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Edited Transcript of CURA.CD earnings conference call or presentation 19-Nov-19 10:00pm GMT

Q3 2019 Curaleaf Holdings Inc Earnings Call

Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Curaleaf Holdings Inc earnings conference call or presentation Tuesday, November 19, 2019 at 10:00:00pm 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 & Treasurer

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Conference Call Participants

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* Graeme Kreindler

Eight Capital, Research Division - Principal

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* 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 - MD & 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 the Curaleaf Holdings, Inc. 2019 Third Quarter Financial Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Daniel Foley, Vice President of Finance and Investor Relations. Mr. Foley, 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 Third 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 September 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 laws, which by their nature involved 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 the conclusion or making a forecast of such statements.

These forward-looking statements speak only as of 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 filing and press release -- releases 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 gross profit from cannabis sales, adjusted EBITDA, 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 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. The third quarter was a very strong quarter for Curaleaf as our industry-leading operational footprint allowed us to deliver record managed and total revenue and the highest adjusted EBITDA in company history driven by strong sequential growth.

Retail operations grew in every state in which we operate despite the negative headlines associated with vaping, which appeared to be increasingly linked to illicit products. We believe these results further support our thesis that over time customers will be driven to legal regulated markets as an alternative to the unregulated black markets. While September vape sales were negatively impacted in most markets, we're seeing sales revert back to previous levels. Quarterly growth was especially strong in markets such as Arizona, Florida, Massachusetts and New Jersey. Critically, we reached operational inflection points in many states and generated the highest adjusted EBITDA in company history, which grew nearly threefold sequentially as we experienced increased operational leverage due to the continued scaling of our business. This helped us generate our first quarter of operational cash flow.

We continue to execute in our plan of prudently deploying capital into high return projects, which we believe will yield further increases in operating leverage that will allow us to finish 2019 having generated our first full year of positive adjusted EBITDA. We expect this trend to continue into 2020 as we will be increasing amounts of our operating capacity online.

As detailed in our October 30 release, we announced the waiting period under the Hart-Scott-Rodino act or HSR expired with respect to the acquisition of Select. We are working to obtain final state approvals and anticipate that the transaction will close on January 1, 2020.

In addition, Curaleaf and Select mutually agreed to reduce the base consideration under the transaction to reflect current market conditions and align the interest of all the stakeholders to the ongoing performance of Select's business. We remain firm believers in Select, which has tremendous amounts of white space across the nation with which to expand its product offerings. Further, Curaleaf and Select remain committed to creating a lifestyle brand leader across the United States leveraging both Curaleaf and Grassroots' tremendous footprints in the large wholesale market that exists nationwide to build further significant market share. We believe this thesis is supported by Select's robust operations in California, Oregon, Nevada and Arizona. We look forward to adding the Select brand distribution network and their outstanding and talented team members to our organization. We are also diligently working to complete the Grassroots transaction, which we expect to close in the first quarter of next year.

In aggregate, including pending and calendar year 2019 closed transactions, we generated record pro forma revenue of $129 million representing an annualized run rate of nearly $520 million. As a result of our investments in increased cultivation capacity, a larger distribution network and the overall ramp in operations, we expect robust growth to continue through 2020 and beyond. We are reaffirming pro forma revenue in excess of $1 billion in fiscal 2020 with pro forma EBITDA margins above 30%.

On the legislative front, cannabis remains a very hot topic at both the state and federal level with continued liberalization gaining momentum across the country and more bipartisan support on reform.

During the third quarter, a very important piece of legislation moved through the House of Representatives. The SAFE Banking Act would offer protection to depository institutions that provides financial services to legitimate cannabis businesses and service providers. The bill passed through the house by a margin of more than 3:1 showing the strong bipartisan support cannabis enjoys. A version of the act is now in front of the Senate, and we are working closely with lawmakers to influence this progress. We continue to believe that the SAFE Banking Act is an important piece of legislation that will not only enhance financial services for cannabis industry but also the financial transparency of the industry, which we fully support.

In addition, we continue to monitor additional key pieces of legislation such as the recently proposed War act, which would decriminalize cannabis federally. That bill is gaining traction in the House judiciary committee and is further evidence of increasing support for cannabis reforms.

We believe there is strong momentum for further bills that will over time ultimately pave the way for the continued liberalization of cannabis laws, more robust capital markets access, resolution of items such as tax treatment of cannabis sales at the state and federal level.

Turning to our M&A outlook. We have integrated several accretive acquisitions since the beginning of the year and are preparing to integrate 2 transformative acquisitions in Select and Grassroots. While we are continuously evaluating the cannabis landscape, at this point, we are well represented in the markets in which we operate.

Upon closing of Select and Grassroots, we will operate 19 of the most attractive cannabis markets in the nation and 11 of the 12 largest markets where we believe significant upside exists. Our priority is on execution in our markets of operation and integration of both Select and Grassroots with strong operating positions and important markets, outstanding management teams and great assets will be combined with Curaleaf's already large footprint to create a coast-to-coast cannabis industry leader.

On the back of our strong operational performance and growth in adjusted EBITDA this quarter, we are confident in our financial position and ability to fund our current business and future growth, particularly as we start to generate significant organic cash flow. We continue to consider opportunities to add financing to our capital structure and lower our overall cost of capital.

Given our strong financial position and liquidity on standby from our larger shareholders, we remain prudent in our approach to the capital markets. With our strong balance sheet and improving credit profile, we will only consider adding additional financing on terms that adequately reflect the strength of our business. As I stated on our second quarter call, we do not intend to dilute our existing shareholders in any new financings, and Curaleaf remains the only major cannabis company that has not utilized the equity markets since its IPO.

Lastly, as detailed in late October, a core group of shareholders representing approximately 75% of the issued and outstanding shares agreed to an amended and extended lockup, and I, myself, recently purchased additional shares of Curaleaf. I want shareholders to know that neither I nor my key partners have any intent to sell a single share given the tremendous upside we believe exists in the company and the sector.

As we approach the end of fiscal 2019, I'm very pleased with all that we have accomplished this year. The third quarter will be excellent operation full quarter for Curaleaf and shows the strength of our underlying operations and the operating leverage that exists in our business. As our operations continue to scale, we expect key states to become self-supporting and generating increasing amounts of operating cash flow. As such, we remain firmly focused on operational execution to drive both top and bottom line results for the balance of 2019 and into 2020.

I will now hand 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 generated strong results in the third quarter and are encouraged with the overall trajectory of our operations. Despite the negative headlines around vaping, we weathered the media confusion, and it has become increasingly apparent the issues are primary related to the unregulated, illicit market.

We believe Curaleaf is extremely well-positioned to service those patients and customers who wish to access legal, regulated and tested products. We care deeply about our patients and the experiences of our customers and remain committed to delivering products of the highest quality allowing customers to consume cannabis with confidence.

As we close out 2019, I would like to take a moment to thank all the outstanding team members of Curaleaf for their tireless and dedicated work, from the home office in Massachusetts to our cultivation, manufacturing, processing, dispensary and shared service members across our 12 states of operation.

I look forward to welcoming the outstanding team members of both Select and Grassroots in early 2020. Curaleaf, Select and Grassroots combined will create the most accessible cannabis company in the country and set a national standard for excellence in cannabis.

Turning to our current operations. The third quarter was a record quarter for the company as we delivered strong sequential growth, record managed in total revenue and the highest adjusted EBITDA in company history. We continue to focus on developing operations in key markets and are laying the groundwork to integrate Select and Grassroots.

Most importantly, I am highly encouraged by the continued growth of our business, which has reached sufficient scale whereby margins are beginning to expand and adjusted EBITDA across a number of states has turned positive and continues to increase quarter-over-quarter. This demonstrates the operating leverage that exists in our business.

Every one of our key markets delivered growth during the quarter with notable strength in Florida, Massachusetts and New Jersey. Impressively, each of our states grew retail operations in the quarter.

Over the last 3 years, we have made significant investments to develop all of our key markets and it's rewarding to see those businesses begin to more than cover their costs as they continue to scale to meet demand, which is resulting in increasing share in the markets in which we operate.

I would now like to review our significant progress in key states.

In Florida, by the end of this week, we will have 28 operating stores, totaling 8 opening so far in 2019, establishing a leading position in the state. We saw significant growth in our business in the third quarter as our operation scaled to meet increasing demand, which produced record quarterly revenue nearly triple the prior year and generated positive operating cash flow. While we experienced a temporary shortage of flower in October, our weekly sales had bounced back to new heights, which gives us confidence that our products, brand and consumer experience is resonating with our customers.

As we continue to build a robust supply chain, we'll open at least another 12 stores by the middle of next year ensuring that Curaleaf is present in every major population center in Florida. With nearly 284,000 active registered patients in the state and a backlog of nearly 120,000 patients, Florida is among the fastest-growing medical cannabis markets in the country having more than doubled year-over-year. The demand for our products, most notably flower, has been strong and daily sales volumes have steadily increased. We are anxiously awaiting the regulations on edibles and look forward to bringing a whole new class of products to market in 2020.

In Massachusetts, we were extremely excited to announce on November 4 the opening of our first adult-use dispensary, which is colocated with our medical retail location in Oxford. In addition, we received conditional approval for our adult-use dispensaries in Provincetown and Ware. We are working closely with regulators to complete inspections and expect to open those stores in early 2020.

We also secured our adult-use license for our cultivation and manufacturing operations, which is allowing us to tap into an extremely vibrant wholesale market. During the quarter, Curaleaf generated nearly fivefold increase in revenues year-over-year and positive adjusted EBITDA.

We continue to work with regulators to close our transaction with alternative therapies group, which for now has been included in managed revenue but ultimately will move to wholesale revenue once we close on the cultivation and processing assets.

With respect to the ban on vapes in Massachusetts, the industry is working collaboratively with regulators to review and improve the rules around vape products, and we look forward to bringing that form factor back to our customers in Massachusetts soon. We remain extremely optimistic about the overall prospects for the adult-use market in 2020.

In New Jersey, our dispensary, the largest on the East Coast, once again produced record quarterly revenue and strong operating cash flow. During the quarter, we completed the first wholesale of Curaleaf vaporizer cartridges, which gave us an entry point into highly populated Northern New Jersey market. We remain the largest provider by revenue and market share in the state and continue to pursue plans to open additional dispensaries.

The overall market continues to grow, and we believe that patient count in New Jersey can more than double in the next year. We continue to monitor the progress of potential adult-use legislation, which remains uncertain. However, the state continues to liberalize policies around medical cannabis to benefit residents in the state.

In October, we secured a new property in Winslow, New Jersey with an existing 128,000 square-foot warehouse plus 21 acres of land, and we'll be building up that facility in 2020 to capture the growing demand and maintain our position at the top of the market.

Lastly, we are actively working through the process of converting our operation to a for-profit entity, which we expect to complete by year-end, which would result in our consolidating this entity in 2020.

Moving on to New York. Curaleaf remains 1 of only 10 licensed operators in the state with 4 stores, and they continue to harvest regularly from our cultivation facility. Construction that doubled our cannabis size was completed in July and positions us to deliver nearly 14,000 pounds of flower per year allowing us to meet future demand for the medical program if further legislative liberalization occurs.

In the third quarter, our 4 locations achieved 20% market share, achieving double their fair share according to the state tax data. We look forward to continuing to build momentum as the program and form factors expand. On that front, we continue to work with regulators to improve the product approval process and increase form factors including flower and edibles so that we can tap into the full potential of the market. As part of our recent efforts, Curaleaf became the first operator in the state to offer flower pods starting this past September, an important step towards continued liberalization.

Currently, we remain focused on growing the medical program while keeping an eye on the legislative debate around adult use. New York currently has low penetration as compared to other markets. With just a few modifications to the law, we believe New York could share the same growth characteristics as Florida and represent one of those -- the biggest potentials for untapped growth in our business.

In Maryland, as one of the only growers in the state operating 4 dispensaries, the most of any cannabis company, we are focused on optimizing our 20,000 square-foot growth facility, which continues to yield streams of over 30% THC content allowing us to continue to fetch premium wholesale prices as well as drive increased and reliable repeat traffic toward our dispensaries, which are all achieving higher wallet share than peers.

Construction on our new processing and manufacturing operation in Frederick continues, which will also incorporate edible production. Maryland is a terrific market, and we are 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.

Moving on to Connecticut. We continue to build out our new 50,000 square-foot cultivation facility, which is opening in phases throughout the end of the year. Once complete, this facility will deliver over 7,300 tons of flower per year. This increased capacity coincides with the opening of more dispensaries across the state and gives us confidence that our wholesale revenue will meaningfully grow for the remainder of the year and into 2020.

On the legislative front, both Governor Lamont and many state legislators supported adult-use legislation and are working on various bills that will liberalize the market. We continue to believe there's 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. We are also working on the process of converting the 2 nonprofit entities to for-profit with a goal of completing by the end of the year. 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 the new program, and Maine's strong support of cannabis and robust tourist market bode well for growth in 2020. We intend to open 4 retail locations, and we have real estate in development to maximize our footprint early in the program.

In Ohio, we continue on cultivation and processing facility in Johnstown, which we expect to complete in December. Upon completion, the facility will include 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 and bring a full breadth of products to the market. Ohio's medical cannabis industry is still very nascent, and we are excited about this growth opportunity as Ohio is the nation's 7th most popular state with 11.7 million residents.

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 continue to rapidly expand our Salinas facility in order to maximize capacity that is expected to reach over 54,000 pounds of flower per year. We work towards and look forward to integrating Select, and in the meantime, we are selling flower interim into the wholesale market and expect that business to accelerate later this year and into 2020.

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 and is generating increasing amounts of revenue each quarter. As announced on October 31, we closed on the acquisition of Acres cultivation. The Acres farm, located in the Amargosa Valley, continues to be developed and began generating significant flower and biomass in the third quarter. And by December, we plan to complete 42,000 square feet of additional greenhouse space. Upon full buildout and ramp of the entire Acres cultivation facility, we expect to deliver nearly 33,000 pounds of flower to the market by year-end 2020. Much like California, we look forward to backward integrating Select onto this farming platform, which we expect will significantly reduce their input cost.

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

We continue to build out and optimize 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 upon completion.

Arizona continues to be one of the largest cannabis markets in the U.S. with over 210,000 registered patients, a full 3% of the state's population, and we continue to believe state residents will vote to approve adult-use in 2020. Like California and Nevada, we plan to backward integrate the site and into this market.

Turning to our pending acquisitions. We were happy to report Curaleaf and Select mutually agreed to reduce the fixed consideration for the transaction, significantly derisking the deal for Curaleaf and shareholders while allowing Select shareholders full value if they execute to their initial expectations. We remain firm believers in the Select brand and products, which have a tremendous amount of white space across the nation to expand their products into. We look forward to adding the Select brand, distribution network and their outstanding and talented team members to our organization.

Select did see some limited impact from the negative vape headlines. However, as it became apparent, the case appears to be linked to unregulated black-market products, and Select began to see some rebound in sales. Select has always been seen as a pioneering brand in testing and safety in the regulated markets, and as such, we are confident the business now has a positive tailwind behind it that will benefit long-term growth.

Grassroots continues to deliver strong operating results primarily as a result of rapid growth in both the Pennsylvania and Illinois markets. Grassroots continued prudent deployment of capital, strong operations team and expanding network of dispensaries, which is now on number 25, generating a record quarter of top line revenues.

As we wrap up 2019, I am confident that we will enter 2020 executing on all fronts with the best-of-breed cultivation and processing facilities, outstanding sales and marketing, innovative and proprietary R&D and prudent returns-focused capital allocation.

With all that we have accomplished, Curaleaf has clearly distanced itself from the pack, and we believe that our execution in both organic development and on the acquisition front sets us up for significant growth and distances us as the unmatched leader in the U.S. cannabis industry. We are creating a brand synonymous with quality, trust and reliability and in Select and Grassroots, we're inheriting a leading lifestyle brand in the West Coast and a major Midwest operator with the same values that will be combined to create a coast-to-coast cannabis leader. Taken together, Curaleaf is poised to deliver strong growth in 2020.

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

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

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Thank you, Joe, and good afternoon, everyone. We are extremely pleased with our record results for the third quarter. We are focused on driving strong top and bottom line growth that ultimately will drive long-term value creation for our shareholders. As such, this quarter, we not only posted both record total and managed revenues, and for second quarter, a positive adjusted EBITDA, but on a consolidated basis, reported a small amount of cash flow generated from operations.

Strong results from Arizona, Florida, Massachusetts and New Jersey were primary drivers, and as Joe and Boris mentioned, retail operations in each of our states showed sequential growth. Furthermore, gross margin on cannabis sales expanded 700 basis points to 47% from 40% last quarter.

Vertical integration remains a key component to our strategy, and we continue to increase cultivation capacity in each of our states of operation, especially 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 and New York.

As we scale, it is gratifying to see the investments we have made paying off as they translate into higher margins, positive adjusted EBITDA and now, operating cash flow. As mentioned in previous calls, while we expect our gross margin for 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 given our acquisitive nature and significant ramp up and pro forma revenue being the best indicator of our mid- to long-term growth profile. As a reminder, managed revenue includes revenues associated with the not-for-profit entities in Maine and New Jersey and revenue associated with ATG. As the not-for-profit entities convert to for-profit in New Jersey and Maine and we closed on the ATT -- ATG transaction, this will ultimately negate the need to report managed revenue as they will be included in total revenue in our financial statements simplifying comparisons of our reported results to consensus.

In the third quarter, our managed revenue more than tripled over last year to a record $73.2 million and was up nearly 33% quarter-over-quarter. Pro forma revenue was $129 million for the third 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 pending and closed acquisitions to date including Select, Grassroots, Acres, Glendale Greenhouse and Phytotherapeutics operations as if they had occurred at the beginning of the quarter.

Adjusted EBITDA was $9 million for the third quarter of 2019 compared to a loss of $3.2 million for the third quarter of 2018 and was up nearly threefold over the sequential quarter. The increase was primarily due to scaling of operations and high gross margin in Massachusetts, Florida and Arizona offset somewhat by continued investment in key markets where we are expanding capacity to meet demand as well as continued investments in our CBD business and California where we expect our first large harvest in the fourth quarter.

Highlighting other key financial metrics. Total revenue increased $40.5 million to $61.8 million in the quarter versus the comparable prior year period and was up 27% over the prior quarter. Our retail and wholesale revenue more than tripled to $50.7 million during the quarter compared to $16.6 million in the third quarter of the previous year.

Management fee income nearly quadrupled to $11.4 million in the quarter versus the comparable prior year period. The increase in retail and wholesale revenue was primarily due to organic growth in Arizona and Florida and acquisitions in Arizona and Nevada. Additionally, wholesale revenue increased in Massachusetts as a result of the number of adult-use dispensaries increasing.

We grew our retail footprint to 49 dispensaries as of September 30, 2019 from 28 in the year ago period. Later this week, with the new store in Florida, we will operate 51 dispensaries, which does not include additional dispensaries that are currently operated by acquisitions, which are pending regulatory approval. As a reminder, once we close Grassroots, we will be licensed to open 131 stores combined.

Gross profit before the impact of biological asset adjustments was $34.7 million for the third quarter of 2019 compared to $13.9 million for the third quarter of 2018. The increase was due to continued improvements in the operating capacity of the company's cultivation and processing facilities.

Revenue from cannabis sales in the quarter was $50.7 million, up $34.1 million or 205% over the prior year and up $13 million or 34% over the sequential quarter. Our gross profit from cannabis sales for the quarter was $23.6 million resulting in a gross margin of 47%. The increase was due to the mix in retail revenue over wholesale revenue and continued improvement in the operating capacity of the company's cultivation and processing facilities.

SG&A for the quarter was $33.5 million compared to $19.6 million in the prior year period and $28 million in the prior quarter. Adjusted for one-time charges, SG&A for the quarter was $25.7 million compared to $22.8 million in the sequential quarter, an increase of $2.9 million or 12.8%. 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 third quarter of 2019 was $6.8 million compared to a net loss of $33.7 million in the third quarter of 2018. Adjusted EBITDA for the third quarter of 2019 was $9 million. We have provided a reconciliation of net loss to adjusted EBITDA in our press release this afternoon. A majority of the third quarter variance relates to a loss on a change in fair value on convertible notes in 2018 and noncash charges related to depreciation and amortization and share-based compensation of $13.6 million as well as one-time charges of $7.8 million primarily related to increasing business development acquisition and finance-related activities. Also, our provision for income taxes was higher during the quarter as compared to prior year due to increased profitability in our operational states. On a per share basis, net loss per share was $0.01 compared to a loss of $0.09 in the third quarter of 2018.

Moving on to the balance sheet. As of September 30, 2019, we had $91.2 million of cash inclusive of our sale-leaseback transaction with Freehold Properties, which raised approximately $24.8 million in net proceeds. Fully diluted shares outstanding at the end of the quarter were 464.1 million while our total shares outstanding as of September 30 were 466 million.

As Boris mentioned, we are confident that our financial position and ability to fund our current business and future growth, particularly as we start to generate significant organic cash flow. We believe our results announced today, another quarter of positive adjusted EBITDA and the first quarter of positive cash flow from operations marks a clear pathway. As our credit profile continues to improve with significant growth in our operations and corresponding growth in adjusted EBITDA and cash flow, we expect our overall cost of capital will be reduced. We will continue to consider opportunities to leverage our capital structure and lower our overall cost of capital. We have ample cash on hand and liquidity on standby from our largest shareholders and remain prudent in our approach to the capital markets.

As it pertains to the fourth quarter of 2019, we expect growth of 20% to 30% in managed revenue over the third quarter and expect to post record quarterly adjusted EBITDA.

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 2020. As noted, pro forma revenue for the quarter was approximately $129 million, which annualizes to almost $520 million.

As such, we continue to expect strong sequential growth to continue into 2020, supported by an expanding footprint, and as Boris and Joe mentioned, our focus on building and expanding our cultivation capacity across markets to meet future demand. We continue to expect our pro forma revenue for fiscal year 2020 will be between $1 billion and $1.2 billion, which assumes both Select and Grassroots close on January 1, 2020. For the purposes of clarity, we expect Select to close on January 1 and Grassroots to close sometime in the first quarter of 2020.

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 adjusted EBITDA margins above 30%.

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 Matt Bottomley, Canaccord Genuity.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [2]

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Congrats. I think the quarter was great on almost all metrics. I just want to maybe go back to one of the main considerations that I think is weighing on the sector overall, and that's the need for capital in order to integrate all of these acquisitions and close this M&A. So given the cash needed to close Grassroots, where you're sitting today, just curious on how the debt financing potentially is going? And where you think the potential -- I know you're not going to give specifics on it, but where you think the potential is to raise capital on attractive terms given that this sector unfortunately is being weighed on right now?

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

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So I'm going to take that question, Matt, thanks. We don't comment on any transactions that aren't closed. That's not in our style, so we are in discussions. We have been for some time. I have to say we're in the very advanced stage. We're very confident in our ability to raise capital on the right terms. I want to reiterate, however, the same thing I said earlier in my talk is that Curaleaf will not do any transaction that it doesn't feel that represents properly our cost of capital, and the shareholders have underwritten to the company any amounts of money that would be required to close the Grassroots transaction. So we do anticipate that we will have a very good financing to announce later on this year. However, if that financing either would not take place or we couldn't receive the terms that we feel are right for our company, the shareholders, the large shareholders of the company are more than happy to provide the financing for the company to close any transactions.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [4]

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Understood. My second question relates to looking at some of the quarter-over-quarter increases as it relates to standalone managed pro forma. And the pro forma nugget of is flat quarter-over-quarter, so I'm just wondering if you can give us any color of how much of that is actually transitioned into your IFRS number now? And how much of that might be potential weight that we saw from Select in September? And specifically on Select, subsequent to quarter end up to current date, have you seen that business reach back to its normalized levels or reach higher highs? Or any color you can give on where we are right now given the vaping headlines?

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

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So I'll take the first part of that question. First, I just want to remind everybody on the call with respect to managed revenue, you may have heard in my prepared remarks, but that's largely New Jersey and Maine. And in fact, we just got the rules for the for-profit conversion of that in New Jersey. So we're hoping by the end of the year to have both of those converted, and ultimately, this whole concept of managed revenue goes away. So that will actually be reported as our true reported revenue in our financials.

The second question is with respect to the pro forma fees. In the last quarter, just looking at a schedule, we've largely closed a few Arizona deals that were in the pro forma last quarter that's probably around, let's call it rounded $3 million that's now included in our managed revenue. So when you're kind of comparing the 2, I'd move $3 million out of last quarter just to get an equal comparison.

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [6]

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Yes. And Matt, this is Joe. With respect to Select, I think it's fair to say like all companies, we did see a pullback in vape sales in September. The encouraging news is that we're starting to see those consumers return to the dispensaries and go back to that product, whereas more and more information comes out from the CDC, for example, and that points to the black market, and [rightfully] I think consumers are getting more confident, so regulated tested cannabis is where they should be transacting, and so -- plus, it really bodes well, I think, for the future growth of Select and for Curaleaf as well.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [7]

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Great. And just if I could get one more question in there. I think your adjusted EBITDA for the period pretty much beat everyone's estimates at least what I've seen. Particularly with that, and again, I know you're not going to give specific numbers, but given that you seem to be hitting an inflection point on operating leverage and critical mass probably in Florida, Arizona, probably New Jersey, should we expect volatility in that number? Given that in more nascent states, obviously the expense front runs the revenues? Or should we expect more of a parabolic increase in the adjusted EBITDA line given the markets that have already reached that critical mass?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [8]

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Yes. I would not say volatility. At this point, we continue to establish bedrock in the foundation of Curaleaf. So you'll see from here on out a growth in that adjusted EBITDA.

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Operator [9]

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Our next question is from Robert Fagan, GMP Securities.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [10]

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Congrats on the great quarter. If I could just ask a first one on the Select kind of revenue targets, we definitely like to overhear how you restructured that and kind of made it performance-based, which is great. But I was wondering if you get a level of confidence in Select hitting those revenue targets. And I think, Joe, you mentioned in your remarks about how they would line up with how the initial expectations were set when maybe your talk -- negotiating a deal. And so, basically, how do you feel about those targets? And how could that maybe factor into the pro forma guidance number that you're reiterating?

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

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Yes. Robert, I think it's important to say that we have a high degree of confidence in that transaction. I think importantly what we did is de-risk it from a Curaleaf perspective, but we really believe deeply in that business. And what we really have confidence in this one that is big -- [one of the biggest] brand in the industry, but also, they have a huge amount of whitespace across the country, right? So with our platform in 19 markets, we're confident Select's going to be a national adult-use cannabis brand, and they're going to execute up to the levels with which we underwrote the deal. When we announced the transaction, we took approximately 40 million shares. We put that into an earnout. The bottom starts at $130 million and they achieved running around $250 million, so I'll let you do your own math. But we think the business is set up for tremendous growth in 2020 under our stewardship.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [12]

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And I'll say with respect to the guidance, look, compared to last quarter when we did our range of $1 billion to $1.2 billion, we had a little bit more certainty around the timing of Select. So that gives us just some more credibility in terms of when that will close. And then second, as Joe mentioned, you now kind of know the ranges we were thinking. So we're highly confident in getting to that $1 billion, $1.2 billion on a pro forma.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [13]

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Okay. Just for a quick clarification, is it fair to say the pro forma was based on the kind of hitting the $250 million sales number for Select? Or was there a different number?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [14]

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Look, I think that now we're talking $1 billion to $1.2 billion in revenue in 19 states I think singling out 1 particular piece is -- I mean, there's just so many different variables. I will tell you a lot of the variables deal with the timing of jurisdictions. So there's a lot of deciding states that Grassroots is bringing on with Illinois and Pennsylvania and we've got Florida as a great state for 2020, Massachusetts, those are variables in it, and then store openings. And then also for Select, some of the variability in their meeting, their management plan is their ability to enter into new states, which I know today they are working hard for. So again, I would say, just when you take it as a whole, we think there's enough positives in the known to hit that $1 billion, and then how far outside of that we did is really based on some of the factors I just mentioned.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [15]

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Okay. Fair enough. I always want to try and get more detail when we can. Next one...

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [16]

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You know the Select number now from the agreement, so...

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [17]

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It's great. Next one, I think it's -- maybe Neil can comment or whoever, but obviously we're seeing a big gap between managed and reported revenues in this quarter, like quite a bit larger than we saw in the past 2 quarters. And I believe if -- maybe Neil, correct me if I'm wrong, but that's mainly attributable to the inclusion of ATG and managed revenues. Can you give us an idea of the magnitude that would have been attributable to ATG in that managed line? And whether that would have been like inclusion for the full quarter or maybe only a partial quarter contribution? Just trying to get some clarity on ATG's potential.

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [18]

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Yes. So to be clear, ATG has been included in managed revenue in all of '19. Obviously, there has been growth in the ATG managed revenue line item just from the store growth. But it opened an additional store, so that helped contribute.

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Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [19]

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Okay. So in other words, the -- maybe growth or -- sorry, the widening of the difference between managed and reported revenue in this particular quarter would have been attributable to organic growth of ATG primarily?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [20]

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I would say it's a combination. Look, New Jersey continues to grow, but certainly ATG is a contributor. And remember, we're in the process of working through the close of ATG, which will ultimately will wide up wholesaling. So those revenues will also move out of managed revenue into our wholesale line item.

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Operator [21]

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Our next question is from Graeme Kreindler, Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [22]

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Just to wrap up the conversation with respect to guidance. Understand the reaffirmation of the range, and there's been a significant bounce back on vape sales that we've seen since the summer. But I was just curious in terms of the underlying assumptions that go within that range, have there been any changes in terms of the underlying assumptions potentially on SKU mix, product volumes and timing of realization of certain synergies as you look at that into next year?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [23]

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Yes, I would say as with every regulated market, you're going to have some timing differences. I would say that we continue with reports out of Illinois. We continue to grow more and more positive out of Illinois. I think Pennsylvania is an exciting state. So we're very excited by Grassroots. We were -- we did, as Joe mentioned, from the date news, Select had some impact. We've seen a bounce back in that. But obviously, we renegotiated the deal so there's been a little bit of impact in establishing our guidance. But I'd say overall, when you put this all together, the give and takes still continue to give us confidence of that $1 billion to $1.2 billion. It might not be exactly weighted to every single piece the same way.

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [24]

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I mean, and I'll also just say that our core business at Curaleaf is really firing on all cylinders right now. So Florida's going from strength to strength, and I think that you'll see in this quarter and most importantly going into the next quarter that Curaleaf is going to bust away from the pack, and start to significantly erode into Trulieve stock -- market share, mainly driven by the fact that we built a lot of cultivation in Florida.

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Graeme Kreindler, Eight Capital, Research Division - Principal [25]

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Okay. Appreciate the color. And then just on another note with respect to the market Massachusetts and being in the early days of operating at the adult-use level. I was just wondering if you could give any color in terms of how that's been going so far. And has there been any issues in terms of managing supply in a wholesale market that seems like it's pretty tight at the moment?

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Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [26]

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Yes. I would certainly characterize the market as a tight supply and a lot of demand. The good news for us is we announced our first -- and opened our first adult-use store about 2 weeks ago and the early returns are very promising. More importantly, we also got approval for our adult-use cultivation and manufacturing. So we're not wholesaling into the adult-use market, and so, all indications that it's going to be very strong demand into the end of the year and certainly into 2020. So we're pretty encouraged about that market. It's -- to be honest, it was a long time overdue, but we're happy to have opened our first stores. And we got provisional approval for our stores in Provincetown and Ware as well. We hope to open those in early 2020, so we should have a very big year in Massachusetts next year.

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Graeme Kreindler, Eight Capital, Research Division - Principal [27]

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And then finally, maybe this question is best directed to Neil. But with respect to the one-time charges in adjusted EBITDA, I know you gave a bit of color in the prepared remarks in terms of what's included in there. But is there any expectation on how we should think about those trending into the future? Could those possibly be going up or down depending on timing and transaction closings as we get into the next couple of quarters here?

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

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Well, if our General Counsel is listening. Look, I mean, the reality is we're going through HSR with respect to 2 transactions that we're going through this quarter. So that is a voluminous process, and it's costly. So I would expect as soon as we get the Select and Grassroots transactions closed, given the size of those acquisitions, you'd see a substantial decline in the one-time expenses.

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Operator [29]

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Our next question is from Vivien Azer, Cowen and Company.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30]

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Neil, I had a question about just the composition of revenue growth on balance between organic and recent acquisitions. But as part of that, I was also hoping for some clarification. Because in your press release, from the organic standpoint, you said it's Florida and New York, and on the recent acquisitions, Maryland and Arizona. And I understand that your prepared remarks -- neither the press release or the prepared remarks are meant to be totally comprehensive, but maybe just kind of order of operations, order of magnitude, organic growth was a bigger or smaller driver versus recent acquisitions. And then, of all the states that have been referenced both in the prepared remarks and in the press release, if you could rank-order those from a contribution standpoint, that would be really helpful.

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

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Okay. So number one, I think Florida certainly is one of our largest states, and we've seen a lot of organic growth in Florida and continue to expect a lot of organic growth there. We've mentioned Arizona as a market that we love. Obviously, we closed on a number of acquisitions in the last quarter. So that did -- there was some organic growth in Arizona, but a big part of the growth in Arizona was related to the acquisitions we closed. Massachusetts, as you're aware that, that has really been our wholesale market, and so as we saw adult-use, we've really grown our wholesale there. So that's largely organic. The rest of the states you mentioned I would say organic. I think you mentioned New York is one, New Jersey is obviously organic. Hopefully, that gets to the root of your question.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [32]

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Yes. That's super helpful. But just to double-click on it, just on balance, was more of your sequential growth organically derived or acquisition derived?

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Neil P. Davidson, Curaleaf Holdings, Inc. - CFO & Treasurer [33]

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Organic.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [34]

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Okay, perfect. And then just a follow up -- this is my last question. I know the call is running long. The comment on SG&A not growing as a percentage of sales or declining as a percentage of sales, would you -- should we still expect that absolute dollars will be growing? Or is there any expectation that as you kind of hit an inflection point from a scale perspective, there could be absolute declines in SG&A?

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

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Yes, look, I'd say quarter-over-quarter without the one-time, it grew about 13%. But as a percentage of sales, it is declining. I would say if you think about us acquiring Select and acquiring Grassroots, naturally, there's going to be an overall buildup in the total SG&A, but it's not 1 plus 1 plus 1 equals 3. It's a number less than that. I'm monitoring it right now on 2 cases. I'm monitoring it on a relative dollar basis to make sure that our corporate overhead still ballooned, and that we're prudent with that. And then second, I'm watching it as a percentage of revenue in the states, because some of that SG&A is related to our retail stores.

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Operator [36]

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Our next question is from Russell Stanley, Beacon Securities

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [37]

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I guess, just first on Arizona. Given your support of one of the adult-use legalization measures, and I guess the rising up of a second measure, I guess how do you manage that? How do you manage to compete against a second measure? What's your game plan given that second measure has come up?

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Joseph Lusardi, Curaleaf Holdings, Inc. - President, CEO & Director [38]

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Yes. I mean, what I would say generally is that 3 years ago the adult-use law narrowly missed passing. So we're highly confident that when the voters go to the ballot box in 2020, they're going to vote for an adult-use bill. We're obviously going to monitor the second initiative closely, but I think we have a lot of strong support for the first one that's going to make it on the ballot. And I think, I would just say generally, we're highly confident Arizona voters are going to get an adult-use law passed next year.

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Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [39]

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And just a question around Florida. I believe you mentioned targeting 40 dispensaries by mid next year. I guess just thinking about the cadence there, how do you feel about 35 by the end of this calendar year? Is that still there? Should we think about more of those dispensaries opening up in H1 '20?

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

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Yes. I mean, to be honest, in Q3 we really slowed down openings a bit, so we could focus on our supply chain to make sure we can load the stores that we have, given the strong demand. We announced this new store in Monday in Jensen Beach. We'll announce another store this week in Sarasota, taking us to 28. We've got a pipeline of 12 stores. Those will unfold over the next 9 months, and you can expect those all to be open by mid next year.

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Operator [41]

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Our last question is from Rommel Dionisio, 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 wonder if you feel comfortable commenting on Grassroots in Illinois. Also, January 1 just around the corner here, I see that 4 stores open. Can you comment on when they might have the other 4 open?

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

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Yes. I think Grassroots is working extensively in the communities throughout Illinois to get 4 more stores open. And I'm in anticipation of adult-use law that will likely start in January. You may be aware of that, in Chicago, they had a lottery. And Grassroots had a -- successfully drew a couple of key locations in the city of Chicago. So things look pretty good for Grassroots and their efforts. Obviously, with HSR, we don't run and control the business yet, and we need to get through those approvals. But we think that 2020 shapes up really well for their -- that business in Illinois. And in Pennsylvania, where they're market leader with the #1 dispensary presence in the state.

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Operator [44]

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We have reached the end of the question-and-answer session. I will now turn the call back over to Daniel Foley for closing remarks.

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Daniel P. Foley, Curaleaf Holdings, Inc. - VP of Finance & IR [45]

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Thank you, everyone, for joining us. We look forward to updating you on our progress after the New Year.

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Operator [46]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.