online presence. We remain focused on growing our cultivation and processing, sales and marketing and innovative and proprietary R&D to deliver brands that resonate with our patients and lifestyle customers.

We saw the fruits of this investment payoff in several key states as we exited 2019. And we firmly believe that our planned investment in 2020, many of which will be completed early in the second half of 2020, would yield strong growth both from the top and bottom line, leading to clearly becoming free cash flow-positive after all planned capital expenditures in the coming quarters.

In summary, despite the challenging environment presented by COVID-19, we have managed to weather this situation extraordinarily well. Cannabis in general remains a bright spot in the consumer space, and we are confident that Curaleaf remains one of the best-positioned cannabis companies to emerge from the crisis stronger than ever with momentum behind us to deliver strong growth in 2020.

Now I'll turn the call over to Mike Carlotti, our new CFO, to review our financials.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [5]

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Thank you, Joe, and good afternoon, everyone. First, I want to say how pleased I am to have joined the Curaleaf team at both a challenging and exciting time in the company's history. Like Boris, Joe and the entire management team, I am very optimistic about Curaleaf's future growth prospects. I've already spoken to several people on this call and look forward to getting to know each of you better over time.

Looking at the first quarter, once again, we posted record results as we remain focused on generating strong top and bottom line growth that we believe will drive long-term value creation for our shareholders. In the first quarter, we not only posted record pro forma and managed revenue but also posted our fourth consecutive quarter of record positive adjusted EBITDA. Our broad geographic base and product diversity, a key strength of Curaleaf, allowed us to deliver these results.

First quarter results were driven by strength in Arizona, Florida and New York, as we continue to see strong growth in retail operations in these key states. Vertical integration remains a key component to our strategy, and we continue to increase cultivation capacity in each of our states of operation in those markets where we continue to see expansion of medical programs and/or ongoing discussions around legalizing adult-use consumption such as Arizona, Florida, New Jersey, New York and Connecticut.

Our gross margins from cannabis sales expanded more than 460 basis points to 43% as compared to the first quarter of the prior year. The increase was primarily due to higher operating capacity of the company's cultivation and processing facilities. As mentioned in previous calls, while we expect our gross margin from cannabis sales to trend upward, it will continue to fluctuate quarter-to-quarter based on our investment cycle in processing and cultivation as we continue to expand and bring new facilities online.

Over time, we expect this fluctuation to moderate, especially in the second half of 2020 as our investments continue to ramp and the capital intensity of our investments continue to moderate. In the first quarter, managed revenue more than doubled over last year to a record $105 million and was up 29% quarter-over-quarter. Total revenue for the quarter was a record $96.5 million, up 28% over last quarter, demonstrating the strong growth that exists in both our core and managed business operations. In order to provide more clarity, this quarter, we have provided a breakdown of retail, wholesale and management fee income as it pertains to total revenue.

Select was acquired on February 1 and is contained in the wholesale revenue line. We reported record adjusted EBITDA of $20 million in the first quarter, up 45% sequentially and compared to a loss of $2.8 million for the first quarter of 2019. As Boris mentioned, the increase year-over-year, primarily due to the continued scaling of operations and higher gross margins across several states, notably in Arizona, Florida, New York and New Jersey, offset somewhat by the continued investment in key markets where we are expanding to meet demand. Our retail and wholesale revenue more than doubled to $77.1 million during the quarter compared to $27.8 million in the first quarter of the previous year. Management fee income was up 160% to $19.4 million in the quarter versus the comparable prior year period.

The increase in retail revenue was primarily results of organic growth and new store openings in Florida, Massachusetts and New York. We grew our retail footprint to 54 dispensaries as of March 31, 2020, up from 43 on March 31, 2019. As of today, we operate 57 dispensaries with the inclusion of the 3 dispensaries we acquired in Connecticut on April 6.

SG&A for the quarter was $45.9 million compared to $23.3 million in the prior year period and $36.2 million in the prior quarter. Adjusted for onetime charges, SG&A in the quarter was $34.7 million compared to $27.9 million in the prior quarter or 33% of managed revenues, a decrease of 100 basis points compared to the prior quarter. As we continue to integrate Select, identify additional cost savings and scale overall operations, we expect our SG&A to decline as a percentage of managed revenue, resulting in significant operating leverage. During the quarter, income tax expense was driven by increased deferred taxes associated with the increase in biological assets. Net loss attributable to Curaleaf Holdings for the first quarter of 2020 was $15.1 million compared to a net loss of $10.2 million in the first quarter of 2019.

Due to our acquisitive nature, we believe adjusted EBITDA is the best measure of our performance as it excludes the impact of $32.7 million of noncash charges related to biological assets, depreciation and amortization and stock-based comp as well as $11.2 million of onetime items primarily relating to increased business development, acquisition and financing-related activities. We have provided a reconciliation of net loss to adjusted EBITDA in our press release this afternoon. Adjusted EBITDA for the first quarter of 2020 was $20 million, an increase of 45% over the fourth quarter and illustrates the operating leverage we continue to experience as we scale.

Moving on to the balance sheet. As of March 31, 2020, we had $176.4 million of cash on hand. With the results announced today, our fourth consecutive quarter of positive adjusted EBITDA, we remain confident in our financial position and believe we have ample cash on hand to fund all of our current business initiatives to support future growth. Furthermore, several of our states continue to generate increasing operating cash flow, which paves the way towards generating significant organic cash flow.

Finally, as Joe mentioned, we believe the capital investments that we made in 2019 and continue to make in 2020 will lead to Curaleaf becoming free cash flow positive after all planned capital expenditures in the coming quarters. Weighted average fully diluted shares outstanding were $507.7 million. Please note that we issued approximately 47.5 million shares to Select shareholders upon the closing of that transaction on February 1.

With respect to guidance. We expect to report another record quarter of managed revenue for the second quarter of 2020, albeit at a slower sequential growth rate due to the temporary COVID-19 related restrictions placed on operators in Nevada through May 8 and the temporary closure of adult dispensaries in Massachusetts. These factors are expected to be offset somewhat by increased strength in key states such as Arizona and New Jersey. As such, we currently expect that managed revenues for the second quarter of 2020 will be approximately $120 million, reflecting sequential growth of approximately 14% and growth of approximately 118% versus the second quarter of 2019. It's worth noting that the impact of temporary closures in Nevada and Massachusetts have reduced our expectations for the quarter by approximately $29 million. This managed revenue guidance excludes any contribution from the proposed Grassroots transaction, which is expected to close at the end of June.

On a pro forma basis, which would include Grassroots, we would estimate that our second quarter managed revenues will be approximately $165 million. This guidance assumes that we are working on our Maryland structure, given the restrictions around the number of licenses that can be held within that state and takes into account the aforementioned impact of temporary closures. It is important to note that embedded in this overall guidance is the assumption that adult-use sales resume in Massachusetts on May 25.

Lastly, these expectations assume no further changes in the operating environment due to COVID-19 for the remainder of the quarter.

With that, I'll turn the call back over to the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Graeme Kreindler with Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [2]

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The first question, I wanted to follow-up on the Q2 '20 outlook here. So you mentioned some of the states where you're seeing growth in some of the other states where it might be a bit weaker. I was wondering in terms of the dynamics with customer behavior, I think the discussion in the past has been about lower volumes and higher average basket sizes, given all the work you've done to implement various alternative methods for customers to transact. I'm wondering if that dynamic has changed at all, looking into Q2 and aside from the individual markets in the states, whether that actually is driving some of the growth as well?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [3]

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Yes. Graeme, this is Joe. Thanks for your question. I would generally say that we're seeing growth across the country. I mean the only limiting factor, frankly, in Q2 is the fact that Massachusetts effectively shut us down for 10 weeks, and we lost a lot of momentum in Nevada. But in terms of momentum, it's building across the country. And yes, we are definitely seeing a change in consumer behavior. We're implementing new strategies, including curbside pickup and electronic payments. And we're seeing the basket size continue to increase when people use electronic payments. That's an encouraging trend. So I think generally, we feel very good about where the business is and the trends across the country, the growing demand. Even in the state like Massachusetts, you saw a 250% increase in medical registration. So the consumers want this product, right? I mean this isn't complicated. And the demand is going to continue to build. We need to build capacity to meet that demand. And if we do, we're going to be very successful.

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Graeme Kreindler, Eight Capital, Research Division - Principal [4]

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Okay. And then just to follow up. Is there anything or any sort of numbers you have to quantify whether these various initiatives you've implemented like curbside, express pickup, things like that, whether that's actually increased average throughput?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [5]

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It certainly has reduced transaction time. I mean it's hard to give metrics given how diversified our portfolios and how different we operate in every state. But I think where we've implemented curbside, it's certainly reduced the transaction time. And we've definitely seen the basket size increase almost consistently across the country.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [6]

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Average basket size is up about 7% since the last quarter, with visitation on slightly on average.

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Graeme Kreindler, Eight Capital, Research Division - Principal [7]

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Okay. Great. And then my last question here, and then I'll jump back in the queue. Looking at the pro forma revenue, sequentially quarter-over-quarter. If my math's correct, the pro forma revenue was up about 12%, which is a significant increase from the previous period where we saw about 2% growth but that bridge, I think, has gone from to about $47 million that was previously $50 million, the bridge from the managed revenues. So I was wondering if you could give a bit of color in terms of some of the parts on that pro forma revenue, especially on the bridge. And from the various entities included in that, which have seen an acceleration or above-expectation acceleration with the conditions because of COVID and which might have lagged a bit there?

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [8]

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Sure. This is Mike. So on the first part, you're correct. The bridge from $119 million of managed revenues expectations to pro forma includes organic growth of about 15%. And then the rest of the delta between managed and pro forma is a result of Grassroots. There's a couple of days of Arrow in there, but it's kind of a rounding error.

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Operator [9]

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Our next question comes from Vivien Azer with Cowen & Company.

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Harrison Vivas, Cowen and Company, LLC, Research Division - Research Associate [10]

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This is Harrison Vivas on for Vivien. Congrats on the strong quarter. As the #3 player in Florida, we were interested to note a recent New York Times analysis that showed the exodus from Manhattan, particularly over-indexed to Florida. Can you comment on the impact of this consumer migration had on week to sequential revenue trends in that key market?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [11]

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What I'll say generally is that we think Florida is going to continue to be one of the fastest-growing cannabis markets in the country. It's hard to quantify the migration from New York and how many new patient registrations were a result of that. But I think if you look at the state data, the new registrations continue to go up. So we're very encouraged by that market. Clearly, for Curaleaf, when we bring on a new 50,000 square foot cultivation facility, we'll be able to bring a lot more supply into our stores. We're going to open another dozen stores this year. So we're working very hard down there to grab market share, and we think that the market potential is quite strong for the foreseeable future, not to speak of adult-use, which could be on the horizon in a couple of years as well.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [12]

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I would just add that on New York, that we're only seeing strength quarter-to-quarter in New York. New York is really picking up to be one of our better states. And that's not necessarily the case for all the other operators. We've seen a lot of operators actually either shutdown stores or bring down the hours that their stores are operating. In our case, actually, we've seen the reverse. We're seeing quarter-on-quarter, substantial growth in New York. And New York is one of the largest, I think it's the second largest black market for cannabis in the United States after California. And as we continue to see those patients or those customers moving over to either the medical market or what we expect fully after New Jersey approves in their ballot in November, adult-use, we suspect New York will go very, very quickly after that, then we'll see a fairly large potential for growth in the New York market.

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Operator [13]

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Our next question comes from Matt Bottomley with Canaccord.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [14]

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And congrats on a very strong quarter. Just two questions for me. One that relates to Select, the other one with Grassroots. Joe, you gave some very fulsome commentary in the operations, state by state. So apologies if this might have been mixed in that -- or if I missed that in the mix. But just wondering on Select, given what you've seen last quarter with some rebounding compared to the headwinds we saw throughout 2019 with vaping, where did that segment of the business all when it comes to maybe that 12% growth that we saw on a pro forma? Did it outperform, underperform? Was it in line? And sort of any other anecdotes with respect to where you see that going in addition to your prepared remarks on that state-by-state basis?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [15]

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Yes. We are very encouraged with how Select is performing. We definitely think that even in -- even in challenging markets like California, we've managed to get back to growth mode as we launch new products like live resin and gummies and so. The business is definitely on the growth trajectory. You've also brought it into a couple of new markets. So we're very encouraged overall about consumers going back into the vape category and also be willing to try the brand out different form factors.

In terms of where Select can go, I think it's important to say that in its core markets where Curaleaf operates, we're going to vertically integrate it, which we've talked about to improve the margins. But more importantly, we are aggressively moving the brand across the country. And so I think it's kind of early to really talk about Select other than to say that we have big plans for it. It's going to be a national brand. It's going to be in New York, Florida, Boston, all the major markets this year, and we see a really unique opportunity to build the first national cannabis brand.

So we're very happy with how it's going, and we're excited about where we can take the brand.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [16]

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I would just add to that, that if you include January, which we didn't own the company, but if you included it in the quarter, the Select business did see sequential growth over the fourth quarter of 2019.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [17]

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Perfect. That's helpful. And the follow-up is just on Grassroots. So a couple of parts to this question, but feel free to answer what you can. One is just on the risk of closing. So we've seen in the past within the sector. One state can kind of gum up the works. I think Oregon has been a bit of an issue in the past. So just wondering if there's any states within Grassroots and understood that both parties within the deal have done everything they need to do. But just with respect to the regulators signing off, if you think there's any sort of trouble states in that, that's an outsized risk? And then the second part of that question is, if you could just comment on if it were to be consolidated in the operations tomorrow, where is their EBITDA profile? Are they already EBITDA-positive much like yourselves? And then also access to capital. I understood there was some real estate within grass roots that potentially could be spun off for sales and leaseback. So anything you can answer in those sort of types of questions would be helpful.

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [18]

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So I'd like to start out by saying that on the -- I'll start with the last question. We don't have any capital problem for Grassroots. Curaleaf has enough capital in Grassroots to build out the rest of their facilities. And so we don't see a real need for Grassroots today, for capital. As far as closing, I just want to make 1 point. Curaleaf has closed every deal we've ever announced. So I don't think we get a lot of credit for that. But if we announce a deal, we're going to close it.

Now there's always circumstances that could stop at extraordinary circumstances in the deal. But we typically treat transactions very seriously, and we don't go out announcing deals unless we have full intention to close it. So we fully expect to close Grassroots. To be honest, I think we see light at the end of the tunnel in terms of closing at the end of the second quarter. I think it's actually a little better than we originally anticipated when we were thinking during the first quarter, we thought that it might drag out into the third quarter due to the COVID situation. We made a lot of progress on the transaction since our last call in March, and we do expect the transaction to close at the end of the first quarter.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [19]

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End of the second quarter.

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [20]

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Sorry, end of the second quarter. End of the second quarter.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [21]

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Perfect. And any other commentary on the potential existing EBITDA profile, which I think you touched on will probably be...

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [22]

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So they are EBITDA positive, but we will not give any more color until we consolidate them, but that would be incorrect for us to do, but Grassroots is EBITDA positive.

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Operator [23]

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Our next question comes from Robert Fagan with Stifel GMP.

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Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [24]

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And congrats on a great quarter there. I thought I just want to focus a bit on the gross margin performance, very solid in the way we looked at it ex IFRS adjustments ex depreciation. We calculate it somewhere in the 56% area and up from Q4. And I was just wondering if you could talk to that in light of the contribution from Select, which I believe was historically lower gross margin than stand-alone Curaleaf. So what's going on in that Q1 gross margin improvement? If you could give some color would be great.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [25]

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Yes. Sure. I'll start. This is Mike. As we've mentioned, the Select margin profile is not the same as Curaleaf, just given it's a wholesale business and not a retail business. And so that would have an impact on our gross margin. However, as we continue to scale up in several of our key markets, we're seeing gross margin improvements in a lot of our key states.

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Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [26]

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Okay. Great. So good benefit of your platform diversity there. And I was just wondering if you guys could comment a little bit on the onetime charges that were included in the Q1 EBITDA. Any additional detail there would be helpful.

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [27]

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Yes. Most of the Q1 onetime charges were mainly due to the closing of Select, which included legal and advisory fees. There was also some certain onetime litigation fees that were incurred in the quarter as well that went into that number.

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Robert Fagan, Stifel GMP Research - Equity Research Analyst of Healthcare [28]

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Great, Mike. One last quick one, if I could get it in. Is there some updated time for closing of ATG, realizing that Massachusetts has been slowed up due to COVID? But is there an updated time line for that acquisition and seeing how it's performing probably quite well after the closures? That would be great to kind of get that integrated.

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [29]

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Yes, Robert, this is Joe. I mean the deal has been filed with the regulators for many months now. The transaction is being reviewed. We fully expect it to be approved. But obviously, the COVID-19 puts a little bit of uncertainty into the exact timing. We will consolidate those assets. They are performing quite well.

In general, Massachusetts is prior to being shut down, was probably our strongest market in the country, really excellent gross margin, EBITDA margin. So in general, we're very bullish about that deal, and eventually, we'll get over the finish line. Just the timing is a little bit out of our control. But we're working hard with the regulators to get it over the finish line.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [30]

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But I think the good news, Robert, is that we -- the governor stepped out this morning, and I'm sure you read the news that he has allowed us to open up as of the 25th of May. And so that's really, really good business for everybody in Massachusetts.

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Operator [31]

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Our next question comes from Matt McGinley with Needham.

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Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [32]

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My question is on the wholesale revenue growth. Specifically, the revenue in that segment went from $9 million to $20 million from the fourth quarter to the first quarter, and that included 2 months of Select, which I think would imply the run rate of that business is probably $65 million or $70 million. I remember the earnouts, I thought the base of that was around 130. So just curious, directionally, that's the where that business is at today? And is there anything different sequentially that, that -- I think you said it was up sequentially, but is there anything different with that business in terms of how it looked in the fourth quarter versus the first quarter that would make that rate much lower than what I think - at least the earnouts were from last year?

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [33]

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Sure. This is Mike. So remember, obviously, we only had 2 months of Select in the quarter. And also as the adult-use businesses in Massachusetts were shut down for a period of time during the quarter, that had a negative impact on our adult -- our wholesale revenues in the state of Massachusetts. So you can't simply look at the delta between wholesale revenues in Q4 versus Q1 and presume that, that delta is all select because there are other movements within our wholesale business, namely. Overall good, but obviously, Massachusetts was a slowdown in wholesale revenues sequentially because of the shutdown.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [34]

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Yes. And it's very important to understand. It's very important to understand that a lot of the wholesales across the country take place at the end of the quarter. So the last 2 weeks are typically the busiest 2 weeks of any quarter of wholesales for all quarters. And so we've had both in the fourth quarter of -- a third quarter of last year where we had the vape crisis and the shutdown in vape sales in Massachusetts. And then, of course, with COVID at the end of the fourth quarter, where our wholesale sales were halted in Massachusetts at the end of the first quarter, also had an impact on that.

So I think that we're expecting very, very large-scale pent-up demand in Massachusetts in June as we reopen here on May 25, and we fully expect to sell anything we could possibly produce in Massachusetts. And as Joe said, we have an expansion of our existing cultivation coming on to the market here at the end of the quarter as well. So we anticipate that we'll have plenty of product in order to be able to supply the wholesale and our retail stores.

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [35]

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Just to add to that, the news, if you all saw on Massachusetts, when the adult dispensaries open back up, they will allow for out-of-state residents to visit those dispensaries or curbside pickup.

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Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [36]

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And on the G&A dollars in the quarter, excluding the onetime items, the dollar growth you kept pretty tight, and that certainly helped the rate. How does that look into the second quarter with the issues that you noted with Nevada and Massachusetts, and it was broadly a COVID [investment]. Would you expect to have deleverage on that into the next quarter? Or is it -- are you pretty flexible with those costs in those states where you're going to have the revenue drags?

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [37]

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Yes. No. We certainly expect that there will be a drag on margins in Q2 due to Nevada and Massachusetts. Nevada is a relatively small state for us, probably about 10% of managed revenues in a normal operating environment. But Nevada will see a negative impact to its gross margin, given the restrictions that were put on there in that state. Massachusetts gross margin will probably remain relatively similar, but gross margin dollars, given the size of Massachusetts relative to other markets will bring gross margin dollars down. Margin compression from those 2 states, however, will be somewhat offset by increasing margins in Florida, Arizona, Connecticut and New Jersey.

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Operator [38]

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Our next question comes from Neal Gilmer with Haywood Securities.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [39]

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A number of the questions have been answered, but maybe just to clarify on the Florida market. You commented about 12 stores opening between now and the end of the year. Is that mostly a second half of the year story with respect to -- are you going to be waiting for your cultivation facilities to increase before we see many more store openings in the Florida market?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [40]

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Yes. We've got a 50,000 square foot expansion that's going to be completed here in June and loaded up in July. So that'll harvest at the end of September, and I think the timing will line up pretty well with that new capacity coming online. I mean Florida is a great market and it's a high-class problem, but we're supply constrained. And every time we put products on the shelves, they move. So I think the more product we make, the more we'll sell and that bodes well for those store openings later this year.

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Operator [41]

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Our next question comes from Bill Kirk with MKM Partners.

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William Joseph Kirk, MKM Partners LLC, Research Division - Executive Director [42]

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I have 2 that are Select-related. When you're putting the Select brands on your shelves, what products are coming off? So what are you replacing when you put that brand out in your retail story?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [43]

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We think that Select is a net new brand and it speaks to a different consumer, particularly in adult-use market. So we think there's room for both. If you think about our brand architecture, we're really building Curaleaf as a wellness brand that Select as an adult-use brand. And in a market like, for example, in Massachusetts, we think that works really well. Markets that have both medical adult use, we think their brands meet different occasions. And so I think that they don't necessarily knock out anything. You also have to keep in mind that Curaleaf is primarily vertical. And so the vast majority of the stuff that we sell in our stores is our own products. And so it's really just a function of making space in our shelves for a different brand, and you're trying to get a different consumer with that product.

So for example, we'll launch Select aggressively in Florida here this summer. I think that will create a lot of excitement. We're going to bring Select into New York. I think that will create a lot of excitement and potentially bring new consumers into the category. So we don't think that it's one or the other. We think both brands can be really successful.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [44]

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Yes. And they target a different audience -- a different customer, sorry. I mean Select -- the average age of a select customer is sort of mid-30s. The average age of a Curaleaf customer is around 50 in. And they're really looking for a different experience. One is looking for a product that could help them sleep in the form of wellness product or help them pain manage or help them in various elements that they have. And on the Select side, it's really a recreational user. So the one that uses cannabis on a regular basis for recreational purposes. So they are targeting different audiences. And what that's going to do is it's going to allow us to really have the full spectrum of customers from the younger customer in their 30 -- late 20s and 30s to the older customers that are more used to this sort of Curaleaf product, which more -- has more sort of SKUs with lower THC or very, very high THC , depending on the conditions, but really is geared at dealing with wellness rather than recreational use.

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Operator [45]

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Our next question comes from Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [46]

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Just first on Nevada, when you look at the business now and the pre-COVID shutdown business, understanding your remarks around focusing on local or residents. How much ground have you taken back in that market with the addition of -- with curbside a little while ago?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [47]

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Yes. I think in Nevada, I think one of our advantages is that we -- as you point out, we did have a long -- a strong local presence. I think the business has come almost all the way back from where it was. But I think that we're definitely -- don't anticipate a tremendous amount of growth until the strip gets back into action, right? I mean both of our stores are in very close proximity to the strip. And without casinos and restaurants and clubs, all the workers that support that industry aren't really coming into the strip area. And so we're feeling good that the business is on solid footing, but to get it back in to really strong growth mode, it's going to require the strip to really lightened up again.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [48]

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Understood. If I could sneak one more in there, just on Pennsylvania and the clinical register program. Is the game plan here? Have you mapped out a build-out plan there? Or are you waiting on closing Grassroots and understanding our position in Pennsylvania and trying to work that in tandem with the combined company. What -- any color on that strategy would be helpful.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [49]

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No. We're going full steam ahead on Pennsylvania. We've secured a building in King of Prussia that we frankly have secured for a couple of years now. The core and shallow is already built, and now we're just doing the internal fit out. We've already secured and are working on 3 of our 6 dispensaries for the clinical register program, and we think that actually, it plugs in quite nicely what Grassroots is doing. And so we really anticipate using all of that -- those stores and that license to capture the market.

As you're aware, Pennsylvania is among the fastest-growing markets in the country. Grassroots has a really nice business there, and they're building more capacity. So I think we're going to have a really strong leading presence in Pennsylvania going forward.

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Operator [50]

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Our next question comes from Pablo Zuanic with Cantor Fitzgerald.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [51]

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Look, just two questions on Grassroots. I understand that this hasn't closed, you can give a lot of details. But all the pro forma number, the difference between the $165 million and $120 million in for the second quarter is grassroots, right? So that's about $45 million revenue. We don't know exactly what it was in the first quarter. I don't know if you can share that. But I'm looking about on my math of 40% growth sequentially for Grassroots in the second quarter, and that's great. But I'm surprised based on comments from other companies and the fact that Illinois is up only like 4% in April versus March. So if you can give some color around that? Was there a big capacity increase? Or what's going on?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [52]

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Yes. Let me address that. So the first thing is that in the case of Grassroots, they have been aggressively building out their Illinois and their Maryland and Pennsylvania cultivation facilities. They have now finished their Maryland cultivation facilities, and I believe it's harvesting as we speak. They are finishing up their new Illinois and new Pennsylvania cultivation facilities here in May. And so most of the capacity in both Illinois and in Pennsylvania for Grassroots will hit the market in early and mid-third quarter. So you're going to see step up growth, substantial step-up growth from Grassroots in the third quarter.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [53]

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Okay. Related to that, do you have a sense roughly of what share you're going to have by the third quarter of capacity in Pennsylvania and of stores just roughly from the 2 combined operations, just rough?

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Joseph Lusardi, Curaleaf Holdings, Inc. - CEO & Director [54]

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I'm not sure I can say that. But Joe, if you -- I don't know, are we allowed to say that or not, I'm not sure.

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [55]

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Well, Grassroots has 9 stores operational in Pennsylvania today. With our clinical registrant license that will take us to 15 stores. That will be the leading footprint of retail stores in Pennsylvania, and I believe Grassroots has a leading wholesale brand as well. So I think that I would say that they're the #1 player or the 1 or 2 players in Pennsylvania.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [56]

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I know it's late in the call, but I want to squeeze two more. Just from an accounting point of view, when those MSAs are consolidated, you get like a doubling of revenue, right, because you are generating the fee on the -- on what you call managed revenue. And then when you consolidate, you're reflecting the full gross revenue. So correct me if I'm wrong, and if you can also clarify, what's the pro forma share count now if we factor glass routes?

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Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [57]

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Yes. Pablo, on the accounting stuff, maybe we can cover that in our call later today because that's -- that can get timely. But in terms of the share count, we had 507 million shares outstanding weighted average at the end of the quarter. Obviously, there'll be more shares issued grassroots, but we really haven't gotten through. We haven't talked about how that's going to work yet.

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Operator [58]

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Our final question today comes from Aaron Grey with Alliance Global Partners.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [59]

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Congrats on the quarter. Just one from me. Just in terms of where you guys stand right now, pretty comfortable from a capital position. Anything you guys see on the M&A front? Are there any markets where you feel like you might need to or want to deepen your penetration through some potential smaller tuck-in acquisitions? Just anything on that, but I know you're pretty diverse geographically right now, but since when and in what markets do you want to deepen your presence?

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [60]

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So we are very active on the M&A front. As you saw, we announced and closed the Arrow transaction in Connecticut at the end of the first quarter, beginning of the second quarter, but we have several bids outstanding for different tuck-in acquisitions across the country. Our strategy is very much to continue to grow our market share in the most important states in our franchise. I will tell you that our -- Curaleaf's position is we want to be #1 in every single market that we operate in, on a market share basis. So that could tell you where we're focused, right? In most of our states, we have that position, but there's 2 or 3 states where we're not that there at this point in time, and we're very focused on those states in order to be able to bring market share position to the #1 position. And so we are very, very active, and we are looking at multiple tuck-in acquisitions in different states where we want to grow our positioning and our market share.

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Operator [61]

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This concludes our question-and-answer session, and I would like to hand the call back over to Daniel Foley for any closing remarks.

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Daniel P. Foley, Curaleaf Holdings, Inc. - VP of Finance & IR [62]

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Thank you, operator. Thank you for joining us today. We would like to invite those of you listening to join us at upcoming conferences and events which are posted on our website in the Investor Relations section under events. I would also like to let you know that we have sent out our first Curaleaf IR newsletter and quarterly update. You can see by signing up for e-mail alerts on the website we certainly welcome your feedback on that.

We look forward to speaking with you at these events or our second quarter 2020 results conference call. Stay well and safe. Thank you for joining us, everyone.

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Operator [63]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.