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Edited Transcript of CURA.CD earnings conference call or presentation 17-Nov-20 9:30pm GMT

·72 min read

Q3 2020 Curaleaf Holdings Inc Earnings Call Nov 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Curaleaf Holdings Inc earnings conference call or presentation Tuesday, November 17, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Boris Alexis Jordan Curaleaf Holdings, Inc. - Executive Chairman * Daniel P. Foley Curaleaf Holdings, Inc. - VP of Finance & IR * Joseph Daniel Bayern Curaleaf Holdings, Inc. - President * Joseph F. Lusardi Curaleaf Holdings, Inc. - CEO & Director * Michael J. Carlotti Curaleaf Holdings, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Aaron Thomas Grey Alliance Global Partners, Research Division - MD & Head of Consumer Research * Andrew Partheniou Stifel Nicolaus Canada Inc., Research Division - Analyst * Eric Des Lauriers Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Glenn George Mattson Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research * Graeme Kreindler Eight Capital, Research Division - Principal * Matt Bottomley Canaccord Genuity Corp., Research Division - Analyst * Matthew Robert McGinley Needham & Company, LLC, Research Division - Senior Analyst * Neal Gilmer Haywood Securities Inc., Research Division - Research Analyst of Special Situations * Pablo Ernesto Zuanic Cantor Fitzgerald & Co., Research Division - Research Analyst * Russell Stanley Beacon Securities Limited, Research Division - MD & Research Analyst * Scott Thomas Fortune ROTH Capital Partners, LLC, Research Division - Director & Research Analyst * Vivien Nicole Azer Cowen and Company, LLC, Research Division - MD & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to Curaleaf Holdings' Third Quarter 2020 Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Vice President of Finance and IR, Daniel Foley. Please go ahead. -------------------------------------------------------------------------------- Daniel P. Foley, Curaleaf Holdings, Inc. - VP of Finance & IR [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone, and welcome to Curaleaf Holdings' third quarter 2020 conference call. Today, I'm joined by Boris Jordan, Executive Chairman; Joe Lusardi, Chief Executive Officer; Joe Bayern, President; Neil Davidson, Chief Operating Officer; and Mike Carlotti, Chief Financial Officer. Earlier today, we issued a press release announcing our results for the fiscal quarter ended September 30, 2020. 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, involve estimates, projections, plans, goals, forecasts and assumptions, including the successful integration of 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 and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward look looking statements, whether as a result of new information, future events or otherwise, except as reQuired by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the company's filings and press releases on SEDAR and the Canadian Securities Exchange. During today's conference call, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS such as pro forma revenue, adjusted EBITDA and managed revenue, the definitions of which may be found in our earnings press release. Please note that all financial information is provided in U.S. dollars, unless otherwise indicated. With that, I'd like to turn the call over to Executive Chairman, Boris Jordan. -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [3] -------------------------------------------------------------------------------- Thanks, Dan. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that Curaleaf delivered another stellar quarter, posting record pro forma revenue, managed revenue and adjusted EBITDA. I want to take a moment to thank all of our team members, patients and customers for their unwavering support to these unprecedented times. Curaleaf's mission is to improve the lives of all of our patients and customers with safe access to a variety of innovative and trusted products, and we continue to deliver on this promise. We take our leadership position very seriously for our shareholders and our team members, but also with our customers and the communities we serve. Before I provide a deeper overview of our record third quarter results, I want to comment on the CEO succession plan we announced today and our views on the recent election and its expected impact to the cannabis industry and Curaleaf. As detailed in the press release issued concurrent with our earnings today, we announced the transition of Curaleaf's President, Joe Bayern, to his new role as Chief Executive Officer of Curaleaf, effective January 1, 2021. Joe Lusardi has been working closely with Joe Bayern over the past year and will continue in this capacity through year-end to ensure an effective leadership transition. Joe Lusardi will remain and on the Curaleaf Board of Directors and be elevated to Executive Vice Chairman of the Board on January 1, 2021. I want to personally thank Joe Lusardi for his strong leadership as CEO of Curaleaf over the past 5 years. Joe is a pioneer in the U.S. cannabis industry and has been driving -- has been a driving force in Curaleaf's nationwide expansion. He's led Curaleaf purely through a period of significant growth from a single state operator in New Jersey to a publicly traded, vertically integrated multi-space operator that is the largest pure-play cannabis company in the world. Joe oversaw an unprecedented period of growth that included several new state license awards, numerous capital raises, including our listing in Canada, building one of the best teams in cannabis and closing on several transformative acquisitions, most recently Select and Grassroots. With the successful integration of both of these powerful assets largely complete and as part of the Board's regular long-term CEO succession planning process, now is the right time for Joe to transition from day-to-day CEO role and leverage his considerable skills as Executive Vice Chairman of the Board. Joe will continue to play an integral role in the company's strategy and vision going forward. On behalf of myself and the Board, I'd like to congratulate Joe Bayern on his new role as CEO. Over the past few months, many of you have gotten to know Joe at various industry and investor events. He has over 20 years of executive leadership experience in top consumer-packaged goods companies. As President, he has been responsible for driving overall operational excellence and revenue growth in Curaleaf and has done an exceptional job in leading in the integrations of Select and Grassroots. He's also been instrumental in helping us navigate and adapt to the considerable challenges of COVID-19. Prior to Curaleaf, Joe spent 20-plus years fueling top line growth and profitability for several large-scale CPG businesses. His achievements included a turnaround of Voss Water that nearly quadrupled sales, position the company into a global brand. The creation of the $6 billion Dr. Pepper Snapple Group, and the transformation of Cadbury into a-singularly focused confectionery leader. As Curaleaf focuses on driving national brands across our expanded platform and evolving our CPG-focused business model, we believe his experience in marketing, brand building, information technology and business and process efficiency make him the ideal CEO for Curaleaf at a tremendous moment in our history. Curaleaf has been at the forefront of advocating for this industry from the begin. And the 2020 election results, which I've called a green land slide, is clearly an undeniable inflection point for cannabis. Arizona and New Jersey will be adult-use states next year. The governors of New York, Connecticut and Pennsylvania are all now seriously talking about adult-use legalization. And soon, the voters have spoken, and we are witnessing the mainstream and bipartisan acceptance of cannabis use nationwide. Our unwavering strategy has been to invest widely and strategically to capitalize on this national trend. And we expect 2021 to be a year of outstanding growth for Curaleaf as a result. More importantly, we will continue to play the long game, investing in a national strategy where our distribution and brands are the most widely available in the country. And like other industry pioneers who have gone before us, most notably in the technology and media sectors, we believe a focus on growth is the right strategy. We cannot create national brands and touch millions of new customers without a national platform, and that is what we are building here at Curaleaf. Moving on to our record financial results. This is yet another terrific quarter for Curaleaf with managed revenue of $193 million, up 164% year-over-year and 59% sequentially. And adjusted EBITDA of $42 million, up 305% year-over-year and 51% sequentially. With our major deals behind us, we expect that our margins will improve as we realize incremental synergies and continue to scale. With the closing of our current acquisitions, the fourth quarter will be the last quarter in which we will provide pro forma revenue. In 2021, we expect to report only IFRS total revenue, thus greatly simplifying our financial reporting. Our balance sheet remains healthy, with approximately $84.6 million of cash on hand at the end of quarter 3. We expect to raise approximately $65 million to $75 million of proceeds from asset dispositions related to the Grassroots transaction over the next several months as well as put in place an up to $50 million revolving credit facility, which is expected to close by mid-December, giving the company ample resources to execute on our growth strategy and to take advantage of new adult-use markets. In short, our balance sheet strength and liquidity, coupled with expected strong cash generation from operations, uniquely positions Curaleaf to capitalize on the hugely transformative opportunities in 2021. Turning to our operational outlook. Our expansion of cultivation capacity across key markets is expected to reach full-scale in first half of 2021. And we will nearly double new capacity in the key supply-constrained states of Arizona, Florida, Illinois, Maryland, Massachusetts, New Jersey and Pennsylvania, where demand continues to be -- to substantially exceed available supply. We'll also continue to roll out additional dispensaries in key markets such as Florida, New Jersey, Pennsylvania and Arizona and introduce Select's products into existing as well as new markets. Taking the above into account, we expect to finish the year on another high note and generate approximately $240 million of managed revenue and $250 million of pro forma revenue in the fourth quarter. We are expecting to enter 2021 with a $250 million quarter under our belt, and we anticipate significant further growth of the business through '21 based on the current landscape. Adding Arizona and New Jersey adult-use and the potential for neighboring states to follow suit will further accelerate our already robust growth. Each of these new states is a multibillion dollar opportunity, and Curaleaf is the only MSO with a leading presence in every one of them. Given the magnitude of these opportunities and as we await better clarity on timing for the launch of adult-use in these states, we will be in a better position to provide 2021 revenue expectations on our fourth quarter earnings call. In closing, the cannabis industry's growth prospects are unmatched by any other U.S. industry, as new consumers enter the regulated market and more states legalize. This is the beginning, and it's only going to get more exciting for those of us on the journey. We've spent the last few years building our footprint and deploying capital across that footprint to prepare for this moment. There's a lot of hard work behind us, and now it's showtime. The future is indeed green, and we remain unmatched in our exposure to these multibillion-dollar opportunities. I will now turn the call over to Joe Bayern. -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [4] -------------------------------------------------------------------------------- Thanks, Boris, and good afternoon, everyone. As Boris said, I've been fortunate to have spent the past 20-plus years contributing to some incredible business growth, turnaround and transformation projects. But I can honestly say those experiences tail in comparison to the opportunity before us right now in the cannabis industry. I'm truly excited to work with Boris, Joe and the rest of our team to not only build great brands and a great company, but to help pave the way for the most exciting consumer product segment to emerge in the past 20 years. I see tremendous opportunities ahead to continue advancing our mission of providing clarity around cannabis and confidence around consumption. With an estimated 5% to 7% of the U.S. population engaged in legal cannabis consumption today, Curaleaf and the U.S. industry are still in the early stage of development of a large and compelling consumer product category, which could easily grow to $75 billion or $100 billion in size over the next decade. And with our focus on using the science behind the plant to create truly differentiated products and leveraging our unparalleled national footprint, Curaleaf is uniquely positioned to lead this growth and address the roughly 93% to 95% of consumers yet to experience cannabis. That's an amazing opportunity. I also want to echo Boris' sentiment and take a moment to express my deepest gratitude for the tireless work of our team members and the loyalty of our patients and customers over the past year. I know it's been incredibly challenging on a professional and personal level, but we have to remain diligent and steadfast in our efforts to prevent the spread of this horrible virus. By working together, we'll continue to get through this. As I assume the CEO position, I am incredibly proud of the role Curaleaf continues to play in addressing our customers' needs and in paving the way towards mainstream acceptance of how cannabis can help improve the lives of millions of Americans. My focus moving forward is relatively simple: to create nationally recognized brands that people love and offer products that meet the needs of our consumers. By staying focused on these priorities, we believe we have the opportunity to not only be the top cannabis company in the world, but one of the world's leading consumer products companies. I will now turn the call over to Joe Lusardi. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Joe, and congratulations on your new role as CEO. I am excited to continue to work with you in my new role as Executive Vice Chairman of the Board as we continue to set Curaleaf apart as the leader in cannabis. Before I cover my prepared remarks, I wanted to thank Boris for his trust and mentorship over the last 5 years. We have built something truly historic, and it's been an honor to work with you. I want to thank our employees, too many to name, that have come to work every day in support of our mission. The last 5 years has been an incredible journey, but good founders know when it's time to hand over the reins. I'm confident that Joe, the management team and all of you will continue to make this business a smashing success. To our investors and analysts listening, I look forward to continuing to see many of you at industry events and conferences in the future. I'd now like to dive into some strategic and operational insights from the third quarter. Our significant investments in existing assets and acquired assets have yielded strong growth. These investments give us unparalleled depth and breadth across the country. According to BDS Analytics, total cannabis revenue generated across our 23-state footprint is projected to conservatively grow to nearly $30 billion in 2025, with Curaleaf having a leading presence in every one of the top 10 markets. I'll start by talking about Arizona, already a nearly $1 billion medical market according to BDS. Right around the start of adult-use sales in April 2021, we expect to complete an expansion that will double our canopy and to open our ninth store in Metro Phoenix. We already have the second largest share of the retail medicinal market. Select is currently the #2 vape brand in the state, and combined with our cultivation expansion, we believe will capture a significant share of adult-use sales. Arizona will be a big part of our growth story in 2021. In New Jersey, Curaleaf is in a strong position to capitalize on the impending adult-use opportunity and to meet the demand of the existing medical market. New Jersey is a state of nearly 9 million residents, more than 1.5x the population of Colorado. New Jersey will generate around $170 million of sales this year according to BDS compared to over $2 billion for Colorado. Given its rational tax strategy, we believe the conversion of the illicit market will occur rapidly and easily exceed $2 billion in annual sales in the coming years. Curaleaf currently has the #1 market share and in anticipation of adult-use sales, we are doubling our production capacity. In addition, we expect to open a new dispensary in Bordentown in Q1 of 2021 and a third location in Q2 of 2021. This will give us the maximum allowance of 3 dispensaries, one of the largest growth capability in a state with only 12 current licenses. We are investing heavily in the Garden State. We'll be creating jobs and tax revenue as we fuel a massive growth cycle in regulated cannabis. In Florida, the medical program continues to grow beyond expectations. Over 15,000 new patients are registered for the program per month and based on current growth trends, Florida has the potential to be a $2 billion-plus market in 2021. We are investing heavily in cultivation to expand our share as the market grows. In mid-October, we had the first harvest from our new indoor cultivation facility on an outdoor campus, and we'll be adding additional cultivation capacity in 2021. We currently have 33 dispensaries, [which are] located across the state, and we'll have at least 39 stores open by early next year. As our supply chain continues to improve, we believe our business will continue to thrive in the Sunshine State. Moving on to Massachusetts. We were pleased to see (inaudible) about the temporary Q2 adult-use closures due to the COVID-19, with statewide September annualized sales over $1.1 billion. Massachusetts continues to see some of the highest wholesale prices in the nation according to cannabis benchmarks, and Curaleaf is uniquely positioned to capitalize in the wholesale market. We recently increased our indoor cultivation capacity on our Webster facility and recently acquired ATG's fully-built out indoor cultivation facility. We believe we have the largest operational indoor cultivation capacity of any operator in Massachusetts, which, combined with our leading dispensaries, gives Curaleaf a leading-edge in the state. Following our acquisitions of Grassroots, we immediately gained a strong presence in Pennsylvania and Illinois, the fifth and sixth most popular states in the nation and 2 of the fastest-growing cannabis markets. The opportunity here, again, is huge. Illinois, as you know, has gotten off to an extremely strong start with adult-use sales and will be around $1 billion market in its first year based on current trends. We acquired a fully-built out indoor cultivation facility, and we will be expanding our capacity in the state. Illinois currently has the highest wholesale prices in the nation according to cannabis benchmarks. In addition, Grassroots now has operational 9 affiliated dispensaries with a tenth and final location expected to come online soon for the maximum number of single operator retail licenses permitted. Based on the number of operational licenses, Grassroots Group is currently the #3 player in Illinois, and we look forward to continuing to rapidly ramp these assets. Pennsylvania has demonstrated equally impressive growth, with over 370,000 registered patients, nearly 3% of the state's population. After acquiring Grassroots in July, we immediately became a market leader with 9 operational dispensaries in the state, and a fully-built out indoor cultivation facility, and we'll be expanding our capacity in the state. Grassroots has the right to open an additional 3 dispensaries in Pennsylvania, and Curaleaf, through its Clinical Registrant license, can open 6 more dispensaries and additional cultivation capacity. Pennsylvania is seriously considering adult-use legislation and Curaleaf is well positioned for this potential development. Although I'm only highlighting these 6 states in my prepared remarks, I could spend as much or more time highlighting the strength in each of our markets. Based on license operations, we currently have the #1 market share in New York, Connecticut, Maryland, North Dakota and Vermont. The potential for New York adult-use alone, a state with 20 million residents, would represent another game changing catalyst for Curaleaf. This is but a single example that our strategy of playing the long game is about to pay off. We are prepared for the sea change happening in the industry, and we are very bullish on our prospects for 2021 and beyond. Turning to Select. Our goal with Select is unchanged, to create a national lifestyle brand that consistently resonates with consumers through its value proposition and innovative product offerings. We've been intensely focused on launching Select in new markets, introducing new in-demand form factors and the Select product suite and realizing cost synergies by integrating Select supply chain within Cureleaf's vast production infrastructure. As part of our initiative to expand Select's presence, we've now introduced Select to 9 new states, including Ohio, Illinois, Pennsylvania in the past 2 months, making Select available coast-to-coast in a total of 16 states. Year-to-date, Select has already generated almost $10 million in incremental sales in legacy Curaleaf states. In states where we have existing wholesale businesses, we continue to see higher average units sold and higher average revenue per week in aggregate when compared to prior periods, when only Curaleaf-branded products were sold. This proves that as we roll Select out across our entire platform, we can expect to see additional revenue gains without cannibalization. We started the year with 51 dispensaries across the U.S., and we now have 96. And we have licensed this for over 135. We will nearly double our cultivation capacity in the coming year and our Select brand has now distributed over 1,000 retail outlets nationwide. We've been busy, and we're delivering on our vision. In summary. I am beyond pleased with our progress as we move through 2020 and look ahead to 2021. Despite the pandemic and temporary shutdown we experienced in Q2, we have managed to weather the situation extraordinarily well and we believe that Curaleaf is, without a doubt, the single best positioned MSO in an industry poised for the kind of exclusive industry growth that we see once in a generation. Now I'll turn the call over to Mike Carlotti to review our financials. -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [6] -------------------------------------------------------------------------------- Thanks, Joe. Once again, we posted record quarterly results as we remained focused on generating strong revenue and adjusted EBITDA growth that we believe will drive long-term value creation for our shareholders. We posted our sixth consecutive quarter of record adjusted EBITDA, driven by strong revenue growth in Florida, Massachusetts, New Jersey, New York and Connecticut. The addition of Grassroots on July 23 also contributed to a strong year-over-year and sequential growth, delivering $45.7 million of revenue to third quarter managed revenue. It is important to note that onetime costs primarily associated with fees to close the Grassroots transaction and unrealized corporate synergies at Grassroots impacted our margins. The $17.8 million of onetime costs included extraordinary legal fees of $4.1 million and acquisition-related cost of $9 million, both primarily related to the Grassroots acquisition. In addition, onetime charges included $4.3 million of cost primarily related to licensing and start-up markets. Onetime costs are expected to significantly decline in the fourth quarter. Additionally, when we closed the Grassroots transaction, we inherited certain corporate overhead costs that impacted the third quarter, but are now being harvested as synergies. We expect to achieve full cost synergies from Grassroots in early 2021. Our gross margins from cannabis sales increased nearly 320 basis points to 50% as compared to the third quarter of the prior year. The increase was primarily due to the higher operating capacity of the company's cultivation and processing facilities in several states. As mentioned on previous calls, while we expect our gross margin from cannabis sales to trend upward, it will continue to fluctuate quarter-to-quarter based on our investment cycle in processing and cultivation as we continue to expand and bring new facilities online. Over time, we expect this fluctuation to moderate as our investments continue to ramp and the capital intensity of our investments begin to cool. In the third quarter, we delivered record managed revenue of $193.2 million, in line with our guidance range. This represented managed revenue growth of 164% over last year and up 59% sequentially, driven by our organic growth and the partial benefit of Grassroots for the period of July 23 to September 30. Pro forma revenue for the third quarter, which assumes Grassroots closed on July 1 with all licenses approved, including Illinois, net of assets held for sale in Maryland and Ohio to meet maximum license requirements, was $215.3 million, above our previously provided guidance. Total revenue for the quarter was a record $182.4 million, up 195% over last year and 55% sequentially. This was driven by strong growth in both our core and managed business operations as well as the acquisition of Grassroots. It's important to note that the delta of $10.9 million between managed revenue and IFRS revenue in Q3 can largely be attributed to the longer-than-anticipated close of the Massachusetts ATG acquisition, which occurred in Q4 versus Q3 and a strong rebound in their operations during the quarter. We recorded record adjusted EBITDA of $42.3 million in the third quarter, up 51% sequentially and more than fourfold as compared to $10.4 million in the third quarter of 2019. The increase year-over-year was primarily due to the continued scaling of operations and higher gross margins across several states, notably in Arizona, Florida, New York and New Jersey as well as a partial quarter of contribution from Grassroots. Our retail and wholesale revenue more than tripled to $180.3 million during the quarter as compared to $50.7 million in the third quarter of the previous year. Management fee income declined to $2.1 million in the quarter versus $11.1 million in the comparable prior year period due to the conversion of the previously managed entities to wholly-owned consolidated entities. The increase in retail and wholesale revenue was primarily due to organic growth and new store openings in Florida, Massachusetts, Arizona and New York; the impact of Select, Grassroots, Curaleaf New Jersey, Arrow, BlueKudu and Maine Organic Therapy acquisitions; as well as acquisition-related growth in Arizona due to the addition to 2 dispensaries in the third quarter of 2019 in Nevada due to the addition of acres in late 2019. Our retail footprint comprised 93 operating dispensaries as of September 30, 2020, and is up from 49 on September 30, 2019. As of today, we operate 96 dispensaries across 23 states. SG&A for the quarter was $72.7 million as compared to $33.5 million in the prior year period and $40.5 million in the prior quarter. The increase was primarily due to the addition of Grassroots and the $17.8 million of onetime charges. Adjusted for onetime charges, SG&A for the quarter was $54.8 million as compared to $36.3 million in the prior quarter or 28% of managed revenues, a decrease of approximately 150 basis points compared to the prior quarter. As we identify additional synergies, particularly from Grassroots cost savings and continue to scale overall operations, we expect our SG&A to continue to decline as a percentage of revenue, resulting in significant operating leverage. During the quarter, income tax expense was driven by increased deferred taxes associated with the increase in biological assets. Net loss attributable to Curaleaf Holdings for the third quarter was $9.3 million as compared to a net loss of $6.8 million in the third quarter of 2019. Due to our acquisitive nature, we believe adjusted EBITDA is still the best measure of our performance as it excludes the impact of the $56.1 million of noncash charges related to biological assets, depreciation and amortization and stock-based comp as well as $17.8 million of onetime items, primarily related to extraordinary fees and integration costs associated with the closing of the Grassroots transaction and start-up costs. We have provided a reconciliation of net loss to adjusted EBITDA in our press release. Moving on to the balance sheet. As of September 30, 2020, we had $84.6 million of cash on hand. There were a lot of moving pieces in the third quarter. So to aid in modeling, the following is a bridge of our cash position from the second quarter to the third quarter: cash decreased from $122.8 million in Q2 to $84.6 million in Q3, primarily due to $27.4 million of cash acquisition expenditure payments, net of cash acquired; $23.2 million of capital expenditures; $7.5 million for the Ohio Grown Therapies license transfer; and a $28.6 million use of cash from operations. This was partially offset somewhat by $41 million of REIT proceeds and $24.5 million from the July private placement. Cash flow from operations was negatively impacted this quarter due to the $19.5 million of cash taxes paid for 2019 during the quarter and $17.8 million of onetime cash expenses, largely related to Grassroots. Also, inventories were higher in the quarter due to increased capacity, operational efficiencies and better harvest. We continue to build inventory in Select and in certain key states such as Florida and New York to avoid product sell-outs to meet incremental demand. We expect our cash flow from operations to materially improve from the third quarter. Looking ahead, acquisition payments are expected to be materially lower, and all of our outstanding acquisitions have closed. Milestone cash acquisition payments due in the fourth quarter are estimated to be $3.2 million. Another estimated $7.8 million is due in the second quarter of 2021. Beyond these payments, we have no additional cash acquisition commitments remaining. We also expect onetime costs to materially decline in the fourth quarter and Grassroot synergies to permanently benefit our operations going forward. Once the integration is complete, we expect to benefit from additional synergies as well. Moving on to guidance. We expect to generate fourth quarter managed revenue of approximately $240 million and pro forma revenue of approximately $250 million, which includes a full quarter of the recently acquired Grassroots assets, net of assets held for sale. Fourth quarter IFRS revenue should be about $1 million to $2 million below managed revenue accounting for the 8 days that we did not consolidate ATG in the quarter. As Boris mentioned, we expect to exit 2020 with approximately $250 million already under our belt. We expect additional synergies from integrations and increased fixed cost absorption to drive improved adjusted EBITDA margin starting in early 2021. We also expect to see strong revenue growth from additional capacity in retail stores in high-margin states as well as incremental revenues from new adult-use states. Overall, we are expecting a very strong revenue growth and margin improvement in 2021. Weighted average fully diluted shares outstanding were 625.2 million as of September 30. This includes the approximately 116.3 million shares issued in the Grassroots transaction and the 4.4 million shares issued in our July private placement. Post-close of Grassroots and private placement, the unweighted amount of fully diluted shares outstanding was 654.2 million. With that, I'll turn the call over back to the operator to open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Matt McGinley with Needham. -------------------------------------------------------------------------------- Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- First, congrats to new Joe and the best wishes to old Joe in your future endeavors. My first question is on the capital spending. You mentioned doubling cultivation into 2021, how should we think about the pace of the dollar spend around that? You walked us through the cash balances and your asset sales and potential of getting a revolver put in place, but is that sufficient to fund the growth into 2021? And what outline should that take into next year? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [3] -------------------------------------------------------------------------------- Mike, do you want to take that? -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [4] -------------------------------------------------------------------------------- Yes, sure. So yes, we ended with $84.6 million in cash. We have $65 million to $75 million of asset sales. We've already announced a few of them, including HMS, which should close probably in early 2021. So we'll have that cash coming in. Also, with respect to capital expenditures, we expect CapEx to go up a bit in Q4. And then probably remain at similar levels in Q1 and start to decline thereafter. So from a cash perspective, certainly with the revolving credit facility as well as the asset sales and cash flow from operations, we feel comfortable with our current cash position and our liquidity going forward. -------------------------------------------------------------------------------- Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [5] -------------------------------------------------------------------------------- Do you have any sense, Mike, of what that dollar spend would be in the 2021 year? -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [6] -------------------------------------------------------------------------------- How much CapEx in 2021? -------------------------------------------------------------------------------- Matthew Robert McGinley, Needham & Company, LLC, Research Division - Senior Analyst [7] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [8] -------------------------------------------------------------------------------- It will probably be similar to where we end up in 2020, but we'll talk more about that on our Q4 call. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- The next question is from Pablo Zuanic with Cantor Fitzgerald. -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [10] -------------------------------------------------------------------------------- Boris, I guess I have 2 questions that maybe are a bit too big picture for this type of call, but I think they are worth asking anyway. Number one, I understand the logic of being the largest in the industry. But if most of the states have caps at the store level and cultivation level, how do you actually leverage on that scale? I mean, Massachusetts is a worst example, right? 1,000 square feet of canopy, that's a maximum and then only 3 stores. So maybe answer that first. But again, if most states have caps on retail stores and cultivation, you're not able to leverage that scale? Or what am I missing there? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [11] -------------------------------------------------------------------------------- So I think -- it's a good question, Pablo. I think that first of all, a lot of these states, the demand is still growing dramatically. There's a massive lack of supply of product. So in states like Massachusetts, for instance, although we're only allowed to have 3 rec stores and 3 medical stores, we have a huge wholesale opportunity, which is why we increased our growing capability to the maximum allowed by the state, which puts us as the largest grower in Massachusetts. In other states, for instance, like New York, you have no canopy restrictions but at the moment, you have store restrictions. But with that state, obviously going to adult-use, you can imagine that with all the licenses -- and by the way, Massachusetts also has an unlimited amount of licenses for dispensaries that are going to be issued over the next few years. There's no restriction on the amount of dispensaries that can be had. By 1 player, they can, but not by the market at large. So we can become the largest wholesaler to those operations. And don't forget, that's why we bought Select. We want to be able to be able to sell our products to as many possible stores as we can, but we want to have the vertical integration in order to be able to capture the margin. So we're seeing huge opportunity in Massachusetts. Obviously, New York, we think is going to be the second biggest market after California, as a dose adult-use, in New Jersey, for instance, there is no limit at the moment for the amount of cultivation capacity. It looks as though we'll be allowed to build out quite substantially for the adult-use market. And there, we've already -- we're almost finished with the new growth facility that should be completed by February, early March and harvesting in the second quarter. So there, we already are the largest wholesaler in the market, and we want to continue the wholesale to other players. So I'm not going to go through every state, but I think what you're seeing is, is that as these states move from medical to adult-use, the states are permitting multiple stores to open up, and we want to be the largest provider, not only in our own stores, but what the future of Curaleaf is as a wholesaler, we want our products to be on everybody's shelves, and we want our products to be the leading brands. And so that's what we're doing, and that's what we scale. Does that answer your question? -------------------------------------------------------------------------------- Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Yes, of course. And just one quick follow-up. So maybe this is obvious to you, but I guess, to a lot of people that I talk to, maybe it's not so obvious. If the STATES Act is delayed for another 4 years, if the Republicans keep control of the Senate, I know this is all hypothetical there. But the fact that federal permissibility may still be 4 years away, it's actually great news for MSOs like yourselves, right? Because you don't have to be competing for assets in the U.S. with the Canadian companies for CPG. Again, maybe this is obvious to you, but I find it's not so obvious to a lot of people I talk to on the investment side. Can you tell me, what am I missing there? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [13] -------------------------------------------------------------------------------- Yes. Listen, I'm not -- to be honest, I think this whole Canadian thing has been blown out of proportion. I think the Canadian companies have no position in the U.S. market. And I don't understand what the -- why everybody is so excited. I guess, because they trade on the U.S. exchanges and there's liquidity around them. But the fact is that they have no entrants. And even if we move to the STATES Act or even if we move to the MORE Act, I think the U.S. government is going to limit international entrants into the U.S. market. I think there's going to be a bit of a moat around the U.S. market. And even if there isn't, we feel very comfortable that we can compete. Our -- as I've said many times, I'm much less concerned about other cannabis companies as I am about bad tax policy, which will lead to a proliferation of the illegal cannabis industry in the United States. Our biggest competitor is the drug deal dealer on the street, not the other cannabis companies. And even if we move to a fully deregulated market, we believe that the time limits to get operations up and going is going to take a substantial amount of time for people to get into the market. We believe that the existing MSOs have at least 2 years, if not up to 4 years, to continue to build our brands and to continue to invest in them and to continue to build out our infrastructure, which is why Curaleaf has taken the position it has. But we're not just throwing money at a bunch of cultivation facilities that are going to be obsolete. We have the major projects in the company working on creating systems where our cultivation operations can be used in a brand-new format where you would not have any kind of limitations on sales between states. And so we're very, very focused on making sure that every dollar spent is a dollar that can be used in either the current situation or as we move forward into a deregulated cannabis market. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- The next question is from Scott Fortune with Roth Capital Partners. -------------------------------------------------------------------------------- Scott Thomas Fortune, ROTH Capital Partners, LLC, Research Division - Director & Research Analyst [15] -------------------------------------------------------------------------------- Can you step through kind of the Select rollout of the stores that are taking in and the uptake there? And then I'm not sure if you talked about the margin improvement due to kind of internal sourcing that's going on there, but just what's the growth of Select quarter-over-quarter going forward now? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [16] -------------------------------------------------------------------------------- So I'll let Joe answer that question, but I'm just going to start off by saying Select, we don't have branded stores, we only have Curaleaf stores. So we have a strategy of just keeping all of our stores under the brand of Curaleaf. And all stores that we acquire are also rebranded into Curaleaf. So we have mono branding of Curaleaf for our retail operations, but Select is part of our wholesale strategy. And today -- we only closed on the transaction in February. Select was present in 4 states. Select is now present in 16 states around the country. And obviously, in those states where Curaleaf had substantial vertical operations, we're getting Curaleaf margins. But in those states where we don't have large vertical operations that are still building them like California, we're still having some margin pressure under Select. But we think that, as we've always said, in 2021, we will rectify and the Select margins will start to come in closer to the Curaleaf margins. But they'll always be a little bit different because the Curaleaf product is largely a product that's sold within our own distribution. So it captures the full margin from cultivation through to retail, whereas the Select product is or a wholesale product to do lose a portion of the margin, but still potentially a variable -- not potentially, it is a very, very profitable market. We're seeing Select in those states where we're vertical, achieving very similar type of margin as the Curaleaf products do. And I don't know whether, Joe, you want to expand on that. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [17] -------------------------------------------------------------------------------- Yes. I'll just -- you covered a lot of ground there, Boris, but I think to build on some of the other concepts, I think, as Boris said, we're now in over 16 states, rolling it through our existing footprint, and we expect to be really in all of our markets by the first quarter of 2021. And what gives us a lot of optimism around Select is that in each market as we launch this, we've actually built incrementality into our category. So we're seeing that it's not just cannibalizing our existing business. It's actually bringing new users into the category. And growing the overall vape category for us. So we're really, really excited about our progress on Select. And I think we have a lot of, obviously, runway left for 2021. And I think just to build on something that Pablo mentioned before, I think being available in 23 markets give us -- gives us a national footprint. And so we believe that long-term value is going to be created by bringing new users into our category. And to do that, we need to be able to create brands and products that they trust. And so that's really the cornerstone of our strategy. It is building brand awareness, building brand trust and building products that meet the needs of our new consumers coming into the category because that's where we think the real growth is going to happen in the marketplace. Yes, we're going to shift people from the illicit market to the legal market, and we're going to grow the existing base. But I think the real value long-term is converting somewhere around -- we're about a 5% to 7% penetration level in U.S. households, being attractive to the other 93% of the U.S. population is where the growth is going to come from. And in order to track those people into our category, we need to create brands that they could trust and products that meet their needs. So that's the overarching strategy for Curaleaf. So that's why it's really important that we're out there now moving Select into all of our markets and building out Curaleaf. With that said, we don't talk about the specific revenue targets on individual brands. But I can tell you that, to reinforce Boris' earlier point, Select is in over 1,000 dispensaries across the U.S. So we're not limited by the number of dispensaries Curaleaf has. And that's the whole purpose, it is to be like any other consumer product company, where we try to create omni-channel distribution for our brands. And whether that's in our dispensaries or other third-party dispensaries and eventually direct-to-consumer, we want to make sure that our products are available in every channel available to us. So again, early on with Select, but we're very, very optimistic about the progress so far, and we're really excited about '21. -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [18] -------------------------------------------------------------------------------- Yes. And just to add a little bit on that. We did say on the call that almost $10 million of sales have occurred in Curaleaf markets for Select products with a substantial portion of that occurring in Q3 because of the addition of Florida. Connecticut, Massachusetts, Maine and New York. In October and November, we've added Ohio, Illinois and Pennsylvania. So Select's obviously growing in its core markets, but we're seeing a nice lift in the Curaleaf markets as well from introducing Select into the chain. -------------------------------------------------------------------------------- Scott Thomas Fortune, ROTH Capital Partners, LLC, Research Division - Director & Research Analyst [19] -------------------------------------------------------------------------------- I appreciate the color. And then 1 quick follow-up for me is kind of you mentioned margin expectations. Can we just focus on the EBITDA side? What type of improvement can we see on the Grassroots side to get up to the Cura's margins? What's the delta there? And kind of a time line as you look out for getting those margins similar to the Curaleaf's EBITDA margins? -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [20] -------------------------------------------------------------------------------- Yes. I mean their -- Curaleaf -- sorry, Grassroots EBITDA margins are not too far off of ours. We expect that they will get to Curaleaf, say, and Select margins within the next quarter or 2 as they continue to ramp up, particularly in Illinois and Pennsylvania by adding cultivation in stores. So as we head into 2021, we expect our EBITDA margins to increase as we continue to scale the business and realize further absorption of our fixed costs. I think for Q4, I would expect EBITDA margins to be somewhat similar to Q3 as we absorb ATG, offset by continued improved margins throughout the rest of the company. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- The next question is from Matt Bottomley with Canaccord Genuity. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [22] -------------------------------------------------------------------------------- And congrats, Joe, on a job very well done in the last 5 years. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [23] -------------------------------------------------------------------------------- Thank you, Matt -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [24] -------------------------------------------------------------------------------- Just wanted to maybe pivot to -- yes, no probem. Just wanted to pivot to Arizona and New Jersey, so obviously, the 2 ballot states of note in the election. Just a commentary on each. One for Arizona, I would have thought that, that market would see a higher degree of consolidation at this point, considering the -- how there's only, I think, 130 or 140 license cap there. And I think you guys have been the most active in doing that. But I'm just wondering if there's any more dynamics that you can give us an overview on explaining why maybe that hasn't been as fast in that market or maybe that's to come. And then in New Jersey, there's been some of your peers that have released results already. And it seems like there's not really any communication yet from the state with respect to what this market might look like in timing. So I'm just curious if that's consistent with what you've heard? And if there's any -- been any updates in the last few weeks here? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [25] -------------------------------------------------------------------------------- So let me cover Arizona quickly. The problem with Arizona right now, to be honest, is price. So because of what we have found generally as these states go from medical to recreational and adult-use, prices for assets tend to go sky-high until people realize how difficult it is to actually manage the business and run it, basically when they come in. So I think at the moment, there's very, very high expectations on price for Arizona licenses. And I think that, that's put us a damper on M&A. We've seen a couple of deals happen recently, but I'll give you an example, we bid on some of those licenses that were recently bought by one of our competitors. And I would tell you that we bid half of what the competitors paid for those licenses. So you can see how -- and we bid from maybe 3 months ago. So you could see how prices have gone through the roof. And people are paying very, very high prices to get into Arizona. We feel very comfortable with our footprint. As I said -- as Joe said, we're opening up our ninth store, we have a tenth one coming in the second quarter. So that's really where we are right now. We feel very strong position in all the high-density populated areas, particularly in Phoenix. And we have our cultivation in place. And obviously, with Select being the #2 brand, we've been trying to build on that. In New Jersey, we -- I don't want to go into a lot of detail, but I can tell you that the state is communicating, as those companies that are involved, and obviously, we've been in that state from the very, very early on, get going. We've built relationships with the regulators. I can tell you that we are very much active in the conversations around where the program is going, and we have to complement the state on the fact that they're taking a very rational approach to it. And we think that there's likely to be some more haggling back and forth over some of the tax proceeds and stuff like that. But we think the program will get launched probably sometime in next year. -------------------------------------------------------------------------------- Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [26] -------------------------------------------------------------------------------- Great. Very helpful. And just one more for me. Is there any other color you can, guys, give on maybe same-store metrics? Or what you're seeing in basket sizes, consumer preferences, obviously, every state is different, but we've seen pretty attractive numbers in almost every market really since the onset of COVID. So just wondering where that's trending? And if you can give any dynamics for stores that, let's say, have been open for a year or something like that? -------------------------------------------------------------------------------- Michael J. Carlotti, Curaleaf Holdings, Inc. - CFO [27] -------------------------------------------------------------------------------- Yes. I mean, we haven't historically provided same-store sales, but we will likely look to do so in the future. But that being said, average spend per patient per month increased 6% in the quarter, and our patient growth was up 11% quarter-over-quarter. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- The next question is from Vivien Azer with Cowen. -------------------------------------------------------------------------------- Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29] -------------------------------------------------------------------------------- Congratulations to outgoing Joe as well as incoming, Joe. So incoming, Joe, a question for you, please. Your background in non-alcoholic drinks and beverages, I think it's really interesting. And I'd love to hear philosophically how you think about running a portfolio of brands. Certainly, our experience covering Coke, Pepsi and the like and the KDP, of course, suggests that more than 2 brands are necessary to build out an adequate portfolio. So I'd love to hear your impressions there. -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [30] -------------------------------------------------------------------------------- Yes. I think my perspective is, we're in early stages of development of the cannabis industry. And today, the market is broadly segmented into major segments of consumers, the health and wellness segment and the lifestyle segment. So today, we have a brand strategy focused on those 2 major segments. Curaleaf is obviously our health and wellness brand and Select is our lifestyle brand. So I think, over time, as the market matures, consumer segmentation will happen in this market like it does in any other consumer product market. And there'll be different brands that meet the needs of different consumers and resonate differently with consumers. So I see -- over time, our brand portfolio might emerge and develop. But today, I think this that the market itself is really fundamentally broken into 2 segments. And so we're very focused on each of those segments through different brands in our portfolio. -------------------------------------------------------------------------------- Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [31] -------------------------------------------------------------------------------- Understood. Reasonable enough. And a follow-up, please. During the prepared remarks, the commentary around Pennsylvania was perhaps a little bit more constructive than I would have expected, given that it seems like the state assembly has remained in Republican control. I recognize, of course, that the Governor Wolf has been a vocal proponent for adult-use, but it seems like historically, the Republican-controlled state legislature had been a sticking point. So if you could just expand on your constructive commentary there, I'd appreciate it. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [32] -------------------------------------------------------------------------------- Yes, Vivien, I'll just -- with regards to Pennsylvania -- this is Jose Lusardi, I think that New Jersey, because they're going to pass an adult-use program and get it operational fairly quickly, it's going to put massive pressure on Pennsylvania. So we can appreciate that it's a Republican-controlled legislature. But frankly, the tax revenue, like in any other market is going to be very hard to ignore. And we expect that will ultimately prevail. You're aware that Curaleaf has a dispensary right across the border from Philadelphia, 10 minutes from Downtown Philly. And so I think that while Pennsylvania figures it out, we stand to be a huge beneficiary, frankly, of that delay because those people are just going to truck across the bridge to New Jersey. And when Pennsylvania does go adult-use, we'll be right on the other side of the border with 15 stores and growing. So from our perspective, I think we're well hedged and well prepared to take advantage of the opportunities as they come. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The next question is from Graeme Kreindler with Eight Capital. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [34] -------------------------------------------------------------------------------- I had a question for Boris. And I just wanted to expand on your earlier remarks about some of the developments we have coming out of the election, more so with respect to the federal level. I mean the way you look at it, Boris, should we really be looking for midterm elections in 2022 to potentially be the next big regulatory catalyst for some of these larger builds to pave a pathway to pass here? Or could we potentially be surprised here between now and that point? -------------------------------------------------------------------------------- Boris Alexis Jordan, Curaleaf Holdings, Inc. - Executive Chairman [35] -------------------------------------------------------------------------------- So I think the first thing we need to do is get a final result on the presidential election and congressional and senate elections. We still have numerous races including the presidential election, which haven't been officially called by the various agencies that need to do that in the U.S. government. And so I think we need that final results before, I think it's going to be easier to predict but certainly -- I mean, if we take the hypothetical that seems to be the case that everyone is pushing down that we are going to have Joe Biden as the President. We're going to have a narrow, pretty narrow majority in the house and a very, very -- for Democrats and a very, very narrow majority for Republicans in the Senate. I think that what we probably feel very comfortable saying for the first time is that we're going to get safer. So we're going to get a Banking Act, and we're going to get some guidance from the new treasury department. If everybody remembers, the Cole Memo was a memo out of the DOJ, which gave FinCEN Treasury the ability to give banks a guidance on what the they can and can't do. That memo was revoked under Jeff Sessions in the first year of President Trump's presidency, and therefore, the treasury and FinCEN had removed their guidance on banking. So I think we're going to get that. And I think that's pretty -- it's an issue that both the Democrats bipartisan issue and the Democrats and Republicans to get their head around. And it will likely come either in the HEROES Act or it will come separately over the next year after the inauguration of the new President. So I think we'll get that. Going beyond that, I think that there's going to be a lot of initiatives. There's going to be a lot of activity. But I don't expect there to be a full scheduling. But I do think that you could get a STATES Act. But I think that, that would probably be in the second part of the next administration. I don't think it will happen right away because I think if we get SAFE Act, McConnell will be -- have marijuana exhaustion and he's unlikely to push on the STATES Act. But I do think the STATES Act was a compromise that could be had between the McConnell-led Republican Senate, especially with all the pressure coming from the states, I think that could be had. But full legalization, I don't think you get until the next administration, whoever that may be. And so that's the way we're looking at it at Curaleaf. Again, we don't have a crystal ball, but that's sort of our approach right now and for what we're hearing in Washington, we have a pretty large operation there. We're seeing that, that is the way it's developing. But anything can happen. But we've already seen [Biden] roll back a little bit. He didn't put cannabis back into some of those transition issues. But we know that The House and the Senate are pushing for the Banking law. And I think that, that would be a huge step because that would bring down the cost of capital. And it also has a safe harbor language in it, which would allow a very broad group of investors to participate in the cannabis market. So that's really our perspective at the moment, but we don't have a crystal ball. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [36] -------------------------------------------------------------------------------- Okay. Understood. And I appreciate that insight. And then just 1 other question here. I wanted to follow-up to Joe Bayern. Just with respect to the track record and experience you have, building brands across the country and from scratch. Do you look at building brands within the cannabis industry to have an added layer of complexity? Or is your approach really a similar approach to what you've done throughout your career, and there's really some basic first principles that apply no matter what happens? I'd appreciate your insight there as you transition into the new role. And so what your approach is going to be through that CPG transition for Curaleaf? -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [37] -------------------------------------------------------------------------------- Yes. I think the essence of brand building is the same, whether you're talking about cannabis or soft drinks or any other consumer product, which is you have to meet the needs of the consumers very specifically, and you have to be able to do that in a way that they relate to through a brand representation, what the brand represents, what the company stands for, the authenticity of the brand and the quality of the products. So I think those are all very similar, and that's -- where we're very focused on at Curaleaf is developing products that actually very specifically meet the needs of our consumers, and do that better than our competitors. And if we can do that, we think we're going to be successful. There are obviously some hurdles in the U.S. cannabis industry because of the structural component of how cannabis has evolved. So not being able to have a national supply chain, obviously, is a bit of a challenge, not being able to ship products across state lines is a challenge. The outlets for communication with consumers is somewhat challenging. So there are somethings that are structurally different. But I think the essence of building a brand is very similar, which is we need to understand who our consumer is, to understand where needs are not being met by other people in the industry, develop products that meet those needs and then communicate those needs through the brand. So that's very, very similar. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- The next question is from Aaron Grey with Alliance Global Partners. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [39] -------------------------------------------------------------------------------- First one for me is on Florida. You mentioned some cultivation expansion you have planned there. Just wondered if you could give some commentary on the degree of that? And then also, any commentary you have on -- in terms of edibles and the planned rollout and ramping up of that now that it's been made available within the state. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [40] -------------------------------------------------------------------------------- Yes. Sure. We just completed -- as I said in my prepared remarks, we just completed the first harvest out of our 50,000 square foot new indoor facility. And that flower will literally hit the product shelves here in late November. So we're definitely bringing a lot of high-quality indoor flower online in the market. We'll be doubling our indoor capacity again in early Q2 to keep up with the demand for that product format. And so I think in Florida, in addition to opening our stores, we're going to be adding a lot of capacity and trying to feed into that demand curve, which we expect to continue to increase. So feeling very good about Florida and the direction that it's headed. -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [41] -------------------------------------------------------------------------------- Yes. As far as the product goes, you may recall, we've talked on -- discussed in other calls that we actually have a sublingual gel existing in the market today. We had to file the rurals in Florida. So we call it a sublingual gel, tablet. And -- but the launch of gummies is imminent. Within the next couple of weeks, we should have products in the marketplace. And we think they're going to be really compelling and unique. We're using different technology as far as the emulsion that goes into the gummy. So we're creating a nano-emulsion technology that we're going to be launching in Florida very shortly. And that's going to have very fast onset and a different experience with traditional gummy, and we're following that up with a traditional gummy for traditional consumers in the marketplace. So we have a very robust pipeline of innovation in Florida and across all 23 states, and we're very excited about some of the innovation coming in the market, especially in Florida over the next couple of weeks. -------------------------------------------------------------------------------- Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [42] -------------------------------------------------------------------------------- All right. Great. And then the second question would be more around product formats specifically vapes, particularly given the acquisition of Select, we've had historically a heavy reliance on the vape category. We're a little bit -- a year removed from the vape illnesses and scares we had seen in the fall of 2019. So just curious towards what you're seeing in the marketplace today in terms of the overall vape category, consumer adoption and kind of where it lies right now in terms of product format market share and how you see that evolving? -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [43] -------------------------------------------------------------------------------- Yes, I could give my perspective, and Joe could add in. But we see that the vape market has responded and rebounded over the past 12 months and coming back off of the vape scare. I think people generally recognize that, that was in the illicit market issue that the products just weren't tested and weren't high quality. So I think that just is further evidence that we believe there's potential growth in our marketplace as consumers really understand the difference between the illicit market and the legal market, which is you get quality and test quality products and testing that you don't get in the illicit market. So that's been very favorable. I think what we're seeing in the vape category in general is that we're seeing -- we're actually seeing the consumers are becoming a little bit more educated and aware of different technologies. So it's not as simple as just having playing distillate in a cartridge, being able to deliver products like live resin, our Elite Live product for Select, is driving new market penetration and bringing new users into the category. So I think what you're seeing is kind of a little bit of a bifurcation of the category, which is in the more educated and sophisticated consumers, they're looking for better, higher quality products. But there's still a market out there for new entrants who are basically still looking for distillate products and shop-on price. So our strategy is pretty simple. We want to have products that are -- will resonate with each of those consumer segments and make sure that we're creating a full lineup of products across both Curaleaf and Select to be able to meet those needs. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- The next question is from Neal Gilmer with Haywood Securities. -------------------------------------------------------------------------------- Neal Gilmer, Haywood Securities Inc., Research Division - Research Analyst of Special Situations [45] -------------------------------------------------------------------------------- I just wanted to touch on a couple of the expansions you mentioned in your prepared remarks with respect to Pennsylvania and Illinois. Can you give any more color on sort of the magnitude of those expansions? And I guess more importantly, when you expect them to be complete and being able to contribute towards revenue? -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [46] -------------------------------------------------------------------------------- Yes, sure. In Pennsylvania, Grassroots completed, over the summer, their -- expansion of their indoor facility. We are also -- because of our Clinical Registrant license, Curaleaf is bringing on a 50,000 square foot facility as well. Grassroots has the ability to open 12 stores with their licenses, Curaleaf can open 6 under the Clinical Registrant program. So we expect to have a significant amount of capacity come online both at Curaleaf and Grassroots as we head into 2021. With respect to Illinois, Grassroots completed the fit-out of their existing 70,000 square foot facility just recently, and that is planted as we speak and we'll be harvesting late this quarter and end of Q1. And so we expect to get the benefit of that fully-built out facility, plus an approximately 46,000 square foot greenhouse that is in construction. And so we're adding a lot of capacity in Illinois as well. As you know, the demand in both Pennsylvania and Illinois shows no sign of slowing down. And so we intend to feed additional capacity into those markets and see significant growth next year. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- The next question is from Andrew Partheniou with Stifel GMP. -------------------------------------------------------------------------------- Andrew Partheniou, Stifel Nicolaus Canada Inc., Research Division - Analyst [48] -------------------------------------------------------------------------------- Maybe just a follow-on on brand building a little bit. It seems like there's 2 dynamics here going on. First, taking share from the illicit market, which as Boris mentioned, seems to be the #1 competitor right now. And the second thing, which Bayern, and I think you spoke to is, the 95% of other people in the United States that have yet to try cannabis. So I would imagine that there is different strategies that could be adopted to speak to both different types of consumers. To the extent possible, are you able to give a little bit of color on that? Is it right to think also that the illicit market is more near term and the 95% of Americans is more long term? -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [49] -------------------------------------------------------------------------------- Yes. I think that is a good way to think about it. At Curaleaf, we're always looking across multiple time horizons to develop our growth strategies. And so we're looking at really 3 different time horizons. As we talked about today, we're competing -- really, we're really trying to keep up with demand in most cases, right? So we're building out capacity to keep up with our existing demand, and we think that's going to continue into the next couple of years. As part of that, we'll see a conversion from the illicit market to the legal market, and I think that will happen naturally over time based on a couple of different dynamics. One will be people want -- if they have the opportunity to buy on a legal market versus the illicit market, they're going to choose to do that. We think that people -- if they have available -- the availability of product, they will make that choice. There's probably a pricing comparison somewhere in there that's not quite defined yet. But I think there certainly would be a bias to purchase on the legal market if product is available. The second thing of conversion of the illicit market in our perspective is we need to give competitive products just like any other competitor. People are only going to switch if they feel like they're getting a better product in the exchange. And that comes with higher quality product and better quality flower, which is the easy entrant point. But I think longer term, it's about creating products that the illicit market isn't going to be able to develop. We're spending a lot of time and energy and resource on technology around, as we talked about live blends and blending different terpenes and cannabinoids together to create different formulas. We're working on new devices. Where we're working on new products, which will meet the needs more specifically of our consumers, so splitting out some of the cannabanoids like CBN and THCV that help with sleep or weight loss or energy. So as we get more sophisticated in our product assortment and our product development, we'll be able to offer products that the illicit market just can't keep up with. And I think that's going to be the biggest catalyst for people that move over. To bring new users into the category, we just have to understand what the existing barriers to consumption are today. And we have to remove those barriers. And I think part of that is the stigma within the industry, part of it is the industry is broadly focused around flower today. It's been a big part of the existing category. And part of it is that people want a product that meets needs that are not necessarily about feeling the effects of THC. So as we're more sophisticated in our product development and how we could use the science behind the plant to create different products, we'll start getting people in who want to use the product for things like chronic pain, but don't want to feel like they're getting high off the THC. So we need to create a different product for that. We need people. We need products that will be able to meet the needs of people who want to be able to sleep at night. So that's really a primary focus of ours, is just making sure we're getting the science behind this plant. Because what makes us really, really optimistic about the future is that the plant can meet so many different need states of different consumers across the consumer landscape. And it's really just about understanding what needs each consumer is looking for and then being able to formulate a product to meet that need. -------------------------------------------------------------------------------- Andrew Partheniou, Stifel Nicolaus Canada Inc., Research Division - Analyst [50] -------------------------------------------------------------------------------- That's very helpful, very thoughtful answer. Just switching gears, a lot of focus has been on the markets in the Northeast. But on the West Coast, we're seeing a phenomenon that hasn't happened in quite a while. Wholesale prices are rising. There's been the wildfires that did records this year. Just wondering if you can talk a little bit about that dynamic there on supply versus demand. And perhaps the wildfires, if there's any positive or negative impact on your -- on namely Select, I would think, given its wholesale presence? And how long that may last, given there's limited outdoor growth cycles? -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [51] -------------------------------------------------------------------------------- Yes. I'll give you my perspective, and I guess, Boris or Joe could chime in as well. I think we're seeing in California that, again, as you said, wholesale pricing is pretty robust in the marketplace, which is great. I mean, I think it's just an indication that there's increased demand in the marketplace. And because of structural -- some structural changes in the market, we're seeing a more rational supply chain in California. So -- and I think part of that might be the wildfires. There was some supply taking out of the marketplace in California. So I think there's going to be a healthy wholesale market going in, not only through the balance of 2020 but into 2021. For us, we were lucky enough that we're not greatly impacted by that because we've locked in on some forward contracts. So one of the things that we are trying to do pretty aggressively is work with different cultivators in different markets to have a more rational perspective of supply chain. And in California, we were lucky enough to do that. So we've forward bought some contracts and where we have supply locked up for not only in the balance of 2020, but into 2021. So we're in good shape in California. So we don't see a major impact on Select. But I think there is a dynamic going on in the marketplace that we'll continue to see increased wholesale pricing for a while because of the increased demand. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- The next question is from Glenn Mattson with Ladenburg Thalmann. -------------------------------------------------------------------------------- Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [53] -------------------------------------------------------------------------------- Most of my questions have been already asked, but I'll just chime in with a couple more that I had. So on Grassroots, it's a rather large acquisition. I'm sure there was a lot of work done before it closed and everything else. But curious, you've seen even some really good operators find out that after they've closed the acquisition, there's some level of new understanding. So I just -- I guess I'm just curious if there's anything that surprised you positively or negatively now that it's under your umbrella? -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [54] -------------------------------------------------------------------------------- I'll give you my perspective. This is Joe again. One of the things that we said is I was responsible for the integration of Grassroots. And I think I've done a lot of these over the last 20-plus years, and I think this is 1 of the smoothest I've ever seen. And I think the basis for that is really we're very complementary businesses. Broadly speaking, they were in markets that we were not in. It was a little bit of overlap. So I think the transition went very well. There was very complementary companies to begin with. And I think we both understood the strategic initiative in front of us, which is we need to put our egos aside at the door and just get on with integrating these 2 companies, and I think we did that pretty well. We gave ourselves a target of trying to integrate the 2 organizations within the first 30 days, and we accomplished that target. We're on track to deliver our IT initiatives and our cost synergies. So I think, broadly speaking, it was -- it went very, very smoothly. We're always learning from each other. I think that's -- one of the things that is one of our keystones is, we're doing something that really hasn't been done in the marketplace. So we have to be collaborative, and we have to respect each other's opinion. So I think we're looking at things like new technologies or trying to bring brands over from Curaleaf over to Grassroots. And I think everybody has been pretty receptive about most of the initiatives because they realize we're kind of on a mission to do something that no one's done before. And so I think everybody is very excited about that. We have a high level of collaboration. I think there's a huge amount of passion about the opportunity in front of us, which is really unprecedented to be able to create not only a great company and great brands, but help forge an industry, which we think is very compelling. So that certainly helps, cut out some of the friction when these things typically occur. -------------------------------------------------------------------------------- Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [55] -------------------------------------------------------------------------------- Yes. Great. And then I'll just follow-up with, the pandemic is getting -- is intensifying a little bit as we enter the winter months. So are you -- have any areas of concern, either on your side, whether it be production or cultivation or retail? Or are there any states that are popping up as potential things we should think about for -- I don't know, about some level of shutdowns or state level control, anything on your radar screen that you guys are worried about? That's it for me. -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [56] -------------------------------------------------------------------------------- Nothing that's major. We're -- we've done a really great job of managing this pandemic as a company. And obviously, the numbers are concerning, but I think we've got really good protocols in place, and I think we're going to be able to operate through the pandemic. So I don't think we're terribly concerned about any 1 particular issue. -------------------------------------------------------------------------------- Joseph Daniel Bayern, Curaleaf Holdings, Inc. - President [57] -------------------------------------------------------------------------------- Yes. And I would just add to that, I think people have seen that we've been able to manage through this and manage through it in a professional and responsible way. So I think our perspective is the legislators will continue to work with us to react to whatever market conditions occur. And we've proven the fact that we could change our model quickly to be able to service our customers more efficiently and more safely. So as Joe said, we've both done a lot of work this year, unfortunately, we had to, but now we've done it, and it's behind us. We've got new procedures in place. We've got staffing models in place. We've got delivery models in place to be able to meet the needs of our consumers. So we'll just have to continue to leverage those procedures going into the next couple of months. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- The next question is from Russell Stanley with Beacon Securities. -------------------------------------------------------------------------------- Russell Stanley, Beacon Securities Limited, Research Division - MD & Research Analyst [59] -------------------------------------------------------------------------------- I just have one at this point, and it relates to New Jersey. There's still another round of medical licenses that were to be issued. And I think that, that has been -- or that process has been stopped by or paused by a court order. I was just wondering what your view is on how that gets resolved? And how that -- does that need to be resolved in order for the adult-use market to open? And what your thoughts are and how that might play out? -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [60] -------------------------------------------------------------------------------- Yes. Russ, so we don't believe that needs to be resolved for the adult-use to move forward. The reality is the New Jersey market, from additional use, we expect to grow considerably in the future as well. I mean we're still at a very low penetration relative to other markets. And so I think you're going to see medical cannabis expand, but the legislature, the governor and really everybody in the state is very focused on getting the adult-use program going quickly, getting the tax revenue, creating the jobs. And so I think we're feeling very optimistic that that's going to happen. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- And the last question is from Eric Des Lauriers with Craig-Hallum Capital Group. -------------------------------------------------------------------------------- Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [62] -------------------------------------------------------------------------------- So you guys have done some really impressive acquisitions to date. And I know integration is a big undertaking, especially given the fragmented state markets. Could you give us a sense of how you plan to integrate all your acquisitions and take best practices across cultivation, processing and retail and implement them across a unified Curaleaf platform? Any specifics would be great, whether it's just a matter of training personnel or upgrading equipment. And how long that might take to reach a unified platform? -------------------------------------------------------------------------------- Joseph F. Lusardi, Curaleaf Holdings, Inc. - CEO & Director [63] -------------------------------------------------------------------------------- Sure. I mean, I think I've lost track of how many deals we've done in the last 5 years, but that really is a core competency of Curaleaf, which is to acquire and integrate and to get everybody on our brands, our procedures. And so we've done a lot of that work already. Clearly, Grassroots and Select are the most significant deals we've done. We've made tremendous progress already with those companies. And I think that you're going to see the synergies really come to bear in 2021. That's what Joe and the team have been working on this year, and I think we are really going to get the benefit of it going into next year. Of course, every market is different, but I think that we've learned a lot in cannabis and up and down the supply chain in terms of having unified SOPs around cultivation, manufacturing, retailing, branding, packaging. And so I think we're feeling very good that 2021, you're going to see our margins expand as we continue to grow the top line. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Foley for closing remarks. -------------------------------------------------------------------------------- Daniel P. Foley, Curaleaf Holdings, Inc. - VP of Finance & IR [65] -------------------------------------------------------------------------------- Thank you, Gary. Thank you all for joining us today. We would like to invite those of you still listening to join us at upcoming conferences and events, including Cowen & Company's third annual Boston Conference, Roth Capital Partners' Deer Valley Consumer Conference and MKM Partners' The Road Ahead, Preparation for 2021 Conference in December. Due to the ongoing health efforts around COVID, these conferences will all be held virtually. For the latest information on our conference participation and links to webcast events, we encourage you to regularly visit the Investor Relations section of our website under these Events. We look forward to speaking with you with at these events and after the new year on our fourth quarter and year-end 2020 results call. If we don't speak to you until then, have a happy holiday season and a happy new year. Stay safe and well, everyone. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.