Cresco Labs - Q1 2019

Transcript

Operator (participant)

Good day, and welcome to Cresco Labs' First Quarter 2019 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press the pound key. Please note, this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Jake Graves (Head of Investor Relations)

Good afternoon, and welcome to Cresco Labs' First Quarter 2019 Earnings Conference Call. We look forward to speaking with you today and discussing the great progress we have made as a company. I'm joined on the call today by our Chief Executive Officer and Co-founder, Charlie Bachtell, our President and Co-founder, Joe Caltabiano, and our Chief Financial Officer, Ken Amann. Prior to this call, we issued our first quarter twenty nineteen earnings press release and financial statements for the three months ended March thirty-first, twenty nineteen. Copies of these documents have been filed with SEDAR and are available on our investor relations website at investors.crescolabs.com.

Before we begin our remarks, I'd like to remind everyone that certain statements made on today's call may contain forward-looking information with the meaning of applicable Canadian securities legislation, as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of nineteen ninety-five. Such forward-looking statements may include estimates, projections, goals, forecasts, or assumptions, which are based on current expectations that are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations.

Additional information about the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found under Risk Factors in Cresco's CSE listing statement, filed with SEDAR on November 13th, 2018, and available on www.sedar.com. Cresco does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco will refer to some non-IFRS financial measures, such as Adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for the calculation of these measures and a reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS.

These non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Certain results exclude the impact of biological assets. Under IFRS requirements, we must include a measurement of biological assets, and the change in overall fair value is recorded as a gain or loss in the income statement each quarter. Please also note that all financial information on today's call is presented in U.S. dollars, unless otherwise noted, and with that, I'll now turn the call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

Charlie Bachtell (CEO)

Good afternoon, everybody, and thank you all for joining us today. Since we just held our last earnings call a little over a month ago, we're going to keep our prepared remarks on today's call on the shorter side and leave more time for questions. I'm going to start off with a brief overview of the highlights of the quarter. Joe will provide some commentary on operational developments, and Ken will discuss our financial results in more detail. After that, we'll be happy to take your questions. Since the beginning of the year, we've made substantial progress towards achieving the vision that we laid out for building Cresco into the most important company in the cannabis industry. From an operational standpoint, we've continued to execute well and generate higher levels of revenue in our existing markets while driving strong margins.

And through our M&A program, we've put a foundation in place that we believe will enable us to capture a leading share in the North American cannabis market. In the first quarter, we generated revenue of $21.1 million, a 313% year-over-year increase compared to Q1 of two thousand and eighteen, and a 24% sequential increase quarter over quarter. Q1's pro forma revenue was equal to $33.9 million, and importantly, we delivered another quarter of positive adjusted EBITDA. We couldn't be happier with what we've been able to accomplish so far this year. Since founding Cresco, we've had a clear plan in place for positioning the company to ultimately be a dominant player in the cannabis industry.

We wanted to build a strategic geographic footprint and develop the distribution capabilities to allow us to have meaningful and market-leading positions in our markets, and this is what we've done. We strongly believe that getting access to and building dominant positions in the most important and strategic markets in the country is the clear path to becoming the long-term winner in this business. While most in the industry are focused on today, we've been focused on success in twenty twenty and thereafter. Being in the most markets has never been our goal. To win, you need to get access to the most important markets, and you need to go deep, and that's what we've done, and that's what we'll continue to do.

We began 2019 with a continuation of our overall strategic goals to, one, create the most strategic geographic footprint with markets that have strong regulatory structures with large consumer bases, and two, obtain meaningful positions in each of those markets. With our pending acquisition to VidaCann in Florida and our recent approval to enter the Michigan market, we rounded out the initial geographic footprint that we targeted and achieved objective number one. Including pending acquisitions, we're in eleven states that include seven of the ten most populous states in the country. The other four states represent high strategic value, including Arizona, arguably the largest medical-only market left in the U.S., Nevada, which has Las Vegas, the most number of annual tourists per square foot of any city in the country, and Massachusetts, the only significant adult use market on the East Coast of the country.

In furtherance of objective number two, which is creating meaningful positions in each of these markets, we made sure that our 2019 M&A criteria had an emphasized focus to find opportunities that would be light on Cresco organizational bandwidth, have fairly short time frames for positive revenue, and eliminate as much execution risk in new markets as possible. With our founder's very unique experience in profitably scaling a company in a highly regulated, emerging industry on a state-by-state basis, we know how fundamental and critically important these three factors are in creating successful scalability. By acquiring VidaCann, an existing operator in Florida, we're able to immediately have a meaningful presence in that market with an excellent platform for driving future growth.

With 11 dispensaries approved for operation and three more finished and scheduled to open in the next 45 days, Cresco Labs will be entering the Florida market with the fifth most number of dispensaries open, 70,000 sq ft of operational cultivation and processing facilities, and an experienced staff of over 100 employees in the state. We've strategically reduced the operational bandwidth it takes to launch a new state, we've eliminated the time to positive net revenue, and we've effectively de-risked to the state from an operational and regulatory perspective. Another example of this disciplined approach to growth includes our acquisition of Origin House, the largest distribution company in California, with over 200 existing employees who are well-versed in distribution, supply chain management, M&A, and the capital markets.

With Origin House, we've added the distribution footprint that will ensure that we have a meaningful position in California, again, the largest cannabis market in the world, as well as channel expertise, operational bandwidth, and adult use cannabis experience that we believe will enable us to take a leading share in all of the markets that we've entered. While Origin House was heavily pursued by other cannabis companies, they recognized that our approach to the industry and the strategic footprint that we've built provided the best opportunity to take the success that they've had in California and be a part of replicating that success across the country. Quite simply, with these two acquisitions, Cresco Labs has created the most strategic and valuable geographic footprint in U.S. cannabis.

We've decreased execution risk, we've increased experienced executive leadership and operational bandwidth, we've reduced our time to positive net revenue in our newest markets, we've increased our overall likelihood of success in this industry, and we've made us a more investable cannabis company. In just a few short months, we've made Cresco Labs a much better, stronger organization. We anticipate that the VidaCann transaction will close within the next 30 days to 90 days. The Origin House shareholder vote is June 11th, and everything is progressing to close shortly thereafter. Earlier this month, Origin House reported its preliminary financial results for the first quarter of twenty nineteen, which reflect the positive trends being seen in the California market and the growing sales volume being driven by Origin House's distribution platform.

The financial momentum demonstrated by Origin House over the first four months of the year has been derived from the integration of two of the most successful and geographically complementary distributors in California into a single, wholly owned, integrated statewide platform in California called Continuum, as well as the success of its organic brand additions and M&A initiatives. During the first quarter, Origin House signed exclusive agreements to distribute Papa's Herb, Humboldt's Finest, Viola, and Utopia Cannabis branded products, while also entering into a distribution relationship with Kurvana, which is currently the fifth highest revenue-producing brand in California. Since the announcement of the acquisition of Origin House, our collective leadership team has spent a great deal of time together developing our integration plans. We're in the process of integrating the Cresco suite of products onto the Continuum platform.

We're confident that once the transaction closes, we can quickly begin to leverage Origin House's proven model and accelerate the growth of our distribution platform in other states across the country. So far this year, the cannabis market has seen quite a bit of consolidation as companies are jockeying for position. Throughout this period, we've stayed true to our vision and have continued to strengthen the key elements of Cresco that differentiate us from our competitors in the space. The strength of our management team has always been a key asset. Our founding executives had the experience of working in the mortgage banking industry during a period of enormous upheaval.

Our experience from that time taught us how to navigate complex regulatory structures on a market-by-market basis, while also communicating with customers to build trust and destigmatize an industry, two areas of expertise that serve us very well in building a pathway for success in the cannabis market. We've further strengthened our team by attracting world-class operational and marketing executives from some of the most successful companies in the world, and adding Origin House's expert distribution team that includes a former EVP at Southern Wine and Spirits, the largest wine and liquor distributor, in the U.S. We've continued to demonstrate our unparalleled ability to execute. We consistently win merit-based application licenses, we get operational, we get products on the shelves, and we get disproportionate market share.

We've been able to understand the requirements for getting operational, develop the standard operating procedures for quickly meeting those requirements, and put in place a startup model that's scalable and can be replicated on a market-by-market basis. This has led to strong revenue growth we're currently seeing. During the first quarter, we had a higher level of revenue in every single market that we operate in compared with the prior quarter. While we have focused M&A efforts to expand our reach to the previously mentioned eleven strategic states, it is important to note that most of these states are new and developing markets and/or are very recent additions to our organizational footprint.

The vast majority of our Q1 revenue is still comprised from just two states, which means there's a tremendous amount of revenue upside still to be generated by the other nine remaining states in the coming quarters and years. And finally, we further enhanced our focus on the middle two verticals of the value chain, creating branded products that resonate with consumers and getting those products on the shelves of dispensaries that we don't own. The exceptional marketing team we've built has done some outstanding work on further developing our house of brands through the creation of new packaging, preparing an advertising campaign to support our relaunch in California, and planning the integration of our brands in Origin House's continuing platform for widespread distribution throughout California.

We had already built an outstanding team focused on creating branded products and distribution, and the addition of Origin House's experience and expertise has taken us to another level that we believe is unmatched in the industry. Lastly, it's with great pleasure and tremendous pride that today we announce the launch of the Cresco Labs SEED Initiative, our social equity and educational development initiative, the first of its kind in the cannabis industry. This initiative is focused around four main areas: social equity, workforce development, education, and community impact incubator, which are all designed to ensure that all members of our society have the skills, knowledge, and opportunity to participate in the cannabis industry.

Some of the specific programs that we're working on for this initiative include collaborating with universities to develop cannabis-focused curriculum to educate and prepare students for pursuing a career in the space, working with local agencies and community organizations to sponsor expungement events that will assist individuals formerly convicted of expungable offenses in obtaining clearance to work within the cannabis industry, and developing a comprehensive incubator program that'll provide a pathway to business ownership. Collectively, we believe the SEED Initiative will help make the cannabis industry a highly inclusive force for job creation. It's important to understand that Cresco's success to date is firmly rooted in our early understanding that this industry will develop in a very community-focused manner. Cresco builds community projects in every market in which we operate, with the state, the county, the local community, and the non-cannabis-related organizations in our surrounding areas.

We create inclusion, and we share the benefits of the privilege that it is to be a part of this industry. Some of the fundamental keys to being successful in any emerging, highly regulated industry is to understand the importance of conducting yourself and your company the right way, with not only an emphasis on corporate governance, but social and community responsibility as well. It's important to understand that being good stewards of the industry has an ROI and can create a company with the highest market share in multiple states. We're the only MSO to be able to say that. It also helps get legislative changes.

The future of cannabis industry, especially as this industry transitions to more of a focus on adult access programs, includes a significant priority on matters of social justice, social equity, and inclusiveness, and Cresco has made it a core part of our business model, not only because we think it's the right thing to do, but it's another business priority that'll ensure the greatest likelihood of success for Cresco Labs going forward. It's been an extraordinarily productive few months for Cresco, and we firmly believe that the steps we've taken this year have put us well on the path to being the most important company in the cannabis industry, with the best opportunity to dominate the North American market in years to come. Now I'd like to introduce Joe Caltabiano, Co-founder and President, to come with some additional recent updates and highlights.

Joe Caltabiano (Co-founder and President)

Thanks, Charlie, and thanks, everyone, for joining us today. As Charlie mentioned, we provided a comprehensive overview of our key developments by market last month. So in today's call, I'm going to provide a few notable updates in select markets. Starting off in Illinois, where we continue to have the leading market share in the state, this week, the state legislature is expected to vote on legalization of adult use of cannabis before ending the current legislative session. Under the proposed legislation, Cresco Labs would be awarded five additional retail licenses and then would be maxed out at 10 dispensaries and three cultivation facilities. Given our position in the state, we would expect that legalization of adult use would have a very positive impact on our revenue growth and profitability, as the state's cannabis market is projected between $2 and $4 billion at maturity.

Moving to Florida, we continue to move forward on our acquisition of VidaCann, which we currently expect to close during the next thirty to ninety days. Since we announced the VidaCann transaction, the medical market in Florida has continued to see very strong growth, with more than ten thousand new patients being registered each week. We are also seeing encouraging developments that will positively impact the future growth of the market, including recent legislation to repeal the state's ban on smokable flower and the finalization of rules to allow sales of edible cannabis products. Given the popularity of our Mindy's edibles line, which has three of the top ten selling edibles in the state of Nevada, including the largest seller, we believe we are well positioned to capitalize on the legalization of edibles in Florida.

With the total number of registered patients now surpassing 200,000. VidaCann's license has increased to thirty-five dispensaries. While we worked on completing the transaction, VidaCann has continued to execute on the expansion of its retail footprint. Since we announced the transaction, VidaCann has opened up new dispensaries in Tallahassee and Port Charlotte and two more in the cities of Bonita Springs and Jacksonville that are approved and ready to open. This will bring its total number of operating dispensaries to eleven, up from seven at the time of the announcement of the acquisition in March. With our proven ability to execute operationally, we expect to accelerate opening of new dispensaries and steadily take market share.

By the end of 2019, we expect to have 20 dispensaries operating in Florida, and that number will grow significantly in twenty twenty, when our license converts to an unlimited number of dispensaries. In Massachusetts, the HHH transaction is progressing well. The Cannabis Control Commission recently approved its first transfer of a license. We anticipate regulatory approval on our transaction within the next 30 days to 90 days. Moving to Michigan, earlier this year, we received a pre-qualification for our license, which represents the completion of the most comprehensive portion of Michigan's application process. We are currently in the process of obtaining licensing approval for the facilities we intend to operate. The Michigan Marijuana Regulatory Agency recently issued a new policy that prevents medical marijuana dispensaries from buying marijuana products directly from caregivers.

As a result of this new policy, the dispensaries can now only buy products from licensed growers and processors. This change has accelerated our expected timetable for generating revenue from Michigan, as we will not need to wait for our own cultivation facility to produce its first crop. We will now be able to buy flower that caregivers use to sell directly to the dispensaries, put it through our processing facility, and get products onto the shelves throughout the state. Given this development, we believe that we could potentially start generating revenue from Michigan towards the end of the third quarter of twenty nineteen, rather than our initial expectation of the fourth quarter. Finally, from a marketing standpoint, we will soon be launching our new national retail brand for the Cresco dispensaries.

Through our acquisition activity, we have added dispensaries that operate under several different retail brands that are unique to a particular market. With the launch of our national retail brand, we will be converting all of these market-specific brands to one unified brand for all Cresco dispensaries. We believe this will be an important step forward in our efforts to build brand awareness and loyalty for Cresco. Now I'd like to turn the call over to Ken, our Chief Financial Officer, to speak about our quarterly financials.

Ken Heyman (CFO)

Thank you, Joe, and good afternoon, everyone. I'll begin by reviewing the financial highlights of the quarter and then address our current liquidity position and M&A activity. I will also be providing pro forma financial results. As you know, we are in the initial stages of scaling our business, which includes many activities that are positioning us for long-term profitable growth. We believe that metrics such as pro forma revenue and Adjusted EBITDA are helpful to both management and the investment community in understanding the underlying operating performance of the business and addressing key trends. We have included a reconciliation of our pro forma results and other non-IFRS measures in our earnings release.

Turning to the results, I'm pleased to report that first quarter 2019 revenue of $21.1 million, which represents a 313% increase year over year and a 24% increase quarter over quarter. Relative to the fourth quarter of 2018, the increase in revenue was driven by strong growth in Illinois and Pennsylvania, the launch of operations in Ohio, and the full quarter impact of Q4 acquisitions. While we generated revenue from six states, the vast majority of the sales were comprised from Illinois and Pennsylvania, leading to significant upside in coming quarters. We are seeing an acceleration of patient growth in our key markets, such as Illinois and Pennsylvania.

Illinois' patient count has increased by 25% this year to over 65,000, and in Pennsylvania, nearly 102,000 patients are registered to participate in that program, up from 83,000 at the end of last year, an increase of 23%. Overall, on a sequential basis, we had higher revenue in every one of our markets as a result of our targeted initiatives to achieve 100% retail penetration and dominant wholesale market share. Despite getting to market first in Ohio, sales are a bit lower than our initial expectations, as the medical use program has gotten off to a slower start than expected. Only 17 of the 56 dispensaries have received a certificate of operation, most of which are not located in large metropolitan areas. This is resulting in lower-than-expected cannabis sales.

We expect this to improve significantly in the coming months as the physician buy-in has been robust, with 484 registered physicians providing over 34,000 patient recommendations as of April thirtieth. Our first quarter revenue mix was approximately 55% wholesale and 45% retail, compared to 60% and 40%, respectively, in the fourth quarter of 2018. With the additional cultivation capacity coming online in key markets and with Origin House in the mix, we would expect that shift to be roughly 70% wholesale and 30% retail, respectively. We have been clear that our long-term focus is on the middle two verticals of the value chain, creating a house of brands to address all segments and distribution of our product to third-party dispensaries.

First quarter wholesale revenue, which consists of revenue from cultivation and production of consumer packaged goods to third-party retailers, grew 15% from the fourth quarter of 2018 and 167% for the comparable prior year period. Relative to the fourth quarter of 2018, we saw increases in wholesale revenue in all of our markets, largely driven by strong growth in Illinois and Pennsylvania. We also benefited from the first meaningful contribution from our operations in California, which we expect to significantly accelerate with the addition of Origin House. Turning to our retail business, revenue increased 51% from the fourth quarter of 2018. This was primarily driven by higher revenue in Illinois, resulting from the full quarter contribution of our three new dispensaries there, as well as initial contribution from Ohio dispensary and from one new dispensary opening in Pennsylvania.

In general, we are driving positive trends in the number of unique customers served at our dispensaries and the number of products sold, which is also contributing to the sequential quarter revenue growth. Our pro forma revenue was $33.9 million for the first quarter. Pro forma revenue reflects the consolidated results of less than majority-owned affiliates, as well as pending acquisitions, with definitive agreements signed during the period presented as occurring at the beginning of the quarter. For the first quarter, this includes the impact of acquisitions in New York, Massachusetts, Florida, as well as Origin House in California. In Canadian dollars, Origin House reported preliminary unaudited revenue of approximately CAD 11 million for the first quarter, an increase of approximately 39% from the prior quarter.

The momentum has continued to the second quarter, with Origin House generating preliminary unaudited revenue for the month of April of approximately CAD 6.5 million, which represents its highest month revenue to date and puts it on pace to nearly double its revenue from the first quarter. With the progress of our integration plans, we are confident in our ability to leverage Origin House's proven distribution platform to accelerate our growth in California. Before the impact of biological assets, Cresco generated Q1 gross profit of $9.4 million, or 44.6% of revenues, compared to gross profit of $2.2 million, or 43.6% of revenues for the comparable prior year period. Given the growth and significant changes in the composition of our business, we don't believe that the year-over-year comparison in our gross margin is particularly relevant at this point in time.

We are more closely tracking the sequential trend in our gross margin. Relative to the fourth quarter of 2018, gross profit increased $2.1 million, or 1.8 percentage points. The gross profit improvement was despite the impacts of our expansion into new markets such as Ohio, California, and Arizona, where we are still building scale, which offset the improved operational efficiencies we are seeing in our established markets, such as Illinois and Pennsylvania. We expect our gross profit margins to continue to improve over time as we leverage the infrastructure associated with scaling the business and expanding our production capabilities in several markets. We also recorded a net benefit to the fair value of biological assets of approximately $5.1 million in the first quarter, primarily driven by the increase in our cultivation footprint and the number of plants under cultivation.

Our total expenses in the first quarter were $17.7 million, compared to $2.1 million in the prior year period. $3.2 million of our first quarter expenses were related to share-based incentive compensation, while $2.5 million was related to acquisition and other non-recurring costs. The balance of the increase represents significant and necessary investments in strengthening our team and operational infrastructure to drive strategic initiatives that better position the company for growth. Compared to the prior quarter, our total expenses declined by $7.7 million. The primary driver of the decrease was the decline in share-based compensation and professional services, which returned to a more normalized level in the first quarter following our public launch.

The company generated a net loss of $7.6 million in the first quarter of 2019, compared to net income of $600,000 in the comparable prior year period. After eliminating costs related to share-based incentive compensation and one-time expenses associated with acquisitions, our Adjusted EBITDA was $818,000 for the quarter, compared to $982,000 for the prior year period. Please refer to the reconciliation of adjusted income in our press release for additional details. Turning to the balance sheet and liquidity measures, Cresco is well capitalized to execute on its strategic initiatives in the coming year. As of March 31st, 2019, Cresco had total assets of over $364 million, including cash and cash equivalents of $106.1 million.

The company has a working capital position of approximately $146 million, with no debt on the balance sheet. Looking ahead, we expect to continue driving strong revenue growth and shareholder value as we execute our organic and acquisition strategies within a tightly controlled capital allocation framework. Throughout the first quarter, we saw higher levels of revenue with each passing month in our wholesale operations and at virtually all of our dispensaries, and we expect to see sales accelerate in Arizona and California when we launch the full suite of Cresco products into those markets in the coming weeks. From an organic growth standpoint, we are seeing very positive trends, both from a broader market expansion standpoint, as well as from the initiatives we are executing on a state-by-state basis.

We see numerous catalysts ahead that we expect to add positively to our financial results in the coming quarters. I would now like to turn the call back over to Charlie for his final remarks.

Charlie Bachtell (CEO)

Thanks, Ken. Before we wrap up, I just want to say a few words about the lock-up agreements that we announced yesterday that are designed to responsibly manage the release of shares over the next six to twelve months. The lock-up agreements demonstrate the continued confidence that Cresco's management, board, and outside shareholders have in the future of the company. Since founding Cresco, we've consistently delivered on the expectations that we have set, and we've received extremely positive feedback on the vision that we've communicated, our disciplined growth strategy, and our capital stewardship, particularly regarding our acquisition of Origin House and VidaCann. As a result, we've built up a high level of trust among our largest shareholders that we can continue to create long-term shareholder value. We tried to be very thoughtful in how we structured the extension of the lock-ups.

While it's important to address concerns about an oversupply of shares for sale, we also thought it was important to increase the liquidity and flow of freely tradable shares in the marketplace, so larger institutional investors see Cresco as more investable. With these agreements in place, we believe that we have provided for the orderly management of the float in our stock while we continue to execute against the milestones we've laid out for the market and create significant shareholder value in the process. Thank you all for dialing in today. Operator, we are now ready for questions. Please open up the call.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press star, then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Derek Dley of Canaccord Genuity. Your line is open.

Derek Dley (Managing Director and Head of Canadian Equities)

Yeah, hi, guys. Congrats on the results today. Just following up on your commentary on Origin House. Joe, I think you mentioned that the shareholder vote is on June eleventh. You know, how quickly should we expect the acquisition to close thereafter? And what are the final steps after the shareholder vote that are needed to complete the acquisition?

Joe Caltabiano (Co-founder and President)

So the vote. Hey, Derek, thanks for the call. The vote is on June 11th, and we expect that to close within the month of June.

Derek Dley (Managing Director and Head of Canadian Equities)

Okay, great. And how quickly will you be putting your Cresco products onto the shelves of OH? Or is that already in, I mean, with OH as a distribution partner, or is that already in progress?

Joe Caltabiano (Co-founder and President)

The Cresco brands have moved on to the Continuum platform and will be distributed on June first through the state of California. So we've already started that piece of commercially available business relationship with Origin House, where they're our distributor. The integration is ongoing for the rest of the company, but we're utilizing that distribution platform effective June first.

Derek Dley (Managing Director and Head of Canadian Equities)

Okay, great, and in terms of the transaction in New York, do you have an update there on the timing you expect that to close?

Charlie Bachtell (CEO)

Yeah, so this is Charlie. We're still optimistic that that's going to close in Q2. All indications are that it'll close in Q2.

Derek Dley (Managing Director and Head of Canadian Equities)

Okay, great. Just switching gears a little bit here to your CBD brand, Well Beings. How should we think about the framework of your plan for distribution of Well Beings? Are you looking to add it into new distribution channels? Is it going to be, you know, a hemp-based product, or is it going to be THC-derived or a combination of the two?

Charlie Bachtell (CEO)

No, it's, you know, as we think about the CBD channel specifically, I'll answer that first. The CBD channel specifically will be hemp-derived CBD, with the full intention that we get to utilize distribution channels that currently are not available to THC products. So we're very excited about direct-to-consumer. We're very excited about, you know, traditional retail channels outside of the limitations of licensed dispensary channel, and that will also include big box retail. We're taking a very measured approach to the rollout of that. We recently started a very sort of local and regional deployment of the Well Beings brand. It's been very well received, and we're actually doing a pop-up event here at one of the big outdoor festivals in Chicago this weekend.

Excited to manage the rollout of that, but we definitely, as far as the distribution channels, we see that as all of the ones that aren't available to THC products. Now, I will say with a caveat, at some point, we also will be introducing THC-ratioed versions of the Well Beings brand into our licensed dispensary channel distribution network, too.

Derek Dley (Managing Director and Head of Canadian Equities)

Okay, and then the last one for me, just on the alternative to opioids program in Illinois. Can you just, I know you gave an update about a month ago, but, can you just give us another update, I suppose, on how that's progressing and how the patient count has been accelerating?

Charlie Bachtell (CEO)

Yeah. So the results of the alternative to opioids bill sort of being live and administered has had more of a result or more of an impact on the overall marketplace. It's the patient growth has been phenomenal month-over-month, largest monthly gains that we've ever seen in the program since February 1st, when it went live. So it's been very positive from that aspect. We believe that will only continue to increase as more people become aware of it and actually get comfortable and understand the process and talk to their physicians about it. So again, we've seen month-over-month growth since it's gone live, and we've had the largest months of patient additions that we've ever had in the Illinois program.

Derek Dley (Managing Director and Head of Canadian Equities)

Okay. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Jason Zandberg of PI Financial. Your line is open.

Jason Zandberg (Equity analyst)

Hi, thanks for taking my call. I just wanted to find out. I know Derek had mentioned, you know, when you'll get into the Continuum and then the Origin House distribution system, but I wanted to get an idea of how many dispensaries you were in at the end of Q1, and then sort of what it looks like going forward, the end of Q2 and for the remainder of the year.

Joe Caltabiano (Co-founder and President)

So at the end of Q1, we were in about 95 dispensaries, give or take. We are ramping up with Continuum having access to roughly 75% of the open stores. We expect to get on the overwhelming majority of those throughout Q2 as well as Q3. So as we launch onto the Continuum platform, on June first, we will certainly begin to penetrate in a much more meaningful way. But really, that effect will come into Q3, where we're targeting getting onto as many of those shelves that they have access to, right out of the gate, so.

Ken Heyman (CFO)

And then, Jason, this is Ken. I would just add to that. I mean, together, we have access to over 700 dispensaries. We've laid the groundwork on the integration. We have an amazing brand portfolio in the largest cannabis market in the world. There were some speed bumps early but we're seeing revenue accelerate, and we expect this to be a massive part of the growth strategy in 2019.

Jason Zandberg (Equity analyst)

No, that's great. That's great. Just, if I could touch on wholesale. You'd mentioned on the last call that you were starting, you know, wholesale distribution of your products in Arizona. Just want to see if I can get an update on that initiative and what the timing looks like, if that's still a Q2 event or if it's in Q3 now.

Joe Caltabiano (Co-founder and President)

Yeah, the Cresco products in the wholesale, we've had transactions this month with the full rollout starting in early June as it relates to the entire product suite. So, we do have revenue generated in Q2 from the wholesale channel, certainly ramping up as we head into Q3.

Charlie Bachtell (CEO)

I think it's important to note that the launch of the full suite of brands in Arizona will also coincide with the new packaging. So we did some rebranding on the Cresco brands and the Remedi brands, so that'll coincide with the relaunch of those brands, which we're really excited about.

Jason Zandberg (Equity analyst)

Okay, perfect. I will get back in the queue.

Joe Caltabiano (Co-founder and President)

Thank you.

Ken Heyman (CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Robert Fagan of GMP Securities. Your line is open.

Robert Fagan (Senior Equity Analyst)

Thanks, guys, for taking my questions, and congrats on a good quarter. Just saw a touch on the pro forma revenue number for the quarter, and you know, kind of just analyzing it a bit, from the $33.9 million, if you kind of back out the Origin House contribution and your you know existing operations contribution, kind of looks like you know rough math, but $4 million-$5 million of pro forma revenue coming from VidaCann you know Massachusetts and New York. Any chance you guys can give us some color on how that breaks out? Like, what's the biggest contributor there, just to get an idea of how those assets are progressing?

Ken Heyman (CFO)

Robert, this is Ken. In terms of overall pro forma revenue, again, $33.9 million, you're right, you have the breakout for Origin House included with that. Obviously, the vast majority of our revenue is still coming from Illinois and Pennsylvania, and then, you know, we're in the early stages, right, of revenue contribution from Arizona, California, and obviously, we just launched Ohio in the second quarter, so those markets will continue to scale up, but again, we're not gonna get into any of the state details at this time. However, we expect that growth will accelerate across those markets in the future quarters, and again, have meaningful contribution beginning in second half of the year.

Robert Fagan (Senior Equity Analyst)

Okay, thanks for that. Maybe just turning to Massachusetts and the advancement towards getting licensed for recreational sales. I appreciate, obviously, the color on the timing of closing that particular acquisition, and 30 days-90 days sounds great. What are your expectations for your ability to kind of launch into the rec market directly once you start consolidating that acquisition, and obviously your thoughts on the overall rec market in Massachusetts would be helpful as well?

Joe Caltabiano (Co-founder and President)

So, that market, Massachusetts is an incredible market that continues to grow. Our facility is operating as a medical facility right now. It's passed its provisional licensing, so there's two phases for us to effectuate that transaction. One is the approval from the state, and they recently did just approve their first. The CCC recently approved their first transfer. The second is the full approval of recreational. So those two triggers, we both expect them to occur in the next thirty to ninety days, and with recreational potentially happening a little bit earlier on the side. So, we expect that market to be a meaningful contributor in Q3.

Robert Fagan (Senior Equity Analyst)

Great. Sounds quite promising. Last one for me is just on the margin improvement potential as your businesses scale up, you know, in Ohio, California and Arizona, as you mentioned in the press release. You know, I guess is there some kind of timeframe maybe that you could indicate where you expect kind of those scale-ups to occur and for margin improvement to accrue? And kind of how would this kind of counterbalance with the integration of Origin House, you know, going later in the year? Are you getting a benefit from the integration of Origin House in your margin outlook as well?

Ken Heyman (CFO)

Thanks, Robert. This is Ken again. Yeah, the margin for me though is really encouraging, especially seeing gross profit margins increase two percentage points quarter over quarter, despite the fact that we're just launching brand-new operations in four markets. So certainly beginning to see significant improvements in margins in the early states, in both Illinois and Pennsylvania.

And then in terms of the timing, again, as we continue to build scale within each of those state markets, and again, we have the SG&A and the infrastructure in place now to operate in eleven states. We'll continue to leverage that infrastructure, and it. you know, our view on the gross profit margin is, this still has a long ways to go, especially with us being vertically integrated, you know, in all of our states except for California. In terms of, so in terms of timing, certainly you'll see a significant improvement in margins in the second half of the year.

Robert Fagan (Senior Equity Analyst)

Great. Thanks, guys. Much appreciated.

Operator (participant)

Thank you. Once again, to ask a question, please press star one on your touchtone telephone. Our next question comes from the line of Russell Stanley of Beacon Securities. Your question, please.

Russell Stanley (Managing Director in Equity Research)

Good afternoon. Thanks for taking my questions. First, if we could start in New York, just wondering what your outlook is there for the revised version of the adult-use legalization bill and how you see that playing out?

Charlie Bachtell (CEO)

Yeah, thanks, Russ. This is Charlie. You know, the New York and New Jersey, you know, we've seen sort of go where they looked optimistic. Now it looks like they're taking slightly different direction in those states. I know that New York is, it still has recently had submitted a new bill for adult use there that looks more in line with what all of the stakeholders are trying to achieve. You know, we'll have to see if it has the support to get through in this session, but it's great progress there.

We definitely, you know, I think, Illinois at this point is definitely looking the strongest as far as passing adult use this session, and as recently as about an hour ago, the adult use bill in Illinois passed the Senate committee with a vote of thirteen to three, so super strong result there. Things moving in the right direction for adult use in Illinois.

Russell Stanley (Managing Director in Equity Research)

Great. Thanks for the color on both of those markets. Maybe if we can move to Florida, I guess two questions there. One, you know, what kind of uptick has VidaCann seen in sales post the addition of smokables? I remember Joe talking on the last call, I think, around seeing a 35%-40% improvement in Pennsylvania last year. Are you seeing that replicated in Florida this year? And I guess secondly, any color you can provide on your approach or the approach being taken with respect to dispensary locations, given the increase in the number of licensees?

Ken Heyman (CFO)

Thanks, Russell. This is Ken. Actually, in Florida, it's been fantastic. In terms of the early results on VidaCann, we're seeing the revenues increase as they open additional stores there from eight, now 10 operational. Their revenues were up nearly 50% month-over-month, so they're gaining a lot of traction within that marketplace.

Russell Stanley (Managing Director in Equity Research)

Great. And any color there on the dispensary locations? How, you know, how is the business approaching that with the, I think, eight new licenses that were issued recently?

Charlie Bachtell (CEO)

One of the good things for us, this is Charlie, and then Joe has something to add to this, too. It's one of the beauties of the VidaCann transaction for us is that they've been in process down there. It's an existing operator. They've been working on establishing that footprint, that dispensary footprint, for the last year. So the fact that they are going to have 14 operational by the end of June and LOI is already executed on six more to get to 20 by the end of the year, it's nice to have that lead down there. As additional competitors are looking for their retail spaces now, we've already got 20 earmarked and located and under control.

Joe Caltabiano (Co-founder and President)

Yeah, and the other thing I would say is, you know, our background's coming from the real estate world. You know, we've partnered with national vendors to help us source real estate. We have a design and a footprint that can work in a multitude of either freestanding buildings or attached properties. So we're comfortable navigating our way while those other groups are figuring out all of the nuances. To my knowledge, I don't know that many of them are operators in the cannabis space to begin with, so they've got to learn a new industry in a new market. I feel like we're well positioned to be out in front of them materially.

That Florida market just continues to accelerate. I think we're in a very strong position, regardless of what that competition landscape looks like over the next twenty-four months.

Russell Stanley (Managing Director in Equity Research)

That's great color. Just one last question from me, and I apologize if I missed this number earlier, but your retail sales in the quarter, what share of that was from Cresco branded products?

Joe Caltabiano (Co-founder and President)

So we focus on in our own stores. It's about a 40%, 35%-40% mix of Cresco products. 55%-60% are other people's products. We focus on giving customers in the retail environment a very broad look at the products and looking at good, better, best in multiple forms. This experience in cannabis is experiential at this time, and giving consumers a wide array of opportunity to explore this space is how we make sure the customers and the patients have access to the products that work for them, and something that they can integrate into their wellness lifestyle on the long term.

Russell Stanley (Managing Director in Equity Research)

Great. That's all I had. Thanks very much.

Joe Caltabiano (Co-founder and President)

Thank you very much.

Operator (participant)

Thank you. At this time, I'd like to turn the call back over to management for any closing remarks.

Charlie Bachtell (CEO)

Again, everybody, I want to thank you for joining us on the call today. Glad we were able to share some positive news from Q1 with you, and stay tuned. A lot more to come. So thanks for joining us. Everybody, have a good evening.

Operator (participant)

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.