Acreage Hldg Cl E Sub Vtg

Good morning. My name is Katrina and I will be your conference operator today. At this time, I would like to welcome everyone to a Courage Holdings third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during the session, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Steve Gertz, Chief Financial Officer.

Good morning, everyone, and welcome to the Acreage Holdings third quarter conference call. Joining me today is Peter Caldini, our Chief Executive Officer. Today's call will be archived on our investor relations website at investors.acreageholdings.com. Before we begin, I would like to remind listeners that today's call contains forward-looking statements subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Any such information and statements should be taken in conjunction with cautionary statements in our press releases and risk factors discussions in our public filings found on CDER and EDGAR, as well as our investor websites. Any forward-looking statements reflect management's expectations as of today's date, and we assume no obligation to update them other than as may be required by applicable securities law. I will now turn the call over to Peter. Thank you, Steve, and good morning, everyone. We are very happy with the progress we've made throughout 2021. Since the implementation of our three key strategic priorities that I outlined at the beginning of the year, which are driving profitability, strengthening our balance sheet, and accelerating growth in our core markets, we have successfully executed on these deliverables each quarter. We are confident that with this refocused strategy, we will continue to improve our financial performance, and I'm extremely proud to share that we once again delivered solid results for the quarter. Q3 2021 was the third consecutive quarter we delivered positive adjusted EBITDA. In addition, revenue once again saw strong growth with a 52% increase over Q3 2020 and a sequential increase of 9% compared to last quarter. During the quarter, we further strengthened our position with a definitive agreement for the sale of our remaining Oregon assets. The operations in Oregon had a negative impact on both our revenue growth and bottom line, and we're utilizing management resources. By exiting Oregon, we eliminate this drag on our financials and allows us to divert valuable management time and efforts to our core markets. We announced in August that two of our medical cannabis dispensaries were rebranded to The Botanist in Connecticut, where we have a market leader position in retail. The Botanist offers premier patient experiences, including a full suite of cannabis-derived products, a loyalty program, private consultation rooms, as well as educational cannabis events and community engagement. By rebranding these locations, we continue to build on the strong brand awareness that Botanist has established while also optimizing resources and developing best practices across multiple states, which will further facilitate operational cost efficiencies. This has been a significant initiative for Acreage, and I'm pleased with the progress. To this point, we have converted our retail dispensaries to the botanist in all our states, with the exception of Illinois and Maine, which we plan to do in 2022. In our New Jersey market, where we own and operate three dispensaries, we recently announced completion of an expansion at our Egg Harbor cultivation facility, which increases its cultivation output fourfold. This expansion will allow us to support and supply all the retail products required for our own dispensaries while also enabling us to increase our wholesale market business in the rapidly growing New Jersey market. We believe that with our current footprint and expansion projects, we are well positioned to be a leader in New Jersey as soon as adult new sales commence. In New York, we are preparing for the introduction of adult use and intend to increase our retail presence beyond our four current dispensary locations by actively identifying additional locations in key areas of the state. The expansion of our cultivation facility in Syracuse continues, and we anticipate its completion by the end of Q2 next year. Looking at Illinois, The cultivation expansion we completed in Q2 2021 has been performing well, and as a result, we saw increased wholesale revenue in the state, which contributed to our sequential increase in revenue. We also launched our new premium brand Superflux at the end of the second quarter, which targets the high value cannabis connoisseur by celebrating the craft of cannabis with live resin vapes and concentrates. The brand saw strong initial performance and was introduced to the Ohio market during the third quarter. We have further plans to roll Superflux out in additional states in the coming months. In Pennsylvania, we have continued to see strong demand for our high-quality premium products, and we are exploring the opportunity to further increase our capacity in the future to meet this continuously growing demand. Our operations in Maine continue to perform well. And during the quarter, we converted two more dispensary locations to adult use, bringing the total to three adult use dispensaries in the state. These store conversions have further expanded our market-leading position in Maine. The construction of our Edibles Kitchen and Lemons for Massachusetts is now complete, and we are rolling out a wide assortment of edible products that will hit the shelves in Q4. In Massachusetts, we're also exploring opportunities to expand both our retail presence and cultivation capacity in this highly attractive state. And lastly, in early October, we announced the closing of our acquisition from Greenleaf Group of Companies of their Ohio operations, where they are a market leader in the state. The acquisition provides us with cultivation, processing, and retail operations in the rapidly growing Ohio market. The assets include a 70,000-square-foot cultivation and processing facility located on eight acres of land, allowing for future expansion opportunities, as well as five operational dispensaries branded The Botanist located in Anchorin, Canton, Cleveland, Columbus, and Wycliffe. These five retail operations have an estimated retail market share of approximately 20%. The operations we've acquired were already performing well in the Ohio market and produce a wide range of high quality cannabis products, including edibles, vapes, concentrates, tinctures, capsules, and flour. These products are sold both directly through the botanist retail dispensaries, as well as through wholesale channels to approximately 70% of the medical cannabis dispensaries currently operating in Ohio. These high quality assets will significantly strengthen our footprint and establish a vertically integrated leading market position in the state of Ohio for acreage. And the acquisition is immediately accretive to our earnings. With the cannabis industry regulations changing rapidly, we are growing our key positions in states such as New York, New Jersey, and Connecticut, which have all recently legalized adult use cannabis. We anticipate that upon commencement of adult new sales in these markets, we will be in a strong position to capitalize on their significant growth potential. We also continue to be encouraged by the progress we are seeing for cannabis reform across various other states. 2021 has been a great year for acreage thus far. We have executed on a significant number of initiatives as part of our refocus strategy while also consistently delivering improved financial results. We've established a strong footprint across several key markets, which has positioned us to have a strong leading position in our core states. We believe with this focus, we will continue to achieve sequential improvements on our adjusted EBITDA over the coming quarters. Additionally, we will further accelerate growth through new dispensary openings, cultivation expansion projects, And we will also explore creative acquisitions if we see a strong opportunity. Lastly, I would like to finish by thanking our team. Their tireless efforts and hard work over the last year is why we are in a strong position today. They bring an immense amount of passion and creativity to their roles, with everyone striving to provide the best experiences for our patients and customers. With this fantastic team and our premier base of assets established, we are excited and motivated about what lies ahead in 2022, and I look forward to speaking to you again next quarter. I will now turn the call over to Steve to discuss the financial results in more detail before we open the call to questions. Thank you, Peter, and good morning to everyone again. Revenue for the third quarter of 2021 was $48.2 million. a 16.4 million or 52% increase compared to the third quarter of 2020, as well as a sequential increase of 9% compared to the second quarter of 2021. Our growth in revenue for the quarter when compared to the third quarter of 2020 was largely due to strong organic growth and aided by the consolidation and conversion of retail locations to adult use in Maine in addition to our wholesale operations in California. This growth was offset by divestitures and closures of assets in non-core markets, as well as decreases in revenue in the Oregon assets, which are being held for eventual sale. Excluding these acquisitions, divestitures and closures, as well as the impact of revenue declines in the Oregon operations, revenue increased by 42% in the current quarter, as compared to the third quarter of 2020. Retail revenue increased 29% for the quarter compared to the third quarter of 2020 and was driven primarily by increased demand and production across states, new store openings since the third quarter of 2020, and the consolidation of several main dispensary locations and their conversion to adult use sales. Retail revenue was negatively impacted by declines in the non-core state of Oregon and the sale of our Florida operations. Sequentially, retail revenue for the current quarter improved by 2.4 million or 8% compared to the second quarter of 2021. Wholesale revenue increased by 119% for the quarter compared to the third quarter of 2020. Due to our increases in cultivation capacity, as well as the maturing operations in our Pennsylvania, Massachusetts, and Illinois cultivation facilities, resulting in higher yields and improved product mix in each of these respective markets. Additionally, our wholesale operations in California contributed to an increase in wholesale revenue in the quarter. Sequentially, wholesale revenue for the current quarter improved by 1.5 million, or 10%, compared to the second quarter of 2021. Gross profit for the quarter was 23.8 million, an increase of 10.3 million, or 77%, compared to the third quarter of 2020. Revenue growth and cost efficiencies achieved at our production facilities drove the increase in gross profit. While wholesale cost of goods saw some increases, this was tempered by production efficiencies. Gross profit continues to benefit from the vertical integration of our operations as a greater portion of the products sold at our retail dispensaries is sourced internally from our own production and processing operations. Gross profit generated from this internally produced product includes both the wholesale and retail margins, and does not contain the external wholesale margin that would be paid if we sourced the same product from external vendors. Gross margin during the quarter was 49.4%, which was a 690 basis point improvement compared to the third quarter of 2020. Gross margin, however, was down sequentially from the second quarter of 2021. A lack of internally produced high-quality flour in some of our states required us to purchase third-party product, which generated a lower margin. Additionally, we increased staffing in preparation for the completion of the expansion of our Egg Harbor cultivation in New Jersey and the opening of our Edibles Kitchen in Lemon Street, Massachusetts, which increased our cost of goods sold to the near term. Finally, the timing of the fulfillment of high-margin wholesale orders had a negative impact on margins during the current quarter. Total operating expenses for the quarter were $30.3 million, a decrease of $21.8 million, or 42%, from the third quarter of 2020. Year-over-year increases in compensation and depreciation expenses as a result of the expanded operations were more than offset by reduced administrative costs and stock-based compensation expenses coupled with no asset write-offs and legal settlements in the current quarter. Additionally, total operating expenses for the current quarter included a $2.3 million provision for the capital assets of the Sewell, New Jersey location, net of the expected insurance recoveries that were damaged by Hurricane Ida. Consolidated EBITDA during the quarter was a loss of $1.3 million. A significant improvement compared to the EBITDA loss of $38.3 million in the third quarter of 2020. Adjusted EBITDA, which excludes impairments, equity-based compensation expense, and unusual items that are not expected to recur in future periods of $6.5 million for the current quarter. Also a significant improvement compared to the adjusted EBITDA loss of $6.9 million in the third quarter of 2020. Adjusted EBITDA from core operations, which excludes markets where the company has entered into definitive agreements to exit, and startup ventures, such as beverages and CBD, with $7.5 million for the current quarter, indicating that the company's core markets are still being negatively impacted by its non-core operations. Lastly, net loss attributable to acreage for the quarter was $12.3 million, a $28.3 million improvement compared to the third quarter of 2020. Revenue growth, gross margin improvements, and operating expense reductions all contributed to the net income improvements and were somewhat offset by increases in depreciation and amortization expenses and the Sewell asset write-off, and finally, interest charges. I would also like to note that our managed entities generated net sales of $16.1 million during the quarter, a small decrease of $900,000 compared to the third quarter of 2020, driven primarily by same-store sales growth offset by the acquisition and consolidation of various entities. Closing with our balance sheet, we ended the quarter with $29.5 million in cash and restricted cash on hand. We also completed steps to improve our balance sheet in the future as, during the quarter, We entered a definitive agreement to divest assets in Oregon for a total consideration of $6.5 million, including a $250,000 cash payment at the sign of signing and a 10-month promissory note. We have vastly improved our financial profile over 2021 with a strengthened cash position, and we will continue to evaluate further opportunities in the market for additional sources of capital at attractive rates and terms. Keeping a strong balance sheet remains a priority for the company and will allow us to further accelerate growth in our core markets while maintaining flexibility to act on attractive opportunities that may arise in this rapidly evolving industry. That concludes our prepared marks. With that, I will now have the operator open the line for questions. Operator, please go ahead.

As a reminder, If you have a question at this time, please press the star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the key, please press the pound key. We have our first question from Vivian Azor with Calvin. Your line is open.