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Edited Transcript of CURA.CD earnings conference call or presentation 29-Aug-19 9:00pm GMT

Q2 2019 Curaleaf Holdings Inc Earnings Call

Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Curaleaf Holdings Inc earnings conference call or presentation Thursday, August 29, 2019 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. - President, CEO & Director

* Neil P. Davidson

Curaleaf Holdings, Inc. - CFO

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Conference Call Participants

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* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Neal Gilmer

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

* Robert Fagan

GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare

* Rommel Tolentino Dionisio

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

* Russell Stanley

Beacon Securities Limited, Research Division - Research Analyst

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to Curaleaf 2019 Second Quarter Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Daniel Foley, VP of Corporate Finance and Investor Relations. Thank you, you may begin.

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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 Second Quarter 2019 Conference Call. Today, I'm joined by Boris Jordan, Executive Chairman; Joe Lusardi, President and Chief Executive Officer; and Neil Davidson, Chief Financial Officer. Earlier today, we issued a press release announcing our results for the fiscal quarter ended June 30, 2019. The press release is 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 law, which by their nature, involve estimates, projections, plans, goals, forecasts and assumptions, including the successful completion of announced acquisitions 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. It 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 release on SEDAR and the Canadian Securities Exchange. During today's conference call, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as managed revenue and pro forma revenue. Please note that all financial information is provided in U.S. dollars unless otherwise indicated.

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

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

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Thanks, Dan. On our first quarter call, we indicated the developing business through both organic growth and sensible acquisitions remained our priority. It is our belief that in order to ensure future success in the industry, cannabis companies need to establish strong brands and have the national platform to deliver them.

I'm pleased to report that we continue to execute on both of those fronts. Our focus in the first half of 2019 helped drive a record second quarter, and we still have several transformative acquisitions pending that will add incredible scale to our business. Upon closing, we will add the largest wholesale cannabis brand in the country in Select, with the biggest private multistate operator in the Midwest in Grassroots.

In the second quarter, our industry-leading operational footprint, now at 48 dispensaries, allowed us to deliver record managed and total revenue along with the strong sequential growth. More critically, the fruits of our investment are becoming evident as we reported our first ever quarter of positive adjusted EBITDA driven by our increase in scale. Further, we anticipate revenue and margins to continue to expand, allowing us to finish 2019 having generated our first full year of positive adjusted EBITDA. We expect all of our major states to contribute to positive EBITDA by year-end and expect the positive top and bottom line growth momentum to continue into 2020.

Including Select and Grassroots, we generated second quarter pro forma revenue of $111 million, representing an annualized run rate of almost $450 million. As a result of our investments in increased cultivation capacity, a larger distribution network and the overall ramp in operations, both organically and as a result of the Select and Grassroots transactions, we are guiding to a pro forma revenue in excess of USD 1 billion in fiscal 2020, with pro forma EBITDA margins well above 30%. This expectation is supported by: our growing fleet of stores; our operational footprint, expanding from approximately 1.3 million square feet in 2019 to 2 million square feet by the end of 2020.

Let me tell you why we are so excited about the Grassroots transaction. First, the combination will bring together the largest public and private U.S. multistate operators, creating the largest cannabis company by revenue and the largest operational footprint with operations from coast to coast on an enviable flat portfolio of licenses for future expansion. Curaleaf will operate in 19 states and service 10 of the 11 largest cannabis markets by population. Further, the combined entity will have the ability to operate 131 dispensaries, 32 processing and 26 cultivation facilities, totaling approximately 2.3 million square feet.

Second, Grassroots brings an incredibly talented team of operators with an unrivaled ability to win licenses in competitive application processes. Their track record speaks for itself. To date, Grassroots has won over 30 licenses across 9 of the most significant markets in the country. We're extremely excited to leverage their proven ability to win licenses to organically grow our business and scale through best-in-class execution. And we are highly confident that our compatible cultures will lead to a seamless integration and increased value to our shareholders.

Third, Grassroots have been actively growing their operational footprint in markets that are new to Curaleaf, including -- which include Pennsylvania, Illinois, Michigan, North Dakota, Oklahoma, Arkansas and Vermont.

We are particularly excited about Grassroots' position in Pennsylvania and Illinois, the nation's fifth and sixth largest states in terms of population. Pennsylvania is one of the fastest-growing cannabis markets in the U.S., launching in February of 2018 and already generating $350 million of revenues according to state data. In Pennsylvania, Grassroots is a clear market leader, operating 9 of the state's 60 open dispensaries and one of the state's 10 operational production facilities where Grassroots is tripling capacity over the next year to meet demand.

In Illinois, a market poised to begin adult-use cannabis sales in 2020, Grassroots is aggressively expanding its cultivation capacity to meet future demand. They currently operate 4 dispensaries, servicing the medical market and the new law allows them to double that count for adult-use, which we expect they will do in 2020. Illinois has already seen significant growth in their medical program with monthly medical sales nearly doubling in 2019 alone primarily driven by the key regulatory changes, including the implementation of the Opioid Alternative Program.

The Pritzker administration has shown a strong commitment to the marijuana program, highlighted by the fact that in June, Illinois became the first state in the country to legalize and regulate adult-use cannabis programs through the legislature. We expect this market to begin adult-use sales in January of 2020, potentially increasing the customer base by millions and creating a billion dollar market almost overnight. Grassroots is poised to capitalize on this opportunity.

These recent acquisitions along with numerous tuck-ins will allow Curaleaf to move into a class of its own in terms of scale and reach. Our continued strategy of investing in our existing businesses to drive organic growth and targeted acquisitions to complement that growth will give us a presence in nearly every major U.S. cannabis market, many of which are poised to potentially legalize adult-use in the very near future.

We are now in the enviable position to take advantage of existing and greenfield opportunities in medical, adult-use and CBD markets from coast to coast that are expected to reach a total addressable market size in United States of $45 billion by 2022.

We also continue to work with the Department of Justice in educating them on our business in order to move both the Select and Grassroots transactions through the HSR review process. We received a second request from the DOJ on Select and will be submitting our response in September. We submitted our HSR notification for Grassroots on August 13, which will be -- which began the 30-day waiting period.

We continuously review our capital structure and monitor market conditions. As a result, we signed a definitive agreement for $28.3 million in a sale leaseback transaction with Freehold Properties that will fund later this month. We believe this deal, which has the best terms in the industry, clearly demonstrates the premium credit profile of Curaleaf and our continued ability to finance our business on the most favorable terms.

We remain comfortable with our financial position and ability to continue to finance our current business, particularly as we start to generate significant organic cash flow. As we look ahead, to closing the Select and Grassroots transactions, we'll continue to consider opportunities to leverage our capital structure. For the avoidance of doubt, we do not intend to dilute our existing shareholders in any new financings.

I want investors to know that the founding shareholders, Board and executive officers remain committed to the long-term shareholder value creation. Earlier this year, we announced that more than 80% of our shareholders had voluntarily locked up their shares through October 2019. This group remains optimistic about the long-term value creation opportunity and will continue to support the growth and prosperity of Curaleaf.

As such, these combined shareholders have agreed to voluntarily extend their lockups, again, such that 15% of outstanding shares will be released each quarter so there is an orderly release of these shares. I also want to mention that the 3 largest shareholders, including me, represent 74% of the outstanding shares and we have no intention of selling a single share. I continue to firmly believe Curaleaf, with its industry-leading scale and potential reach, is the best-positioned operator in the cannabis space to create substantial shareholder value both in the near term and the long term.

I will now hand it over to Joe to discuss the operations of the company in greater detail.

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

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Thank you, Boris. As Boris noted, we have been busy in the first half of 2019 and continue to execute on all aspects of our strategy and build momentum on our goal to be the largest vertically integrated multistate cannabis operator in the United States. Most importantly, Curaleaf reached an important inflection point this quarter in generating positive adjusted EBITDA.

In addition to generating adjusted EBITDA on a consolidated basis, several of the states in which we operate also continue to see strong revenue growth and increasing adjusted EBITDA contribution, such as Florida and Massachusetts.

I would further note that in many of our markets, we are still making necessary investments to fuel future growth and we are generating increasing amounts of operating free cash flow in these states. We continue to focus on vertical integration, which remains core to our strategy and a differentiator that is key to driving higher margins in the cannabis industry.

As Boris mentioned, we are excited about our pending acquisitions of Select and Grassroots. In addition to extending our nationwide reach, we will add 2 outstanding management teams in Curaleaf with a demonstrated track record of success. On a combined basis, Curaleaf, Select and Grassroots will bring to bear a deep bench of highly accomplished executives who have operational experience in some of the world's largest companies, positioning us to deliver accelerated revenues, profits and ultimately, long-term shareholder value through best practices and improving capital deployment.

Turning to our current operation. The second quarter was an important milestone for the business. Not only did we achieve strong organic growth, but we reported our first quarter of positive adjusted EBITDA. While we have much work ahead to develop our key markets and integrate acquisitions, I am highly encouraged by the growth we are seeing in the business. Major markets including Arizona, Florida, Massachusetts, New Jersey and New York, all delivered strong sequential growth. Over the last 3 years, we have made significant investments in capital, people, time and energy to develop those markets and it's rewarding to see those businesses begin to more than cover their costs and then grow while preparing to capture future market share.

We currently operate 48 dispensaries across 12 states and expect our store openings to accelerate through the remainder of the year from both organic growth and acquisition. We serve over 65,000 active patients a month in medical cannabis and continue to invest in our national CBD product line, introducing a wide range of cannabis products to entirely new classes of consumers.

We continue to make prudent investments in our state of operations and believe that we have hit an inflection point in the life cycle of the company, where several large capital investments are beginning to produce tangible free cash flow.

As we look out into the second half of 2019 and into 2020, we are highly excited about the potential of each state in which we operate. We firmly believe that our focus on highly regulated and limited license markets is beginning to pay dividends and tremendous upside exists based on continued regulatory liberalization of key markets. We are continuously working with legislators and regulators to unlock the full potential of each of our markets and we have made significant strides in building out our operations this year to set the company up for significant growth.

I would now like to review our significant progress in some states. In Florida, we have grown our store count to 25, with 5 openings so far in 2019, and a goal of ultimately opening 35 stores by year-end, establishing a leading position in the state. While the growth in our Florida business was slower in Q1 due to supply constraints, we saw significant growth in our business in the second quarter as we brought high-quality flower to the market. The demand for flower has been strong and daily sales volume has increased nearly 2x since the first quarter.

We continue to fit out our 5-acre glass greenhouse and have commissioned several new indoor flower rooms, which, in total, will give us the ability to produce nearly 100,000 pounds of flower per year, almost a fivefold increase in current capacity.

With over 250,000 active registered patients in this state, Florida is among the fastest-growing medical cannabis markets in the country, having more than doubled year-over-year, and we now have the #2 market share in the state. We expect the patient count to continue to grow and further expect edible products will be approved in Florida later this year, stimulating additional demand for cannabis products. We remain optimistic about our business in Florida and anticipate dramatic growth throughout the remainder of the year and into 2020.

Lastly, Florida hit an important inflection point during the second quarter, as for the first time, we produced positive adjusted EBITDA in what is currently our largest operational state.

In New Jersey, we manage the largest dispensary on the East Coast. We remain the largest provider by revenue and market share in this state and continue to pursue plans to open additional dispensaries. Importantly, we just completed the first wholesale of our Curaleaf vaporizer cartridges which gives us an entry point in the highly populated northern New Jersey.

With the prospects of adult-use legalization remaining uncertain, we expect significant growth in the state as the legislature looks to further liberalize the market and create greater access to medical cannabis. Recently, the legislature enacted a law allowing for-profit conversion, and we are actively working throughout that process.

Most importantly, we believe the patient count in New Jersey could more than double in the next year, and improvements to the law will allow Curaleaf to capitalize on this growing market through new retail locations and wholesale relationships.

To that end, we continue to invest in our cultivation infrastructure and work diligently to open our next retail location in Central New Jersey. We expect to open this dispensary and expand our cultivation operations by year-end to further address the growing retail and wholesale market. Ultimately, we expect to expand our total cultivation capacity to nearly 46,000 pounds of flower per year by the end of 2020, an almost threefold increase in current capacity.

Massachusetts remains one of the largest opportunities for Curaleaf. We are harvesting and manufacturing regularly through our 50,000 square-foot facility and operate 2 successful medical dispensaries. An additional 50,000 square feet of harvesting and manufacturing capacity remains on track to come online in anticipation of an expanded adult-use program. This will bring our cultivation capacity to nearly 39,000 pounds of flower per year, almost a 50% increase in our existing capacity. In fact, our wholesale business ramped significantly in the second quarter and has provided strong revenue growth with strong adjusted EBITDA. We expect new retail locations will continue to open across the state, including ATG's new store in Salisbury, which provides significant wholesale opportunities for our business.

On August 9, we announced that our change of ownership application was unanimously approved by the Cannabis Control Commission. The approval was reached after we renegotiated its settlement, including a fine related to our reverse takeover of Lead Ventures in October 2018. This was an important step that now clears the way for our adult-use licenses to be approved. We look forward to the final approval of our cultivation and processing license in Webster and our dispensary in Oxford and a provisional approval of our dispensaries in Provincetown and Ware. It is our goal to begin adult-use sales this year and complete our transaction with ATG, adding significant scale to our business.

While we continue to be disappointed with the pace of the overall program, momentum is slowly building and Massachusetts should be one of the strongest cannabis markets in the country in 2020 and beyond. We expect our assets to be fully operational this year and we will be uniquely positioned to capitalize on the strong growth ahead.

Moving on to New York, Curaleaf was the first licensee in its class to open a dispensary and is one of the only 10 licensed operators in the state. We are now operating 4 stores across the state and harvesting regularly from our cultivation facility. Construction that nearly doubled our canopy size was completed in July and will position us to deliver nearly 14,000 pounds of flower per year, almost 2.5x the current capacity, which will allow us to meet future demand from the medical program if further legislative liberalization occurs.

Speaking of legislation, we continue to work with regulators to improve their product approval process and increase form factors, including flower and edibles, so that we can tap into the full potential of the market. While the debate around adult-use continues, we remain focused on growing the medical program, which currently has low penetration as compared to other markets. With just a few modifications to the law, we believe New York could show the same growth characteristics as Florida, and represent one of the biggest potentials for untapped growth in our business.

In the second quarter, our 4 locations achieved 17.3% market share in their first full year of operations, achieving well above average wallet share according to state tax data. We look forward to continuing to build momentum as the program and form factors expand.

In Maryland, we are vertically integrated and operate 4 dispensaries, the most of any cannabis company in this state. We are optimizing our 20,000-square-foot growth facility and yielding strains of over 30% THC content, which continues to allow us to fetch premium wholesale prices as well as drive increased and reliable repeat traffic to our dispensaries, which are all achieving higher wallet share than peers.

We expect Maryland to accelerate even further this year. Last quarter, the State of Maryland passed legislation allowing for the sale of edibles, and construction is underway to build a new processing and manufacturing operation at our Frederick facility. Maryland is a great market and we're optimistic our vertical platform and the additional cultivation capacity we plan to bring online will drive significant growth and meet demand, should adult-use come to the market in the future. Currently, Maryland continues to ramp revenues and is generating free cash flow.

Moving on to Connecticut. We continue to build out our new 50,000-square foot cultivation facility, which is opening in phases. Once complete, this facility will deliver over 7,300 pounds of flower per year, more than 2x our current capacity. This increased capacity coincides with the opening of 9 more dispensaries across the state and gives us confidence in our wholesale revenue will meaningfully grow through the back half of 2019.

On the legislative front, Connecticut lawmakers remain aware of the large source of potential revenue that adult-use represents. Both Governor Lamont and many state legislators continue to remain supportive of adult-use and are working on various bills that would open up the market to adult-use. With neighboring states enacting or debating adult-use programs, we believe there is a high likelihood that adult-use will become a reality in 2020.

In Maine, we continue to provide management services to 2 of the 8 existing license holders. The governor signed legislation in June to permit adult-use sales, which are expected to commence in early 2020. Curaleaf will use its position in this market to be a leader in this new program. Our adult-use licenses will be allowed to operate for retail locations, and we have real estate in development to maximize our footprint early in the program. Recently, the legislature passed a law allowing the nonprofit entity to convert to a for-profit entity, and we are actively working through that process. Maine is a tourist market and has the potential to generate significant growth in 2020.

In Ohio, Curaleaf won a processing license earlier this year. Ohio is the nation's seventh most populous state with 11.7 million residents. We have begun work on the cultivation and processing facility in Johnstown. Upon completion, the facility will include the maximum allowable cultivation of 25,000 square feet plus processing square footage that will allow us to bring our full breadth of products to the market later this year. Ohio's medical cannabis industry is still very nascent and we're excited about the growth opportunity in this highly populous state, which has only just begun to make cannabis sales.

Now I want to take some time to touch on our West Coast strategy. In California, which is the largest market for cannabis consumption in the country, we are rapidly expanding our Salinas facility to maximize its capacity, which is expected to reach over 54,000 pounds of flower per year upon completion, over 4x our current capacity. We expect to reach full capacity by year-end, which will set us up to backward-integrate Select if that deal closes. In the meantime, we are selling flower interim into the wholesale market and expect that business to accelerate later this year.

We also continue to ramp our oil manufacturing facility in Vegas, using a proprietary process to consistently achieve a high-potency oil. With established cultivation and processing operations and a sound expansion strategy, including our pending acquisition of Select's large wholesale presence, Curaleaf is ready to capitalize on the opportunity in California in a strategic and prudent way.

In Nevada, we are successfully operating a 10,000 square foot cultivation facility and dispensary in Las Vegas, which moved to a new flagship location near the Strip during the quarter. We continue to make regulatory progress on our acquisition of Acres and expect to close the transaction shortly.

The Acres farm located in the Amargosa Valley continues to be developed and will start generating significant flower and biomass starting this quarter. Upon build-out, we expect it to deliver nearly 33,000 pounds of flower per year, almost 4x its current capacity. Much like California, we look forward to backward-integrating Select onto this farming platform, which we expect will significantly reduce the input cost and increase supply.

And finally, in Arizona, we continue to see strong revenue growth out of our 8 retail locations. During the second quarter, we announced 3 acquisitions: Emerald, which was closed and rebranded Curaleaf in densely populated Gilbert, southeast of Phoenix; Glendale Greenhouse, which closed in August and is located in fast-growing Northwest metropolitan Phoenix; and a third, Phytotherapeutics, that will be relocated to a new flagship Curaleaf dispensary, near the Ak-Chin Pavilion in Western Phoenix in early September. Combining these 3 dispensaries with Curaleaf's established supply chain is anticipated to enhance an already strong top and bottom line earnings profile in Arizona and further extend Curaleaf's ability to provide highly rated patient service. We continue to expand our presence in this market, and we expect to yield a strong return on investment in the long run.

Meanwhile work continues on the build-out and optimization of our 100,000 square foot indoor cultivation facility in Holbrook, with a focus on improving gross margins and free cash flow through increased vertical integration that will deliver over 32,000 pounds of flower per year, more than 2x our current capacity.

Arizona continues to be one of the largest cannabis markets in the U.S. with over 203,000 registered patients, a full 2.9% of the state's population, and we continue to believe state residents will vote to approve adult-use in 2020. Again, we plan to back-integrate Select in this market.

We remain very excited at the prospect of closing the Select transaction. As we build towards full capacity, we're very well positioned to backward-integrate Select. Select has a tremendous amount of whitespace across the nation with which to expand its product offerings. We firmly believe Select will ultimately be a lifestyle brand leader across the United States, leveraging both Curaleaf and Grassroots' tremendous footprints and cultivation capacity nationwide to build significant market share as they have done in California, Oregon, Nevada and Arizona.

We remain incredibly excited and look forward to adding the Select brand, distribution network and their outstanding and talented team members to our organization. In the meantime, we continue to opportunistically look for ways to expand our presence out west.

Finally, we are excited about the growth prospects of the CBD market and our ability to drive meaningful growth for our shareholders in that category, which is estimated to grow to $22 billion in sales by 2022.

We continue to build out our facility in Lexington, Kentucky to support our hemp-based CBD business. Earlier this year, we partnered with a trusted cosmetics manufacturer with a history of supporting top-selling cosmetics brands. Combining Curaleaf's cannabinoid experience with cosmetic formulation experts has resulted in one of the best CBD skincare products on the market. We recently launched 15 new CBD-based skincare products and began shipping those products to national retailers in July.

Through our exclusive broker relationships, we are developing a deep pipeline of national retail opportunities and are optimistic in our sales prospects for the remainder of 2019 and beyond. We expect CBD to show growth in the second half of the year and be a meaningful contributor to the top line growth and ultimately, free cash flow in 2020.

I think it's important to state that Curaleaf was built on the idea of providing products and, equally importantly, education to our consumers in a highly compliant manner. As the regulatory landscape changes at both the state and federal level, we continuously work closely with stakeholders to ensure that we not only deliver best-in-class products, but that education and information about those products is compliant and safe.

As such, upon receipt of the FDA letter on July 23, we immediately took action to address the concerns raised with our CBD business and have subsequently informed the FDA that the company has fully addressed the issues. To be clear, the majority of the FDA concerns were focused around marketing of our CBD products and pointed to third-party content that was linked to our website. We have removed all such content.

In fact, several months prior to receipt of the letter and shortly after the passage of the Farm Bill, we embarked on a comprehensive review of our product line as part of an ongoing effort to monitor and ensure regulatory compliance. Based on this review, we discontinued sale of our vape pens and soft-gel products and made a number of changes to our product labeling and descriptions, all prior to receipt of the letter.

Our industry needs, wants and appreciates the work the FDA and other state and federal regulators are doing to ensure there is regulation and compliance in the cannabis marketplace. As they work to put a framework around this new and burgeoning space, we are committed to being an ethical and responsible company and working with these various agencies to be a leader in our industry. We are committing to setting the highest bar for standards and guidelines to best service our customers and their communities we serve.

We are meeting our customers' needs in and outside of our stores through educational programs, community partnerships and delivery services. We are creating a brand synonymous with quality, trust and reliability. And in Select and Grassroots, we are inheriting a leading lifestyle brand on the West Coast and a major Midwest operator with the same values that will be extremely beneficial to Curaleaf.

When combined with our best-of-breed cultivation and processing facilities, outstanding sales and marketing, innovative and proprietary R&D, existing deep management team and tuck-in acquisitions, Curaleaf is poised to continue to deliver outstanding greenfield development, strong same-store sales growth and an expanding the footprint for the foreseeable future.

Curaleaf has clearly distanced itself from the pack, and we believe that our execution in both organic development and on the acquisition trail sets us up for terrific growth for the remainder of 2019, momentum we expect to carry into 2020 as the unmatched leader in the U.S. cannabis industry.

Now I'll turn the call over to Neil to review our financials.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [5]

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Thank you, Joe, and good afternoon, everyone. As Boris and Joe stated, we've made significant progress on a number of our long-term growth initiatives, and we're extremely pleased with our record results for the second quarter. We are focused on driving strong top and bottom line growth that ultimately will drive long-term value creation for our shareholders.

This quarter, we reached a major milestone reporting positive adjusted EBITDA, which was accomplished largely from contributions from Florida and Massachusetts, both of which are expected to accelerate in the back half of 2019. Furthermore, gross margin on cannabis sales expanded to 40% from 38% last quarter.

As Joe mentioned, vertical integration is a key component to our strategy, and we believe we are ahead of the curve in preparing for demand by increasing cultivation capacity in each of our states of operation. These investments are paying off, as demonstrated by the strong revenue growth we experienced in the second quarter, both on a reported and managed basis.

Most importantly, we have focused our investments in capacity expansion in key states such as Arizona, Florida, New Jersey and New York, where we continue to see expansion of medical programs and/or ongoing discussions around legalizing adult-use consumption.

In addition to building out infrastructure that will benefit the back half of 2019 and into 2020, we have been busy deploying capital on strategic acquisitions that we believe will build significant long-term shareholder value.

Having said that, as mentioned in our last quarterly call, while we expect our gross margin from cannabis sales to trend upward in the long run, it will continue to fluctuate quarter-to-quarter based on the number of processing and cultivation facilities we expand or bring online.

Moving on to the quarter, we believe managed revenue and adjusted EBITDA are the best measures of our business from period to period. However, given our acquisitive nature and significant ramp-up, pro forma revenue is the best indicator of our mid- to long-term growth profile.

In the second quarter, our managed revenue more than doubled over last year to a record $55.1 million and was up more than 35% quarter-over-quarter. Pro forma revenue was $110.9 million for the second quarter of 2019, an industry record and shows the step function growth our business is experiencing as we work towards adding high-quality assets to our portfolio. The pro forma number includes all announced acquisitions to date, including Select, Grassroots, Eureka, Acres, the Emerald Dispensary, Glendale Greenhouse and Phytotherapeutics operations as if they had occurred on January 1, 2019.

Adjusted EBITDA was $3.4 million for the second quarter of 2019 compared to a loss of $3.8 million for the second quarter of 2018. The increase was primarily due to scaling of operations and higher gross margins in Massachusetts and Florida offset somewhat by continued investment in other key markets where we are expanding capacity to meet demand such as New York, Arizona and Connecticut as well as continued investments in our CBD business.

Highlighting other key financial metrics. Total revenue increased $33.9 million to $48.5 million in the quarter versus the comparable prior year period and was up 30% over the prior quarter. Our retail and wholesale revenue more than tripled to $37.7 million during the quarter compared to $11.5 million in the second quarter of the previous year. Management fee income more than tripled to $10.8 million in the quarter versus the comparable prior year period.

The increases in revenue year-on-year were largely driven from the acquisitions made in 2018 and 2019 as well as organic growth in Arizona, New York, Florida and continued build-out of our existing licenses as we grew our retail footprint to 45 dispensaries as of June 30, 2019, from 23 in the year ago period. As of today, we operate 48 dispensaries, which does not include additional dispensaries that are currently operated by our announced acquisitions, which are pending regulatory approval.

Gross profit before the impact of biological asset adjustments was $26 million for the second quarter of 2019 compared to $7.8 million for the second quarter of 2018. The significant increase was due to improved operating capacity and efficiencies of our business and increased revenues, particularly in Florida.

Revenue from cannabis sales in the quarter was $37.7 million, up $26.3 million or 229% over the prior year and up $10 million or 36% over the prior quarter. Our gross profit from cannabis sales for the quarter was $15.3 million, resulting in a gross margin of 40%.

SG&A for the quarter was $28 million compared to $12.5 million in the prior year period and $23.3 million in the prior quarter. Adjusted for onetime charges, SG&A for the quarter was $22.8 million compared to $21.8 million in the prior quarter, an increase of only $1 million or 4.4%. As we scale, we expect our SG&A to decline as a percentage of total revenue, resulting in significant operating leverage.

Net loss attributable to Curaleaf Holdings for the second quarter of 2019 was $24.5 million compared to net loss of $6.4 million in the second quarter of 2018.

Adjusted EBITDA for the second quarter of 2019 was $3.4 million. We have provided a reconciliation of net loss to adjusted EBITDA in our press release this afternoon. Note, a majority of the second quarter variance relates to noncash charges such as depreciation and amortization and share-based compensation totaling $11.7 million as well as onetime charges of $5.3 million, primarily related to increased business development and acquisition activities. Also our provision for income tax was higher during the quarter due to increased profitability in the states in which we operate. On a per share basis, net loss per share was $0.05 compared to a loss of $0.01 in the second quarter of 2018.

Moving on to the balance sheet. As of June 30, we had $107.3 million of cash. This does not reflect our recently announced sale-leaseback transaction with Freehold Properties, which we expect will raise approximately $27 million in cash that we'll fund and close later this month.

Fully diluted shares outstanding at the end of the quarter were 461.3 million. We believe the increased REIT activity in the market and increased number of leveraged finance transactions taking place in the industry signal an increased supply of capital willing to be deployed in cannabis. We were pleased with our ability to get a low double-digit cap rate through monetizing our real estate portfolio and believe this helps to set the market for any future leverage we may take on. Given our financial results are beginning to see the benefit of scale and produce positive adjusted EBITDA, we believe the capital structure for our company should now include an appropriate amount of leverage that does not dilute our equity holders. Given this increased interest in our industry, we would anticipate taking advantage of the debt markets if such capital were to present itself.

During our first quarter's earnings call, we noted the volume of M&A activity we had undertaken, and this pace continued into the second quarter. To date, we have announced or closed 10 deals that have given us access to 7 additional states with the ability to grow to 131 dispensaries.

Accordingly, we continue to believe the best way to view our overall business is on a pro forma basis for both 2019 and for 2020. As noted, pro forma revenue for the quarter was $111 million, which annualizes to almost $450 million, a number we clearly expect to exceed for 2019 given our continued expectations for revenues to be more back half weighted in 2019 and to ramp sequentially.

Our view on 2019 initially included a significant contribution from opening our Massachusetts adult-use stores. While approval of our ownership change paves the way to a receiving our adult-use licenses, we now expect sales from our stores to contribute less meaningfully in the back half of 2019 but expect to enter 2020 with significant tailwind in Massachusetts.

As such, we continue to expect strong sequential growth in 2019 and expect it to continue in 2020, supported by an expanding footprint and, as Boris and Joe mentioned, are focused on building and expanding our cultivation capacity across markets to meet future demand. This gives us confidence that we will deliver pro forma revenue for fiscal year 2020 between $1 billion to $1.2 billion.

In addition, as we scale, we expect to realize significant operating leverage in the markets in which we operate and to harvest synergies from our acquisitions. As such, we expect to deliver, on a combined pro forma basis, EBITDA margins above 30%.

I'd like to leave you with some few closing thoughts. First, we believe all the investments we have made over the past 18 months will accelerate revenue growth and contribute to adjusted EBITDA throughout the rest of 2019 and into 2020 as more cultivation capacity comes online, more retail locations open and we begin servicing several key adult-use markets. Our core business has reached a step function in terms of operational capability due in large part from dedicated and tireless teams across the states in which we operate. Through the hard work of our employees and our investments, we are well positioned to take advantage of states that continue to liberalize the use of cannabis.

Second, while our team remains focused on driving organic growth, we have also announced several transactions over the past few months, including Select and Grassroots, which enhance our growth trajectory. Our efforts on this front allowed us to deliver pro forma revenue of $111 million, once again, the highest in our history and an industry record during the second quarter.

We believe our aggressive expansion plans, both organically and through acquisitions, will drive strong top and bottom line growth and ultimately, long-term value creation for our shareholders, as evidenced by our expectation to deliver over $1 billion in pro forma revenue for 2020.

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 is from Robert Fagan with GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [2]

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Congrats on a really standout quarter and thank you for providing that updated outlook for 2020. I thought I could maybe just start with that and ask a little bit about the maybe individual drivers that you see bringing you to that north of $1 billion revenue number, if that could be mainly driven by the growth of your stand-alone platform or if you're going to have a very significant contribution from your pending M&A. Just any kind of color around the way that you get there would be great.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [3]

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Yes. So we actually -- we apologize, we spent a lot of time on our prepared comments today. Specifically, if you listened, you'll hear a lot about our cultivation capacity that we go through for 2020. Quite frankly, what we're trying to do is provide all of you a little bit of a road map into where we see 2020 and almost the weighting of the states. So if you go back and listen to some of those cultivation stats like Florida, 100,000 pounds; New Jersey, 46,000 pounds, I won't go through all those, but that gives you a good road map for Curaleaf.

And then likewise, with respect to Grassroots, I think they're in a similar situation as Curaleaf in terms of growth. They're in the very early stages having Pennsylvania and Illinois just entering 2020 with tremendous growth opportunity.

And then on the Select front, just a tremendous opportunity to take the Select platform and take that to the East, combined with our ability to help leverage better buying power in their distribution channel. So all of that is factored in our pro forma thoughts around the $1 billion to $1.2 billion and the pro forma EBITDA margins north of 30%. Hopefully, that helps you.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [4]

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Yes. That's actually quite helpful. Just moving on to your comments around increased operating leverage which you referred to quite a bit during the call. And I think that was pretty evident in this quarter from what we would see as like mid-single-digit growth in SG&A versus the 38% in reported revenue. So is it really that you've reached now an inflection point in your platform where the CapEx that you've sunk into the business is now beginning to bear fruit? And kind of how much larger of a kind of SG&A base do you think you need to support all that volume growth? Are we going to see kind of immediate operating leverage increases? Or it could be a little bit more gradual the next few quarters?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [5]

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I think on the SG&A front, I think from a retail standpoint, when I think of a lot of our markets that we have opened today obviously Florida being one of our largest retail, we'll have some increased retail -- or, excuse me, SG&A as we open up more stores going into the end of the year. So there will be a natural pickup there. There might be a little bit of a timing for us, preopening of store and revenues coming in line. I would say at the corporate level, we continue to build modest infrastructure at the corporate level, but I wouldn't expect anything out of control there. So that's why when I think about SG&A, I think we're near that inflection point where there's really a lot of operating leverage.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [6]

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Excellent. That's good to hear. Maybe one, a little more broader for Boris or Joe is we've seen other companies kind of indicate that they've achieved the kind of platform breadth that they wanted to get to and are now focusing on, let's say, going deeper or acquiring brands. How do you guys see your platform in that respect? Have you gotten into every state that you want? And where do you think the M&A activity could focus going forward?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [7]

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Yes, Robert, this is Joe. I think with the completion of the Grassroots and the Select transactions, we'll be in 19 states. So that's a pretty significant platform and something that we're going to focus very heavily on with respect to integration. And just to remind people, that will allow us to open up 131 stores. So we're very happy with the platform we've achieved. We've said publicly that we're always looking for -- to go deeper in certain markets. We've just announced a couple of tuck-in acquisitions in Arizona, which we think is going to be a very promising market post 2020 because we feel strongly that they'll vote for adult-use.

So we're always looking at opportunities. We've also said that Colorado was a more -- that's one of the biggest cannabis markets in the country, and they've now passed a law to allow public companies in there. So we're looking at markets like Colorado. But generally, we're going to focus on integration here and pull this all together and continue to building up the leading platform in the country.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [8]

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Great. Okay. Excellent job, guys. Back in the queue.

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Operator [9]

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The next question is from Vivien Azer with Cowen and Company.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [10]

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So Joe, I really appreciate the detail that you guys offered on the cultivation front. It certainly provides a pathway to the $1 billion dollar target. But I've got a couple of follow-up questions on that. So I first heard $1 billion. Then I've heard $1 billion to $1.2 billion. So which is it? That's question number one.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [11]

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Our range is $1 billion to $1.2 billion as guidance. You heard us say that's how we're going to reach in excess of $1 billion. So again, the range is $1 billion to $1.2 billion, with 30% pro forma EBITDA margins.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

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Terrific. But it does sound like you've used that as a mechanism to gloss over the $400 million target. I heard you on the pro forma basis, but the more philosophical question is why are you guys being more conservative? I mean I don't cover you, right? But I do cover the Canadians. I know what the negative earnings revisions look like. Why don't you temper that a little bit, philosophically?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [13]

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So look, so on the $400 million, I think we've been clear that adult use in Massachusetts in 2019 was a pretty significant factor in us reaching that $400 million. At this point, we're not going to have at least 3/4 of Massachusetts in our numbers. So you're right, we're not going to reach that $400 million. We're not glossing over that. The good news is from our vantage point, the Cannabis Commission unanimously approved our ownership approval. And so that really does pave the way. And most importantly, it sets a tailwind for Massachusetts going into 2020 that we're excited about. So I think that -- from a 2019 standpoint and then going into 2020, I think that's our viewpoint there.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

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And that's totally fair. I will just respectfully, like, remind Boris of what he said, "Last quarter, we don't like to guide or give numbers that we can't make." I just think it would be appropriate for you guys to temper your language. With that said...

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [15]

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So Vivien, I just would like to answer that question. This is a conservative approach, and we have just built a very detailed model because we're out talking to banks about debt financing. None of the analysis -- none of the forecasts that's put forward has any assumptions for recreational markets and laws to be changed. It has no assumptions for us selling in recreational markets what's even been approved until we sell recreational cannabis. So we're not going to have a repeat of Massachusetts. So we're not making an assumption that even if the state passed legislation regarding adult-use that we're actually going to get those revenues until we start selling. So we've actually budgeted those states as medical states. So I think that can send you a very clear signal about how powerful the platform that we've acquired is when I tell you that is a conservative number.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [16]

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So Boris, for the benefit of all your shareholders who are listening to this call right now, let's just, like, make sure that I heard you and everyone else heard you correctly; that you guys have tightened up and conservatized, I'm going to make that word up, your approach?

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [17]

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Yes. Yes. So the only difference -- so let me just tell you the -- if you could call it, the only -- I'm not sure it's a mistake, but the only assumption that was made in 2019 was that we would have our licenses in Massachusetts as of the first quarter. And had we had our licenses in Massachusetts for the first quarter, we would have beaten our number for this year and we will be at consensus for this year on our revenue numbers. So our other states have, in fact, actually done better. So the only reason we're not meeting it is because Massachusetts did not provide us the licenses even though we were the second company in the state to apply for a license in April of 2018.

So we had, I think, made a reasonable assumption at the time that we would have our licenses because the other company that applied along with us in April of 2019 did receive their licenses. But because they didn't go public, they got them, whereas when we went public, the state didn't have rules for change of ownership for public companies at the time that we went public and that held up our applications and our process for getting our recreational licenses. Now that we've been through that process, we will get those licenses in the near term. And therefore, we are very comfortable with the forecast we made.

Now for next year, none our forecasts have any kind of recreational sales in states even where those sales have been approved until such time as we open our store. So we have actually budgeted those states on the basis of them being medical until we know that we've been approved for operation in those states. So that we have been conservative and we have, in fact, budgeted down our numbers. And I think that just the reason the number is where it is because the acquisitions that we have made are very, very powerful. These are big companies growing at substantial rates.

And I want to just bring up one more issue. Since the founding of this company and the first year of revenue, we have grown 300% every year. We went from '16 at $7 million of revenue to the following year at $30-plus million of revenue to the following year of $80-plus million of revenue to our current year of $300-plus million of revenue. So we have actually met our 300% annual growth target every single year as we will next year.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [18]

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That's super helpful and I really appreciate that context. And to be respectful to the queue, I just have one more question. And I'm really glad that you mentioned, Boris, the licensing issue and the transition to a public company because that was the next question I had already written down, which is insofar as there have perhaps some blind spots, given how fast you guys are moving, like not trying to like blame you guys or anything, like everyone is moving fast. There are a lot of like opportunities to like trip up a little bit. But Joe, in the prepared remarks, you did acknowledge what happened in the CBD. You did acknowledge what happened with the licensing. I believe you failed to acknowledge what happened in Nevada with the product quality issue. Can you address that, please?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [19]

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Would you mind elaborating?

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [20]

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No, I'm happy to. On Friday night, there was a report that we found where there were product deficiencies and there were -- it was a cannabis product advisory report from the State of Nevada. And one of your dispensaries was involved in that. So…

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [21]

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I'll have to look…

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [22]

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Exactly, like you might have it in your fingertips. This is a bigger, again, philosophical question. Maybe let's talk about CBD. That's probably more top of the mind for you. As you identify areas, it could have been third party, could have been procedural, whatever -- whatever, like you recognize that your industry and your company, more specifically is moving at lightning pace and there is probably a mismatch in terms of how fast you're operating and how fast you're backfilling regulatory competencies. What are you doing to remedy that?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [23]

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Yes. I mean thanks for the question, Vivien. I think with respect to CBD and the FDA, I think I addressed that in my prepared remarks. But what I'll just say is that we -- this company was built on the idea that we're going to give education to consumers to make informed decisions. As I said, the majority of those issues related to our intention to provide people with information to make informed decisions. Based on the comments in the letter, we quickly remedied it and moved on. So from my perspective, I think we satisfactorily responded to that letter, and we're frankly excited about the opportunity to participate in that market.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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And we'll take that time…

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [25]

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And Vivien, let me -- I'd like to address that issue one more time. This market, I mean in the 30 years that I've built many, many billion-plus companies, moving fast and getting market share on a new industry is very, very important. And you will have missteps along the way. That's just part of doing that. And the successful companies, in fact, are companies that do take risk. Those that don't take risk never make it to the finish line. Those that do take risk, make it.

Now, we have appointed recently a new head of compliance within the company, some of it comes out from one of the biggest -- bigger compliance operations in the country and a big corporate, in order to beef up our internal compliance. However, I will tell you that if you look at both of -- all of our situations because we've always taken compliance seriously, if you look at both the Massachusetts situation and the FDA situation, in both of those situations, there was a tremendous amount of ambiguity and lack of transparency from the regulators about what the rules are. Both in Massachusetts where we were told -- when we came to the Massachusetts regulators and said to them that we're going to do an IPO, what do we do to file a change of ownership, they told us, "We don't have rules for change of ownership."

And with the FDA, who has gotten a law passed, where the Congress passed the law in December and the FDA has come out and not really guided to what they are -- you are allowed to do and what you're not allowed to do in the CBD market. And as matter of fact, the only company -- or I would say maybe not the only, but from what I can tell you for sure is that after the April meetings of the FDA, the hearings, when they came out and they advised companies -- advise, they didn't say that they have to advise, not to sell edible products with CBD, Curaleaf took all -- immediately took all its the edible products nationally off the shelves. And I can tell you that the biggest CBD companies right now in the country, including the public ones, continue to sell that product where actually Curaleaf took those products off the shelves.

And the concern that the FDA had with Curaleaf was that we had third-party research on our sites that covered the issue of what the effect of CBD can be, including references to NIH and other -- of the National Institute of Health and other very reputable medical institutions. And the FDA took issue with that. And we removed that. And as a matter of fact, we welcomed the FDA actually given companies guidance and telling us what we can or can't do because at the moment, all the companies operate in a vacuum.

But more importantly what I want to say is that Curaleaf was the only major player in CBD that took all of its edible products off the shelves, and this is the irony of that letter, whereas most of the other CBD players, and you can do it yourself and go on their sites, continue to sell these products that the FDA clearly said not to sell, whereas Curaleaf immediately took them off. And all we had was references to research on our site that the FDA referenced, and that's why it took us less than 24 hours to comply with the FDA issues.

So I just want you know that in both of the situations, in the FDA and in Massachusetts, there was a tremendous amount of lack of transparency or rules by these regulatory agencies because it is a new industry. And I'm not pointing my finger at either the FDA or Massachusetts, these are new industries moving at a very fast pace, so they haven't even written the rules.

Literally, in Massachusetts, when we came to them and said, "We're about to do an IPO," they said, "We don't have rules for that." And that's -- and if you read the letter signed between the Massachusetts Commission and Curaleaf, it clearly stipulates that we were not -- it wasn't an intentional breach of their rules because there were no rules.

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Operator [26]

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Our next question is from Brett Hundley with Seaport Global Securities.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [27]

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I'm just going to ask one question, and it ties back to the discussion on the pro forma guidance for 2020. So Neil, I guess I'll pick on you. So maybe I can ask you. This is pro forma guidance, but for The Street to actually see $1 billion plus in revenue in 2020, what kind of a delay can you guys tolerate on closing Select, closing Grassroots? If you can just kind of, I guess, talk to the stress test against actually realizing that $1 billion plus in 2020.

And related as a follow-on, I'm glad that you and Joe talked about the margin progression towards 30% plus in 2020. If I'm right, I think you are going to have a fair amount of cultivation, new cultivation or what I call expansionary cultivation coming online in Q4 this year. So can you just address maybe those potential dips that we might see in gross margin heading into 2020 as well and just try and give us a pattern so that we're not surprised quarter-to-quarter, if you can do that?

So first part of it, stress testing the $1 billion plus, actually seeing that in 2020; and then just talk to the margin progression.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [28]

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Yes. So to be clear, the $1 billion to $1.2 billion is a pro forma number that does assume both Select and Grassroots occur on January 1, right? So we will have the ability to report to you, regardless of when it closes, what that pro forma amount is during the period prior to closing. But what we wanted to do is present you as though it closed January 1 so that you guys didn't have to guess on the timing.

Second, one of the things that is important to note is given the fact that with the closing of both acquisitions, we'll be in 19 states. As you can imagine, there's a lot more ability to stress test because you're not solely reliant on one state or the other. So there's a lot more ability to stress test that model.

And then second, with respect to that and with respect to margins, you are correct, in Q4, we do have some additional capacity coming online. So it's likely we'll have a little bit of stress on our margins in Q4 from additional cultivation capacity coming on. I think on a pro forma basis, once you wrap in the 19 states and on $1 billion to $1.2 billion revenue, that's going to be less noticeable just given the relative size of the company.

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Operator [29]

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Our next question is from Matt Bottomley with Canaccord Genuity.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [30]

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Congrats on the quarter. And Joe, I think a few others have said this, but I'm going to echo it. I appreciate all the color on particularly the cultivation retail buildup. Not to belabor anything that was previously discussed, but just on the guided number, more on 2019. Neil, I appreciate your commentary saying that it's going to be back end weighted and

(technical difficulty)

got sequential growth. Can you give any range of percentages of what H1 versus H2 in 2019 might be on that pro forma number, just to clarify a little bit more what should be expected for these 3 main entities to potentially achieve in 2019?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [31]

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Yes. Well, with respect to 2019, on a pro forma basis, as I said, it's about $111 million this quarter. Just so you have a similar comparable, it was around $91 million last quarter. All I can say is we continue to expect a sequential quarterly [impact] of double-digit revenue growth. So I think you can kind of take that and go from there. And to be clear, on Curaleaf standalone, we're comfortable on the consensus side.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [32]

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Great. And then just on 2020, Boris, I just want to make sure I understand this correctly in terms of the assumptions in that modeling. Is it fair to assume that there's no recreational Illinois going into that number? Or did I mishear that?

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [33]

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Yes. So we took the Illinois numbers that were developed by Grassroots during our due diligence process and when we agreed the transaction with them, there was no recreational numbers in their forecast at that point of time. So that actually happened while we were in the middle of negotiation of the deal the state went rec. So the numbers that we were using were the original numbers that they put in, that did not have recreational in it. It was a medical forecast.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [34]

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Great. That's very helpful. And then just last on my end, in Q2 specifically, the $111 million pro forma revenue, it seems that your legacy business outgrew as a percentage. The other -- I know you have a lot of deals to close, but I'm speaking specifically to Grassroots and Select, the more material value drivers. Can you give a ranking or any sort of rough allocation of what those 2 entities did on a stand-alone basis given that it does seem that the Select legacy did outperform the overall growth?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO [35]

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Yes. I think we're not going to get into detail by detail on the pro forma other than to say you have our managed revenue, and then you've got the pro forma. But we're not going to point out Select and Grassroots at this point.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [36]

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Okay. Great. And If I could just slip in a housekeeping item. Did Grassroots open any Pennsylvania dispensaries in the period? When I first looked at them on the announcement, I thought they had 7 locations. I thought I heard they might have 9 now. If you can give any color on that, that's just a little housekeeping item.

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [37]

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Yes, they have recently opened dispensaries in Pennsylvania. They're now up to 9 locations.

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Operator [38]

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Our next question is from Graeme Kreindler with Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [39]

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I just wanted to follow up with respect to the prepared remarks on 2020, the outlook there. You mentioned that CBD is expected to be a meaningful part in terms of contribution to that. So I was just wondering, number one, if possible, is there any sort of percentage terms that you're willing to disclose? And above and beyond that, in terms of distribution, I know there's been significant work done to expand the national retailer presence, but just wondering if you had any color you could provide in terms of how much of that might be direct to customer, how of much of that might be towards national retailers and effects that could have for the overall margin profile?

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

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Yes, Graeme, this is Joe. I think we're not going to get into specifics business unit by business unit for 2020. But I will say the following that, I mean although CBD is a nascent market where we're highly encouraged by the amount of interest that has been shown by national retailers, and, in fact, as I said in my comments, we just launched a 15 SKU skincare line, we're shipping that product starting in August, and so we think that sets up well for growth in 2020. It's a very new market. As you know, the regulations are changing. And so I can only say that we're optimistic about the line and the ability to put the Curaleaf brand outside of our 19 regulated state markets.

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Operator [41]

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Our next question is from Rommel Dionisio with Compass Point.

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Rommel Tolentino Dionisio, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [42]

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I think in the prepared comments, someone mentioned something about some optimism about Arizona turning rec. in 2020 with the voter referendum. I know that, that didn't quite pass in 2016. So I wonder if I could just get your color in terms of what kind of gives you that confidence it will pass this time around or in 2020. And also what preparations you would make in anticipation of that potentially passing in addition to just building capacity?

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

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Yes, sure. Our view is informed by the fact that in 2016, the ballot initiative narrowly missed passing. And social attitudes towards cannabis continued to change and improve. The Arizona market has grown every year. And there is a ballot initiative that we believe will make it on the ballot for the 2020 election. And we're highly confident based on the attitudes and polling around cannabis that, that will pass in 2020. And Arizona is one of the most developed medical markets in the country. There's almost a 3% penetration. So it has a very wide user base in the state. So it all sets up for a very positive outcome at the election.

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Operator [44]

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Our next question is from Russell Stanley with Beacon Securities.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [45]

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Just on Florida, I think on the last call, we talked a little bit about maybe pursuing a similar sort of legal route that Curaleaf did with respect to opening additional dispensaries beyond the current cap of 35. I'm just wondering, what's your latest view on that given your comments earlier?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [46]

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We're definitely paying attention to that process, and we're working with the regulators to come to a mutual satisfactory outcome with respect to getting more licenses. As I said in my prepared comments, we're actively working on opening more stores every month. And the Florida market in general is showing very strong growth. So we have a lot of confidence in our ability to execute in that market in the near term, and for 2020, as we continue to build out our cultivation, we're very optimistic about our prospects in that market.

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Russell Stanley, Beacon Securities Limited, Research Division - Research Analyst [47]

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Great. And on 2020, I guess, there are 2 separate measures have been filed for -- to put adult-use on, on the ballot there. Just wondering what your thoughts are on the probability of success, how it might play out, especially given, I believe, the governor there has kind of stated his opposition to adult-use. How do you think this works out for Florida?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [48]

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Yes. I mean my crystal ball is broken today, so I'm not sure my prediction will be very good. But what I would say is that Florida is a bit unique in that it's a constitutional amendment and so requires a much higher threshold. 60% of the electorate would have to vote for it. So the bar is definitely higher in Florida. I think based on polling, there seems to be a lot of support for it, but we'll have to see what happens in 2020.

In the meantime, the market, as you know, continues to add medical patients every month. We could expect that Florida could achieve a 2% penetration conservatively, which would suggest there's probably another 150,000-plus patients out there that could join the ranks. So regardless of whether they adopt adult-use, we see a lot of growth in Florida.

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Operator [49]

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And our final question is from Neal Gilmer with Haywood Securities.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [50]

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A lot of the questions have been asked, so I'm not going to dwell on 2020 any further. But maybe I'll just follow up on your comments there, Joe, on Florida. Maybe just a little bit more color on how you're seeing flower sales. Do you think that's driving some of the more of the patient growth there in that market there or just a little bit more color on that? I know you touched a little bit on it in your prepared remarks.

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [51]

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Yes, we do. There's been a strong demand for flower that the Florida State puts out statistics now which shows that the grams sold every week. And so I think you can see through the public data there's a strong demand for flower. As I say, Curaleaf has now the #2 market share in the state, and we're going to continue to put high-quality flower into the market and try to grow our share of the pie over the next couple of quarters.

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Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [52]

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Okay. And then again, you provided lots of great detail in your prepared remarks. I just want to make sure I heard something correctly. In Nevada, you're expecting to close shortly the Acres acquisition. Is that what you're thinking? You're sort of thinking in the next month or 2? Or...

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [53]

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Yes, we hope so. I mean we've gotten some positive news from the Department of Taxation, and we need to work through a couple of more approvals. But we're hopeful we'll close it here imminently.

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Operator [54]

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This concludes the Q&A. You may now disconnect your lines, and have a great day.