Curaleaf Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 18 Nov 2020

[Operator:]

Good afternoon, and welcome to Curaleaf Holdings' Third Quarter 2020 Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded.

[Daniel Foley:]

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-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 Jordan:]

Thanks, Dan. Good afternoon, everyone, and thank you for joining us. I am 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 through these unprecedented times.

[Joseph Bayern:]

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 pale 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.

[Joseph Lusardi:]

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 as the leader in cannabis. Before I cover my prepared remarks, I want to thank Boris for his trust and mentorship over the last five 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 five 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.

[Michael Carlotti:]

Thanks, Joe. Once again, we posted record quarterly results as we remain 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 one-time costs primarily associated with fees to close the Grassroots transaction and unrealized corporate synergies at Grassroots impacted our margins. The $17.8 million of one-time 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, one-time charges included $4.3 million of costs primarily related to licensing and startup markets. One-time 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 and 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 getting to core. 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 organic growth and the partial benefit of Grassroots over 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 this 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 two dispensaries in the third quarter of 2019 and Nevada due to the addition of Acres in late 2019. Our retail footprint combined 93 operating dispensaries as of September 30, 2020 and it was 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 one-time charges. Adjusted for one-time 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 non-cash charges related to biological assets, depreciation and amortization, and stock-based comp as well as $17.8 million of one-time items, primarily related to extraordinary fees and integration costs associated with the closing of the Grassroots transaction and startup 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 one-time cash expenses, largely related to Grassroots. Also inventories are 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, New York to avoid product sell-out 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 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 one-time cost to materially decline in the fourth quarter and Grassroots synergies to permanently benefit our operations going forward. Once the integration is complete, we expect to benefit from the 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 eight 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 back to the operator to open the line for questions.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Matt McGinley with Needham. Please go ahead.

[Matthew McGinley:]

Great. Thank you. Firstly, congrats to new Joe and the best wishes to old Joe in your feature endeavors. My first question is on the capital spending. You mentioned doubling cultivation into 2021, how should we think about the pace and the dollar spend around that? You walked us through the cash balances and 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 the next year?

[Joseph Lusardi:]

Mike, do you want to take that?

[Michael Carlotti:]

Yes, sure. So yes, we ended with $84.6 million in cash. We have $65 million to $75 million of assets 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 McGinley:]

Do you have any sense, Mike, of what that dollar spend would be in the 2021 yet?

[Michael Carlotti:]

How much CapEx in 2021?

[Matthew McGinley:]

Correct.

[Michael Carlotti:]

It'll probably be similar to where we end up in 2020, but we'll talk more about that on our Q4 call.

[Matthew McGinley:]

Okay. Great. Thank you very much.

[Operator:]

The next question is from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.

[Pablo Zuanic:]

Thank you. Boris, I guess I have two questions that maybe are a bit too big picture for these type of calls, but I think they're 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 you actually leverage on that scale? I mean, Massachusetts is the worst example, right? 1,000 square feet of canopy, that's the maximum and then only three 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 here? Thanks.

[Boris Jordan:]

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 three rec stores and three 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 one 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 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 it goes adult-use. In New Jersey, for instance, there is no limits 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 grown facility. It 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 all the 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, states were permitting multiple stores 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're scaling. Is that answers your question?

[Pablo Zuanic:]

Yes, of course. Thank you. 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, and it's not so obvious. If the STATES Act is delayed for another four years, either Republicans keep control over the Senate. I know there's a lot of hypotheticals there. But the fact that Senator permissibility may still be four 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 or 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? Thanks.

[Boris Jordan:]

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, is that they have no entrance and even if we move to STATES Act, or even if we move to the MORE Act, I think the U.S. government is going to limit international entrance into the U.S. market. I think there's going to be a bit of a mole around the U.S. market. And even if there isn't, we feel very comfortable that we can compete. 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. Well, our biggest competitor is the drug 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 two years, if not up to four years to continue to build our brands and to continue to invest – and 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 major projects in the company, working on creating systems where our cultivation operations can be used in a brand new format where that 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.

[Pablo Zuanic:]

Understood. Thank you.

[Operator:]

The next question is from Scott Fortune with ROTH Capital Partners. Please go ahead.

[Scott Fortune:]

Good afternoon. Thanks for taking the call. 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 what's the growth of Select quarter-over-quarter going forward down?

[Boris Jordan:]

So I'll let Joe answer that question. But I'm just going to start out 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 old 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 down the transaction in February. Select is present in four 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, we’re 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 there'll always be a little bit different because the Curaleaf product is largely a product sold in our own distribution, so it captures the full margin from cultivation through to retail, whereas the Select product is largely a wholesale product so you do lose a portion of the margin. But still potentially – not potentially that’s 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 it.

[Joseph Lusardi:]

Yes. I'll just say – you’ve 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 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 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, is building brand awareness, building brand trust and building products that meets the needs of new consumers coming into the category because that's what 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 of long-term is converting somewhere around we're about a 5% to 7% penetration level in the 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 attract 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 a 1,000 dispensaries across the U.S. So we're not limited by the number of dispensaries Curaleaf has. And that's the whole – the whole purpose 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 optimistic about the progress so far and we're really excited about 2021.

[Michael Carlotti:]

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 is 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 Fortune:]

I appreciate the color. And then one 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 Cura’s margin? What's the delta there and kind of a timeline as you look out for getting those margins similar to the Curaleaf’s EBITDA margins?

[Michael Carlotti:]

Yes. I mean, Grassroots EBITDA margins are not too far off of ours. We expect that they will get to Curaleaf and Select margins within the next quarter or two, 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.

[Scott Fortune:]

I appreciate it. I'll jump back in the queue. Thanks guys.

[Operator:]

The next question is from Matt Bottomley with Canaccord Genuity. Please go ahead.

[Matt Bottomley:]

Good evening, guys. Congas on the quarter. And congrats, Joe, on a job where you've done in the last five years.

[Joseph Lusardi:]

Thanks, Matt.

[Matt Bottomley:]

Just wanted to maybe pivot to – yes. Just wanted to pivot to Arizona and New Jersey, so obviously, the two ballot states of node 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 time, considering 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 Jordan:]

So let me cover Arizona quickly. The problem with Arizona right now, to be honest is price. So because of what we found generally as these states go from medical to recreational and adult-use, prices for assets tend to go sky hot until people realize how difficult it is to actually manage the business and run it. They spend, 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. They were recently bought by one of our competitors. And I'll tell you that we bid half of what the competitors paid for those licenses. So you can see how – and we bid for maybe three months ago. So you can see how prices have gone through the roof. And people are paying very, very high prices to get them to Arizona. We feel pretty comfortable with our footprint. As I said – as Joe said, we're opening up our ninth store, but then the 10th one coming in the second quarter. So that's really where we are right now. We feel very strong position in all the high densely populated areas, particularly in Phoenix, and we have our cultivation in place and obviously, Select being the number two brand, we build on that. In New Jersey, I don't want to go into lots 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 very, very early on and get going. We've built relationships with the regulators. I can tell you that we’re very much active in the conversations around where the program was going. And we have to compliment 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. We think the program will get launched probably sometime in next year.

[Matt Bottomley:]

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 size is, 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 Carlotti:]

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.

[Matt Bottomley:]

Okay. Thanks a lot.

[Operator:]

The next question is from Vivien Azer with Cowen. Please go ahead.

[Vivien Azer:]

Hi. Thanks. Good evening, and congratulations to outgoing Joe as well as incoming Joe. So incoming Joe, a question for you please. Your background in non-alcoholic ready-to-drink 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 KBP, of course, suggests that more than two brands are necessary to build out inadequate portfolios. So I'd love to hear your impressions there. Thanks.

[Joseph Bayern:]

Yes. I think my perspective is we’re at early stages of development of the cannabis industry and today the market is broadly segmented into two major segments of consumers, the Health and Wellness segment and the Lifestyle segment. So today we have a brand strategy focused on those two 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 that the market itself is really fundamentally broken into two segments. And so we're very focused on each of those segments through different brands in our portfolio.

[Vivien Azer:]

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 at sticking point. So if you could just expand on your constructive commentary there. I'd appreciate it. Thank you.

[Joseph Lusardi:]

Yes. Vivien, I'll just – with regard to Pennsylvanian – this is Joe 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, it will 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.

[Vivien Azer:]

Understood. Thank you very much.

[Operator:]

The next question is from Graeme Kreindler with Eight Capital. Please go ahead.

[Graeme Kreindler:]

Hi. Good afternoon, and thank you for taking my questions. 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 mid-term elections in 2022 to potentially be the next big regulatory catalyst for some of these larger build to have the pathway to pass here? Or could we potentially be surprised here between now and that point? Thanks.

[Boris Jordan:]

So I think the first thing we need to do is get to a final result on the Presidential election and Congressional and Senate election. 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 result before I think it's going to be easier to predict, but it's certainly, I mean, if we take the hypothetical case that everyone is pushing now that we’re going to have Joe Biden as the president, we're going to have a 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 the STATES Act. 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 in Canada DoJ, which gave treasury the ability to get bank guidance on what they can and can't do. That memo was revoked under Jeff Sessions in first year of President Trump's presidency and therefore the treasury concession 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 – it’s a bipartisan issue and Democrats and Republicans to get their head around, and it will likely come either in the Heroes Act and were to come separately over the next year after the migration 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 is going to be a lot of activity, but I don't expect there to be full of 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 the STATES Act, McConnell's being – or have marijuana insertion and he's not likely to push on the STATES Act. But I do think the STATES Act is a compromise that could be had between the McConnell and Republican Senate, especially with all the pressure coming from the state. I think that could be half. From a full legalization, I don't think you get until the next administration, whoever that maybe. So that’s the way we're looking at it. In Curaleaf, again, we don't have a crystal ball or that sort of our approach right now. And from what we're hearing in Washington, we have a pretty large operation there. We're seeing that's the way it's developing. But anything could happen. But we’ve already seen roll back a little bit. We didn't put cannabis back into some of the transition issues. We don't have – 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 safe harbor language, 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:]

Okay. I understood. And I appreciate that insight. And then just one 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 is really some basic first principles that apply and no matter what happens. I'd appreciate your insight there as you transitioned into the new role and to what your approach is going to be through that TPG transition for Curaleaf? Thank you very much.

[Joseph Bayern:]

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 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 were 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 as a challenge. The outlets for communication with consumers is somewhat challenging. There are some things 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.

[Graeme Kreindler:]

Okay. Understood. I appreciate that. Thank you very much.

[Operator:]

The next question is from Aaron Grey with Alliance Global Partners. Please go ahead.

[Aaron Grey:]

Hi. Congrats on the quarter and thanks for the questions. First one for me is on Florida. You mentioned some cultivation expansion you have planned there. Just wanted to get some commentary on the degree of that and then also any commentary you have on in terms of edibles and the plant rollout and ramping up of that now that it's been made available within state. Thank you.

[Joseph Lusardi:]

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 I'm feeling very good about Florida and the direction that it’s headed.

[Joseph Bayern:]

Yes. As far as the product goes, you may recall we’ve talked on – discussed on other calls that we actually have a sublingual gel existing in our market today. We had to follow the rules in Florida, so we call it a sublingual gel tablet. 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 a really compelling and unique. We are using different technology as far as the emulsion that goes into the gummy. So we're creating a nanoemulsion 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 to the market, especially in Florida over the next couple of weeks.

[Aaron Grey:]

Great. Thanks. And then the second question would be more around product format, specifically vape, particularly given the acquisition of Select, which had historically, and haven't been aligned 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? Thanks.

[Joseph Bayern:]

Yes. I can give my perspective and Joe could add in. We're seeing 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 an illicit market issue, that the products just weren't tested and weren't high quality. So I think that just as 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 it, 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 plain distillate in a cartridge, being able to deliver products like live resin or 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 are looking for better higher quality products. But there's still a market out there for new entrance who are basically still looking for distillate products and shop on price. So our strategy is pretty simple. We want to have products that will resonate with each of those consumers 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.

[Aaron Grey:]

All right. Great. Thank you.

[Operator:]

The next question is from Neal Gilmer with Haywood Securities. Please go ahead.

[Neal Gilmer:]

Yes. Good afternoon. Just want to touch on a couple of 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 Lusardi:]

Yes. Sure. In Pennsylvania, Grassroots completed over the summer. The 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 six under the clinical registrant program. So we expect to have a significant amount of capacity come on line 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 into 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. So we're adding a lot of capacity in Illinois as well. As you know the demand in both Pennsylvania and Illinois shows no signs of slowing down and so we intend to feed additional capacity into those markets and see significant growth next year.

[Neal Gilmer:]

Okay. Great. Thanks very much.

[Operator:]

The next question is from Andrew Partheniou with Stifel GMP. Please go ahead.

[Andrew Partheniou:]

Thanks for taking my questions. Maybe just a follow-on on brand building a little bit. It seems like there's two dynamics here going on. First, taking share from the illicit market, which, as Boris mentioned, seems to be the number one 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 Bayern:]

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 three different time horizons. As we talked about today, we're competing – 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 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’s certainly would be a bias to purchase on the legal market if products 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 or 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 cannabinoids like CBN and THCV that help with sleep or weight loss or energy. So as we get more sophisticated in our product assortment and in 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 to 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 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 can use the science behind the plant to create different products, we will 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 lead 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:]

Thank you. 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 have bid 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 Lusardi:]

Yes. I'll give you my perspective and I guess Boris, 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 some structural changes in the market where we're seeing a more rational supply chain in California. 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’re 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’re lucky enough to do that. So we've forward – bought some contracts and we have supply locked up for not only 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 awhile because of the increased demand.

[Andrew Partheniou:]

Thanks for that and congrats again.

[Joseph Lusardi:]

Thank you.

[Operator:]

The next question is from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

[Glenn Mattson:]

Hi. Yes. 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’s a lot of work done before closed and everything else. But curious, you've seen even some really good operators find out that after they've closed this acquisition, there's some level of new understanding. So I guess I'm just curious if there's anything that surprised you positively or negatively now that it's under your umbrella?

[Joseph Lusardi:]

I’ll give you my perspective. This is Joe again. One of the things that we said as 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 was one of the smoothest I've ever seen. And I think the basis for that is really, we’re very complimentary businesses. Broadly speaking, they were in a markets that we were not in. There was a little bit of overlap. So I think the transition went very well. There was a very complimentary 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 two companies. And I think we did that pretty well. We gave ourselves a target of trying to integrate the two organizations within the first 30 days and we accomplished that target. We're on track to deliver our IT initiatives and our cost synergy. So I think broadly speaking, 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's been pretty receptive about most of the initiatives because they realize, we're kind of on a mission to do something that no one has done before. And so I think everybody is very excited about that and 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's certainly helps cut out some of the friction when these things typically occur.

[Glenn Mattson:]

Yes. Great. Thanks for that. And then I'll just follow-up with, the pandemic is getting – is intensifying a little bit as we enter the winter months. Are you have any areas of concern either on your side, whether it would be production or cultivation or retail, or are there any states that are popping up as a potential things we should think about for – I don't know, but some level of shutdowns or state level control? Is there anything that on your radar screen that you guys are worried about? That's it for me. Thanks.

[Joseph Lusardi:]

Yes. Nothing that's major. 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 one particular issue.

[Joseph Bayern:]

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 a 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 can change our model quickly to be able to service our customers more efficiently and more safely. So as Joe said, we've 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:]

The next question is from Russell Stanley with Beacon Securities. Please go ahead.

[Russell Stanley:]

Hello, and thanks for taking my question. And 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 court order. I'm 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? Thank you.

[Joseph Lusardi:]

Yes. Russell, we don't believe that it needs to be resolved for the adult-use to move forward. The reality is the New Jersey market for medicinal 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's going to happen.

[Operator:]

And the last question is from Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

[Eric Des Lauriers:]

All right. Great. Thanks for taking my questions guys and congrats on a strong quarter. So you guys have done some really impressive acquisition 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? Thanks.

[Joseph Lusardi:]

Sure. I mean, I think I've lost track of how many deals we've done in the last five 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’re 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 topline.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Foley for closing remarks.

[Daniel Foley:]

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 at 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 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:]

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