Cresco Labs - Q3 2019
November 27, 2019
Transcript
Operator (participant)
Good day, and welcome to Cresco Labs' Third Quarter 2019 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal for a conference specialist by pressing the star key 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' Third 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 third quarter twenty nineteen earnings press release for the three and nine months ended September thirtieth, twenty nineteen. This document has been filed with SEDAR and is available on our investor relations website at investors.crescolabs.com. We plan to file our corresponding interim consolidated financial statements on SEDAR by November 29th.
Before we begin our remarks, I'd like to remind everybody that certain statements made on today's call may contain forward-looking information within 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 1995. Such forward-looking statements may include estimates, projections, goals, forecasts, or assumptions, which are based on current expectations and 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 for our forward-looking statements and risk factors can be found under Risk Factors in Cresco's 2018 Annual Information Form, filed with SEDAR on May ninth, 2019, and available at 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 pro forma and non-IFRS financial measures, such as pro forma revenue, Adjusted EBITDA, and operational gross profit, 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 pro forma and 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. Please also note that all financial information on today's call is presented in US dollars, unless otherwise noted, and all interim financial information, including disclosures for any pending acquisition, is unaudited, and with that, I'll now turn the call over to CEO Charlie Bachtell. Charlie, please go ahead.
Charlie Bachtell (Co-founder and CEO)
Good afternoon, everybody, and thank you for joining us on today's call. On the call today, we'll provide updates on our quarterly results, provide some insight on how we see the industry unfolding, how we impact it, take a deeper look at some of the most substantial opportunities for Cresco as we approach the new year, and how we are allocating capital towards those opportunities. Joe will then provide some highlights from our operations and pending acquisitions, and Ken will discuss our financial results in more detail. In the current business and capital markets environment, it's more important than ever to be a company with sound fundamentals, a successful business model, a responsible capital agenda, and a strong management team with a proven ability to execute. Cresco's mission continues to be to normalize and professionalize the cannabis industry.
With the top management team in the industry, we continue to execute at a different level. We get access to markets, we get operational, we get products on the shelves, and we get disproportionate market shares. We also manage regulatory challenges at the state and federal level with an unmatched level of success. We are focused, strategic, and deep. We've established proficiency in all four verticals of the value chain, which is critical today, but we've effectively prioritized the middle two verticals, branded products and distribution, a business model for consumer verticals that historically has garnered the largest growth margins, the largest EBITDA margins, and premium valuations for shareholders. We've built the most strategic geographic footprint in cannabis, and we obtain meaningful material positions in each market.
For Cresco Labs, this approach has garnered consecutive quarters of profitability, and we're the only MSO in the industry with a top market share in more than one top-tier state. Allocating shareholder capital is a fundamental responsibility and key to a company's ability to execute. We've focused on developing a superior capital agenda, responsibly accelerating the top line on an organic basis, managing costs to drive bottom line, and executing accretive transactions that build shareholder value. Cresco Labs is committed to this disciplined approach to growing profitably. In Q3, we continued to deliver on these commitments. Cresco Labs' third quarter revenue was $36.2 million, representing a 21% increase sequentially from Q2 on an identical asset base. No additional assets were accounted for in this quarter.
We saw a sequential growth in our consumer products channel of 28% and a 10% increase in revenue from our existing retail channel. We delivered $11.1 million in adjusted EBITDA, or $3.1 million, excluding the net benefits of biological assets, marking another quarter of profitability. In Q3, we increased our revenue mix to 65% wholesale and 35% retail. For our retail locations that have been operational for at least a year, we're pleased to report same-store sales grew at a rate of 62% from Q3 2018. While we are pleased to see the same-store growth, we're very pleased to see the continued effectiveness of our consumer products channel. As we know, operating leverage is magnified in this vertical, and margins at scale will exceed those seen from the retail vertical.
Many now agree that brands and wholesale distribution should be the focus for any successful MSO, but executing on this business model has long been a point of distinction for Cresco Labs. In addition to the sequential improvements in all material business metrics, in Q3, we became the only MSO in Illinois to have all of their existing cultivation and dispensary licenses approved for adult use at the state and local level. We completed the DOJ HSR second request for the Origin House transaction in ninety-one days, which is faster than any other cannabis transaction to date, and subsequently, with the Tryke transaction, we became the first cannabis company in 2019 to submit a transaction for DOJ HSR review and not have the DOJ ask for a second request.
This is what a strong focus on regulatory compliance and a proven execution looks like, and the benefits of such are truly differentiating. Now, I'd like to turn to a discussion of the key opportunities we see ahead as we prepare to enter 2020. We have consistently stated that our goal is to gain access to states with the most strategic value, and given the current environment, capital allocation has never been more important. The markets where we see the most opportunity have favorable economics for suppliers of consumer products and substantial near-term growth capabilities. It's pretty simple. These markets marry the greatest opportunity for return on invested capital with the shortest timelines and the highest likelihood of success.
Specifically, without a doubt, the single most significant opportunity in front of us today is in Illinois, the sixth-largest state in the country, with almost 13 million residents and 117 million tourists a year, 58 million to Chicago alone. And in just 35 days, it'll become the largest adult use market in the Midwest. On January 1, the state's cannabis market will explode from approximately a $250 million medical program to a $2 billion-$4 billion adult-use market at maturity. Illinois will truly be the first adult use limited license program. Not only do we currently have the largest market share in the state, but we are positioned to extend this lead in the coming years. We're the only operator in Illinois with three cultivation licenses.
There is one peer that has two licenses, and all of the other operators only have one. Now that these cultivation licenses are capped at 210,000 sq ft of canopy each, Cresco Labs has the ability to expand our production capacity to 630,000 sq ft of canopy, which will, by law, always be 50% more than the only peer that has two licenses and 200% more than all of the other operators in the state. As Illinois ramps up to the 500 retail dispensaries that the law allows, clearly, we see benefits from having more supply capacity than anyone else in the state. Our brands are already well established, and we expect to continue distributing our products to 100% of the Illinois retail dispensaries.
Beyond that, we have five dispensaries of our own that'll be up and running on January 1, with licenses to open five more doors. We're very proud of our home state for the prudent and responsible way that they've put this legislation into action. We look forward to showing millions of consumers, patients, and visitors what normalized and professionalized cannabis looks like. Pennsylvania presents another outstanding opportunity for Cresco as we move into 2020. Pennsylvania is the fifth-largest state in the country, with over 13 million residents and has the sixth most populated city with Philadelphia. The medical market opened in early 2018 and already has nearly 200,000 patients, making it one of the fastest-growing medical markets in the country. In September, Governor Wolf expressed support for adult-use legislation, noting that 68% of the state's population supports legalization as well.
Currently, we have the number one market share in the state, and we sell Cresco products into every dispensary. The three dispensaries we own in Pennsylvania continue to outperform our expectations, and we look forward to opening three more locations in the first half of 2020. With an imbalanced demand to supply ratio, this market has characteristics that clearly make the allocation of capital prudent. Now, let's talk about California and the opportunity we see with Origin House post-close. In the world's largest cannabis market, owning the largest wholesale distribution network is the way to win meaningful market share. This is a transformational deal for Cresco Labs, which we expect will drive top and bottom-line growth and put us in position to develop our house of brands into the most influential consumer market.
As enforcement measures and news about illicit products continue to erode the state's illegal cannabis market, the revenue opportunity for the regulated industry becomes even more attractive. As an example of capital stewardship and discipline, we were successfully able to modify the terms of this agreement to ensure that Origin House has a strong balance sheet, substantiated future revenue streams, shored up operational platforms, and we reduced the overall amount of consideration. We're very excited to be moving forward with this transaction. In another example of capital stewardship, and given these tremendous near-term opportunities in existing Cresco markets, we've made the strategic decision to terminate our agreement to acquire VidaCann.... We have a responsibility to effectively manage our cost of capital and to then drive the highest return for our shareholders, and we simply believe that this cash can be allocated to markets with superior return profiles.
All operators in our industry will be forced to make tough decisions regarding the optimal allocation of capital. We're fortunate to have built an existing strategic geographic footprint with a long-term strategy in mind, so our decision boiled down to time horizon and where we see the most opportunity in 2020. We didn't terminate this transaction lightly, and I certainly don't want to give the impression that we don't like the Florida market. However, from a return on invested capital perspective, an executive and operational bandwidth perspective, and a brand-building perspective, we feel that investments in the states I've mentioned represent better uses of that capital. This, along with today's announced sale-leaseback transaction, also allows us to eliminate the perceived overhang related to the cash consideration of this acquisition and further solidify the health of our balance sheet.
We appreciate the relationship we've developed with the VidaCann team and greatly respect the platform that they've built. We will continue to monitor Florida closely for opportunities to enter the market in a capital-efficient manner. To wrap up, I know I speak on behalf of the entire team when I say that I'm very excited about the future for Cresco. We're executing along our strategy and are positioned perfectly to capitalize on opportunities in twenty twenty with the hard-earned operating leverage we've created. We consistently demonstrate a unique understanding of where this industry is going, provide the thought leadership to guide it there, then execute and obtain disproportionate share of the resulting opportunities. Our performance is driven by a best-in-class team that will continue to be the foundation of our long-term success, and I would like to specifically thank our team for getting us to this point.
With that, I'll pass the call to Joe Caltabiano, Co-founder and President, to provide highlights from our operations and pending M&A.
Joe Caltabiano (Co-founder and President)
Thanks, Charlie. Now that we've identified the opportunities for return on investment, let's discuss our execution and how we're growing our commanding share in these markets. In our home state of Illinois, we completed sale-leaseback transactions on two of our three facilities in the state to fund and expand our production capabilities by an additional 205,000 sq ft. This will provide us with the largest cultivation footprint in the state. We look to further expand these facilities in the coming year, as we expect demand will outpace supply, much like we've seen in other states that have made the transition to adult use. On the retail side, we literally won the lottery. We were fortunate to select two of the seven available retail licenses in Chicago's prestigious Central, the only publicly traded MSO with the ability to open more than one dispensary in these Central neighborhoods.
Adding our existing north dispensary, just steps from Wrigley Field, we have multiple locations slated at the nexus of where Chicago shops, gathers, and lives. We are in the process of updating all of our retail stores under the Sunnyside brand. We expect our Illinois stores will be rebranded by the end of this year, and pending regulatory approval, we expect all of our stores to be updated by the end of Q1 2020. While impending adult-use arrives in 35 days is exciting, the existing medical program continues to scale, growing 90% year over year, which further de-risks the investments we're making in Illinois. Pennsylvania is another priority on our capital agenda. As Charlie mentioned, the medical program is one of the fastest growing, which creates a dynamic supply-demand imbalance.
Accordingly, we are growing our Brookfield cultivation facility from 75,000 sq ft-115,000 sq ft as we speak. We expect to add a flagship Sunnyside location in Philadelphia in Q1, which will make it our fourth in the state. We are excited to grow our own footprint in this market as the demand growth continues to exceed expectations. On October 8, we closed the acquisition of Valley Agriceuticals, granting us one of only 10 vertically integrated licenses in the state of New York. Subsequent to the close, we opened two additional dispensaries, one in Williamsburg, Brooklyn, and one in Huntington, Long Island. Both locations serve dense populations, particularly Brooklyn, where this is currently one dispensary per 630,000 people. This brings our total dispensary count to four in the state, which is the maximum allowed.
New York is one of the most influential customer markets in the world, and we look forward to introducing both our retail and product brands in 2020. Hope Heal Health, our transaction in Massachusetts, is still pending. The license transfer requires approval from the CCC. We continue to be optimistic for some movement on this before year's end. In Michigan, we've completed the first phase of our construction on our facility in Marshall. We now await final approval and inspection from the state. On September sixteenth, we announced our signed purchase agreement with Tryke, including the six iconic Reef Dispensaries. Tryke represents a major piece of our strategic footprint. Upon closing, we will immediately have a top three market share in Nevada and a substantial presence in Arizona, with room to grow quickly as we introduce our wholesale model.
In Q3, Tryke generated over $17 million of revenue with significant earnings. Contributing to these outstanding numbers are their six retail dispensaries located on some of the best corners throughout Nevada and Arizona, where they average over 150,000 visitors per month. We fully expect the addition of Tryke will both accelerate our near-term growth trajectory and further advance Cresco Labs towards our goal of being the most important company in the cannabis industry. Subsequent to the close of Q3, we announced an amendment to our proposed acquisition of Origin House, which we'll now expect to close in January, pending a vote by Origin House shareholders. We introduced Cresco-branded flower to the California market via the Continuum platform at the end of Q2, and we recently launched our largest advertising campaign ever for the Cresco brand.
Within the Origin House portfolio are two ultra-premium indoor cultivation sites and additional production facilities to expand our product offerings throughout the state. Origin House has a lot of human capital in the exact verticals that will generate long-term value in the industry. FloraCal is led by one of the strongest cultivation teams in the industry that consistently outperforms the market on yields and quality metrics. As we transfer this knowledge and operating efficiencies to our other cultivation locations, the benefits are massive. We are very excited to welcome the Origin House team to the Cresco family, and I am very confident that we can do far more together over the next several years than either of us can do alone.
2020 is shaping up to be an amazing year for Cresco, from our pending acquisitions to adult use in Illinois and Michigan, to the rapidly expanding medical markets, to the growing of our brands and sales in California. We look forward to the opportunities we have in front of us. With that, I'll pass the call to Ken Amann to discuss our financial results and capital markets activity.
Ken Amann (CFO)
Thank you, Joe, and good afternoon, everyone. I'll begin by reviewing the financial highlights from the quarter, then provide more context around our capital allocation strategy and balance sheet. Please note that all numbers are stated in U.S. dollars. Third quarter provided evidence of the organic growth being generated in our core business. We have the most strategic footprint in the cannabis industry, focused on high-quality states, and as we go deeper into those markets, we drive economies of scale, grow market share, and ultimately increase profitability. In the third quarter, we generated $36.2 million in revenue, up 184% year-over-year, and sequential growth of 21% on identical asset base. This is 100% organic growth from last quarter and includes contribution from six of our 11 markets, with much more growth being derived in Illinois, Pennsylvania, California.
Pro forma revenue increased 48% sequentially to $73.6 million, a run rate of nearly $300 million. This includes revenue from our three pending acquisitions of Tryke, Hope Heal Health, Origin House, as well as Valley Agriceuticals, which we closed in October. On a consolidated basis, our revenue mix increased to 65% wholesale, 35% retail, up from 62% last quarter. This mix supports our distinction of being the foremost operator in the middle two verticals of the value chain. The company achieved a record operating gross profit during the quarter of $17.1 million, or 47.1%, compared to 48.1% in Q2.
It is important to note that each of our core markets individually saw a sequential increase in operating gross profit, but the slight decline is attributed to a higher revenue mix from California, a state which we are still scaling our operations and we made targeted investments in gross profits. Beyond distribution, we look forward to leveraging Origin House's outstanding cultivation and production capabilities to help drive margins in California to levels that we're seeing in other states where we're vertically integrated. SG&A, excluding non-recurring items and stock-based compensation, was $16.8 million, or 46% of revenue, compared to approximately $14 million in Q2. The sequential increase reflects additional headcount as we continue to build our infrastructure and make investments aimed at driving brand awareness to gain material market positions.
It's important to note that SG&A, on an adjusted basis, is down as a percent of revenue by 200 basis points, and we expect this trend to continue as we leverage our existing infrastructure to scale the business. We generated solid profitability in Q3, as measured by adjusted EBITDA of $11.1 million, or 31% of revenue, compared to $9.7 million in the prior year period. Excluding the net impact of biological assets, adjusted EBITDA for Q3 was $3.1 million, or 9% of revenue, marking our second consecutive quarter of profitability. CapEx rose to $22.4 million from $16 million in Q2 to fund expansion of our cultivation facilities in Illinois and Pennsylvania. The strategic allocation of capital is critical, and when we look at going deeper into a state, we consider four things.
One, the size of the investment, two, the payback period, three, return on invested capital, and four, how does it further our goal of building our brands? For example, the evaluation process considers the following unit economic model, rounded for ease of math. If we spend an average of $200 per sq ft to expand our indoor cultivation space, each 1,000 sq ft of expansion would cost $200,000, and that space produces approximately 500 lbs of flower per year. Wholesale flower in Illinois sells for an average of about $3,500 per lbs, for a total revenue potential of $1.8 million. Assuming a gross profit margin of 60%, a $200,000 investment would yield $900,000 or $4.5 million of incremental profit over five years from 1,000 additional sq ft of cultivation.
When you extrapolate that across approximately 200,000 sq ft of additional cultivation space currently being added in Illinois, the revenue potential is massive. Turning to the balance sheet, we ended the quarter with $73.7 million in cash and zero debt. Recall that we closed our original sale-leaseback transaction with IIPR for two of our three Illinois cultivation facilities in Joliet and Kankakee after the close of Q3 for approximately $46.3 million. As announced earlier today, Cresco entered into a second sale-leaseback agreement with IIPR to sell our Marshall, Michigan, and Yellow Springs, Ohio, cultivation facilities for nearly $38 million, which includes some funding for tenant improvements as well as other growth initiatives. The agreement is expected to close in December.
By taking VidaCann out of the equation and executing on multiple sale-leaseback transactions as part of our strategic capital plan, we have significantly strengthened our balance sheet and overall financial position.
We're also in late-stage discussions focused on other non-dilutive sources of capital, including an additional sale-leaseback transaction and senior secured debt to fund our continued growth going into 2020 and beyond. We do so knowing that Cresco Labs is the premier operator in the industry with lots of debt capacity, especially as we continue to scale the company. We will evaluate our financing options to lower our overall cost of capital with our shareholders at top of mind. Given our strong balance sheet, we will only consider options that clearly reflect the financial strength of the business. Outside of the financials, we've had a very productive second half of the year. As a senior team, we're very pleased with the organic growth we've experienced this quarter, and we look forward to the huge opportunities in the year ahead.
Our teams have worked diligently to develop the brands that will eventually become nationally recognized. We've gained access to the most important cannabis markets in the industry, and we have transformational M&A deals in the pipeline. We have the right people in place, our strategy set, and we could not be more excited for 2020. Thank you for your time today, and I'll ask the operator to open the line for questions.
Operator (participant)
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Derek Dley from Canaccord Genuity.
Derek Dley (Equity Analyst)
Yeah. Hi, guys. Congrats on a strong quarter. Just wondering, in terms of the operational gross profit that you're seeing in some of your more established markets like Illinois and Pennsylvania, Ken, I mean, I think you just mentioned 50%. Is that a number that you're seeing currently in those markets?
Ken Amann (CFO)
Yeah, Derek, this is Ken. Thanks for the question. We did record operational gross profit of $17.1 million. That was 47.1% in the quarter. That excludes the net impact of the biological assets. It is important to note that in each of our core markets, we did see sequential increase in operating gross profit. This was largely the results of our effort to drive operational efficiencies that reduce our overall cost per gram, quarter per quarter. What I would say is that, you know, in Illinois, for example, we did increase our gross profit margins by 400 basis points quarter over quarter. And another example would be in Arizona, where we increased that by 900 basis points quarter over quarter.
What you're seeing there in the slight decline quarter over quarter is really attributed to the revenue mix in California, where we made some target investments in margin to drive brand awareness. Our investments, though, are starting to pay off, and we've seen significant increase in revenue compared to Q2 in that state. We feel like we've laid the foundation, and as additional awareness grows and we begin pushing product through Origin House's Continuum platform, we expect to leverage that volume and drive operational efficiencies, which will produce even stronger gross profit margins. As we saw in this past quarter, it can be somewhat mix dependent, and in the short term, we expect our gross profit margins to leverage as we ramp up our cultivation and production capabilities in Illinois and Pennsylvania.
And then longer term, we expect this to be consistent with the CPG category, which generates margins of roughly 55%. And then given our focus on the middle two verticals, so really the creation and distribution of brands, we believe that we have the greatest opportunity to create shareholder value, which rewards this type of profitability and valuations similar to beverage and tobacco.
Derek Dley (Equity Analyst)
Okay, great. That's, that's extremely helpful. You mentioned as you get cultivation capacity up and running in Pennsylvania and Illinois, you'll be able to scale that gross margin. Can you just give us an update, and maybe this is for Joe or Charlie, just on when you expect that cultivation capacity to come online in Illinois, the incremental capacity?
Charlie Bachtell (Co-founder and CEO)
Sure. Joe, Joe will take this.
Joe Caltabiano (Co-founder and President)
Yeah. Hi, Derek. Thanks. We are wrapping up the majority of our construction in Illinois as we speak. The bulk of the expansion will be complete and online by the end of December, with kind of the finishing of some of the bays. It will deliver it in a staggered period, but all of it will be done by January fifteenth, is the target, with the majority delivering in this year in December. In Pennsylvania, there's still some rolling construction going on. That will be all wrapped up by end of January as well. So we should have the full Illinois and Pennsylvania construction complete no later than January of 2020.
Derek Dley (Equity Analyst)
Okay, that's great. And I think in the prepared remarks, you said you're continuing to grow your market share in those key states. Can you quantify that?
Joe Caltabiano (Co-founder and President)
Yeah, it's Joe again. So in Illinois, we are holding steady at about that 25% market share, based on capacity. So that we do expect kind of get a lay of the land of some of the other peers in the market. I think we'll be out in front of some of the competitors in the landscape and be able to increase that up. You know, we'd love to try to get it up into that 30% market share, like we've seen in the past in Pennsylvania.
Derek Dley (Equity Analyst)
Okay, great. Charlie, just, given, you know, the announcement this morning with VidaCann, a couple questions there. One, if you can disclose, was there a break fee involved in that transaction? And two, are you thinking medium, longer term, are you comfortable with the current state footprint that you're in?
Charlie Bachtell (Co-founder and CEO)
Yeah, so there was no break fee. Thanks, Derek. There was no break fee associated with the VidaCann transaction. You know, as far as our state footprint, we like Florida. Florida's a great state. It's just a matter of prioritization, right? Timing, capital markets. We'll continue to keep an eye on the state. The state has some upcoming potential volatility as it relates to legislation. There were a couple of bills filed yesterday that might change the look and feel of that Florida program. So it's something that we'll continue to monitor, but you know, right now I think it's most prudent for us to focus on these states where we have these existing opportunities and to really, truly maximize them.
Derek Dley (Equity Analyst)
Great. Thank you very much.
Charlie Bachtell (Co-founder and CEO)
Thanks, Derek.
Operator (participant)
Thank you. Our next question comes from Vivien Azer with Cowen.
Vivien Azer (Managing Director)
Hi, good afternoon. So Charlie, I appreciate your comment just now that you think Florida is a good market. I'd love to just understand kind of how you guys evaluated the opportunity between New York and Florida, because I hear you loud and clear, like, you know, absolutely, like, from a brand building standpoint, New York is critically important. But, you know, given your focus on, you know, returns and, you know, given how small the market in New York is from a medical standpoint, like, how did you guys kind of balance that out? Because surely, as you were thinking about closing New York, I'm sure you were also thinking about VidaCann simultaneously, even though that was a month and a half ago. Thanks.
Charlie Bachtell (Co-founder and CEO)
Yeah. Thanks, Vivien. So, you know, and it's a great question. Both of those markets are, you know, have their pros and their cons. The New York market is a smaller, medical market, but I can tell you, I think we see a ton of upside potential, and especially with the reinvigorated look and view towards adult use in a very near future. And so we're bullish on New York. And, you know, it comes down to your point, the capital allocation associated with it. The VidaCann structure made it just a very difficult transaction for us to close. The structure of that was developed in January, really, of this year, when capital markets were different before Illinois passed an adult use law. You know, it was really a different scenario.
We were able to get what we, at the time, was a below market purchase price by being really cash heavy on the consideration and the portion of consideration associated with cash. Fast forward to, you know, November of 2019, and the capital markets are very different. Illinois has a tremendous opportunity in front of us, and Pennsylvania has a tremendous opportunity in front of us. Again, specifically as it relates to New York, one of 10 licenses ramped up efforts and focus on adult-use in the very near term in 2020. That's, you know, all of and then some were some of the considerations that we took as we debated which transactions to close on.
Primarily, VidaCann, the cash component of that consideration was a major driver of the decision.
Vivien Azer (Managing Director)
That's helpful. That makes sense, and certainly very encouraging to hear how optimistic you are about New York. So just as a follow-up to that, with the sale-leasebacks in Illinois, certainly given you know kind of the growth that you guys want to invest behind in Illinois and Pennsylvania, that's quite helpful. As we look beyond Illinois, are there additional opportunities for sale-leasebacks? Thanks.
Charlie Bachtell (Co-founder and CEO)
And Ken, you want to take this one?
Ken Amann (CFO)
Yeah. Hi, Viv. You know, in terms of the sale-leaseback, obviously this is a great alternative source of capital today. It does allow us to monetize assets from the balance sheet and access capital in non-dilutive fashion, you know, and that's really consistent with the messaging that we've had, and obviously, we've now executed on two of these in the past thirty days, so we do like that opportunity. In terms of the opportunity moving forward, you know, Although we've monetized a significant amount, we do have about $100 million of PP&E currently on the balance sheet. The largest opportunity that we would have in that regard is really around our cultivation facility in Lincoln, Illinois, which is now undergoing a significant expansion. So certainly more opportunity to focus on those moving forward.
Vivien Azer (Managing Director)
Very helpful. Thanks, Ken.
Charlie Bachtell (Co-founder and CEO)
Thanks, Vivien.
Operator (participant)
Thank you. Our next question comes from Russell Stanley with Beacon Securities.
Russell Stanley (Managing Director of Equity Research)
Good afternoon, guys. Thanks for taking my questions. With respect to Illinois, pardon me, just wondering what you think the timeline is on actually opening doors in those three Chicago area locations in the lottery, and what your anticipated timeline is on the fourth and fifth, second sale licenses you have.
Charlie Bachtell (Co-founder and CEO)
Thanks, Russ, and Joe will take this one.
Joe Caltabiano (Co-founder and President)
Thanks, Russ. Yeah, it was fun to win the lottery, to say the least. That was quite an experience. You know, we come from real estate backgrounds, and we've been scouting locations for a significant amount of time. We covered the state or the city entirely, so we had a plan together, kind of, regardless of what, where we were selected. Our headquarters are in the Central District. We're very familiar with that area, have a lot of deep relationships in the area. We expect to get those open in Q1. You know, we have a strong real estate and development team that's capable of moving very quickly, and continue to work with the city to meet all the requirements to get open as quick as possible.
But we think we'll be able to get those open in Q1, towards the end of Q1.
Russell Stanley (Managing Director of Equity Research)
Does that timeline include the fourth and fifth second sites as well?
Joe Caltabiano (Co-founder and President)
Yeah. So the fourth and fifth sites are going to be in other areas within Illinois. And we do expect to have all five of those sites open by the end of Q1. Certainly, construction delays occur in this space, but we are foot on the gas and resources dedicated to getting those open. That is a primary focus of a big chunk of our team.
Russell Stanley (Managing Director of Equity Research)
Great. And moving on to Pennsylvania, I think you mentioned the fourth dispensary expected to go up now in Q1. I'm just wondering what the timelines are on the fifth and sixth. Should we expect those probably in Q2 then?
Joe Caltabiano (Co-founder and President)
No, same timeline with Q1. Our Philly store, you know, we did hit a little bit of a construction delay there, and that pushed that one. We were optimistic to get that open this year. It will bleed into Q1, but the fifth and sixth are also slated to be open in Q1 as well.
Russell Stanley (Managing Director of Equity Research)
Excellent. Great, that's all I have for now. I'll get back in the queue. Thank you.
Charlie Bachtell (Co-founder and CEO)
Thanks, Russ.
Operator (participant)
Thank you. Our next question comes from Robert Fagan with GMP Securities.
Robert Fagan (Analyst)
Thanks, guys, and congrats on a good quarter. Just wanted to touch on the pro forma revenue numbers, which are pretty strong, and just wanted to verify, I mean, you mentioned, I think, Ken, growth of 40% sequentially. So does that include in, like, Q2 pro forma numbers, the contribution from Tryke? I guess, you know, ultimately, what I'm trying to understand here is, you know, what was the main driver of that, you know, strong pro forma growth? Was Origin House performance, you know, very strong sequentially in Q3?
Charlie Bachtell (Co-founder and CEO)
Thanks, Rob, and turn that over to Ken.
Ken Amann (CFO)
Hey, Robert, thanks for the question. So pro forma revenue was nearly $74 million in the quarter. That was up 48% quarter over quarter, and that does include amounts from three of our pending acquisitions, including Tryke, Hope Heal Health, and Origin House, as well as Valley Ag, which we closed in October. The largest component of the revenue increase quarter to quarter was the addition of Tryke, which we put into the prepared comments. That was about $17 million of the overall $37 million of incremental pro forma revenue, if you will.
Robert Fagan (Analyst)
Okay. So, outside of Tryke, would you be able to give us some color around the growth of, you know, maybe Origin House or the assets in Massachusetts?
Ken Amann (CFO)
Yeah, unfortunately, Origin House hasn't reported yet, so I can't comment specifically on those. As it relates to, you know, the revenue across those other markets, you know, what we're seeing there is that the revenue growth was consistent with the rest of our core business, which was up, again, organic growth only, you know, 20%.
Robert Fagan (Analyst)
Fair enough. Thought I'd give it a try. Just shifting to capital allocation, and Charlie, I think you gave us a great overview of some of the key states, which are obvious areas to devote capital. But I just thought that maybe you could give us a little more commentary on Nevada and Arizona with, you know, the integration potential of Tryke in your existing operations in Arizona. Maybe in particular, what kind of, you know, synergies do you expect? And is that also are those two states also where you see capital being devoted?
Charlie Bachtell (Co-founder and CEO)
Yeah. Thanks, Rob. We like those two markets. You know, those are two markets you can look at them from a couple of different perspectives and recognize the value. One, you know, the proximity to even California is a plus. So when you start to build sort of a regional presence, California, Nevada, Arizona together, that's great. Nevada, as a standalone, you're talking about Reno and Las Vegas, you know, two of the most, really the, especially with Vegas, the dynamic marketplaces in the industry. And then Arizona, you're still talking about the, you know, one of, if not the largest remaining medical-only programs with a strong likelihood of moving forward with adult use in 2020 or near future.
So we really do like that footprint. We've always had the footprint, that part of the footprint for a few quarters now, and just we're not satisfied with the positioning that we had there. So Tryke became almost, you know, hand in glove. We were great acquirer for them, and they were a great asset for us. And then for us to be able to get through that DOJ submission and be the first company in cannabis to have to submit the qualifying condition and not get a second request, you know, without the benefit of, you know, federal government closures, is telling.
You know, we're proud of it as a team, and it is going to make the realization of that transaction move forward faster. So we like the market a lot. We like the transaction a lot. We love the team. We love the asset base, and we're excited to really, you know, move forward with true presence in both of those markets. You know, Tryke is top three in the marketplace in Nevada, the Reef Dispensaries from a revenue standpoint. So the amount of people that come through those stores, the revenue that they generate, there's very few retail establishments in the industry that have the profile that those Reef Dispensaries do. So we're really excited about it.
Robert Fagan (Analyst)
Great. Well, thanks a lot, guys.
Charlie Bachtell (Co-founder and CEO)
Thanks, Rob.
Ken Amann (CFO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Michael Lavery with Piper Jaffray.
Jeff Kragel (Analyst)
Hi, this is Jeff Kragel on for Michael. Good evening. My first question.
Charlie Bachtell (Co-founder and CEO)
Hi, Jeff.
Jeff Kragel (Analyst)
How does your CBD strategy with Well Beings change, if at all, in light of the FDA's recent warning letters to companies marketing CBD as a dietary supplement or in food?
Charlie Bachtell (Co-founder and CEO)
Yeah, Mike, thanks for the question. It is Charlie, I'll take that. You know, we've always looked at the CBD channel as an incredibly interesting marketing opportunity. It definitely was not to try and become the largest purveyor of CBD products.
We think that the ability to reach eyeballs in all fifty states and really grab mind share before we can reach them as a cannabis THC-focused cannabis company was a pretty dynamic opportunity. And so we've taken a, you know, what I would say is an appropriately cautious approach to making sure that we don't overstep what is currently and specifically sort of addressed and acknowledged as okay. You know, I've had conversations with your peer set, you know, over the last couple of months, and I've said repeatedly, like, I'm not interested in getting one of those letters. And I'm really not. So we still like the channel.
We like the opportunity there. I think, you know, in the same vein as prioritizing where we're putting resources, in you know, from not only a capital standpoint, from a bandwidth standpoint as well, we are laser focused on the core business. But I will say we're very happy that we recently launched the direct-to-consumer aspect of Wellbeings. We're really in the you know, the infancy stage of it. We're about you know, 12, 14 days into having a real presence and platform on Google. It is fun and exciting to see traditional business metrics and you know, look at it from the viewpoint of real CPG. You know, Google Analytics will let you figure out if pricing is right, if form is right, if messaging is right.
It gives you a lot of very, very valuable feedback that we're really looking forward to exploring further, you know, with that opportunity.
Jeff Kragel (Analyst)
Got it. No, that makes sense. And then a follow-up: could you elaborate on your preparations for recreational cannabis sales in Illinois, and how could capital that had once been planned for VidaCann be deployed?
Charlie Bachtell (Co-founder and CEO)
Sure, and Joe will take this.
Joe Caltabiano (Co-founder and President)
So, you know, our team, both on a cultivation manufacturing side as well as retail side, has been planning for an increased medical program in Illinois, first and foremost. So, you know, we did have a head start on expanding cultivation, looking at redeveloping our retail, and then with the recreational law being passed, that certainly accelerated. So our teams have been in place from both a staffing standpoint, from a marketing standpoint, from increased cultivation, construction, etc, for a very long period of time. So I feel like we had a head start. We had the capital to deploy. It's in our home state, where we've had, you know, very strong market share for since inception of this program.
So certainly having that pride of ownership in our home state has been a top priority, and our team really feels it and lives it every day. So from hiring, from relaunching brands, from preparing for automation to help increase the speed that we can get products out, adding on logistics and delivery vehicles, all of those things have been underway, and we're excited to see it all come to fruition in roughly 35 days.
Jeff Kragel (Analyst)
Got it. All right. Thank you very much.
Charlie Bachtell (Co-founder and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Graeme Kreindler with Eight Capital.
Graeme Kreindler (Principal of Institutional Equity Sales)
Yeah. Hi, thanks for taking my questions. Just two quick ones here for me. The first is, of the two sale-leasebacks, how much of that is actual cash to be received on the balance sheet? And then what's the split out of how much of that is gonna be the tenant improvements portion of that? Thanks.
Charlie Bachtell (Co-founder and CEO)
Thanks, Graeme, and Ken will take this.
Ken Amann (CFO)
Hey, Graeme. As it relates to the announcement that we made earlier today, that sale-leaseback for those assets in Marshall, Michigan, and also Yellow Springs, Ohio, the split between the cash and the tenant improvements was split, pretty much fifty-fifty down the middle. But either way, it's all going to be used for growth initiatives. As it relates to the original IIPR transaction that we completed about a month back, the total amount of that transaction was about $46.3 million. However, more of that, the majority of that went back into tenant improvements than it did cash back into our balance sheet.
Graeme Kreindler (Principal of Institutional Equity Sales)
Okay, that's helpful. Thank you. And then just to follow up, I know you outlined, you know, timelines earlier on the call with respect to when you're looking to complete most of the cultivation build-out. I was just wondering if you had a specific CapEx budget for Illinois and Pennsylvania that you could share, and you know, how much has gone to date and how much is expected remaining to be spent based on the timelines outlined earlier? Thanks.
Ken Amann (CFO)
Thanks for the question, Graeme. Our CapEx was elevated a bit in the third quarter. It was $22.4 million overall, and that was mainly the result of spend related to our production capabilities in New York, excuse me, in Illinois and Pennsylvania, which are the two states that we feel have superior return profiles. Again, this is about going deeper into our core markets, and again, consistent with our prior messaging. The PA market is already supply constrained, and the transition to adult use in Illinois is really the most exciting story in cannabis right now.
Again, this is our home state, where we already have the highest market share, and if our competitors aren't investing in a similar amount of capital for expansion, then they're gonna miss a significant opportunity, and we look forward to taking even higher market share in those states. So again, $22 million in the quarter, and I expect a similar amount in the fourth quarter as well. And then we'll start to see that decline over time as we move into 2020, and a larger percentage of our CapEx I expect to come from operating cash flow.
Scott Fortune (Analyst)
Okay, appreciate the color. Thank you very much for that.
Charlie Bachtell (Co-founder and CEO)
Thanks, Dan.
Operator (participant)
Thank you. Our next question will come from Matthew Pallotta with Echelon Wealth Partners.
Matthew Pallotta (Analyst)
Hi, guys. Thanks for taking my question. Just wondering on Illinois, when you expect the supply from the expansion initiatives to, you know, be available and come online? And with, you know, how strong the medical market's been there, are you guys bumping up against supply constraints today without that additional capacity, that, you know, may cause us to see possibly less of a jump in, Q1, with adult use sales than we might expect just because of, those potential supply constraints?
Charlie Bachtell (Co-founder and CEO)
I think Joe will take that.
Joe Caltabiano (Co-founder and President)
Hey, Matt. So yes, there is, there has been an accelerated growth rate of medical patients in Illinois, and there has been bumping up against supply constraints to service even the medical community. The majority of our construction, as I mentioned, does deliver at the end of the year, but we've already had phases start to deliver. So we'll be recognizing product from the expansion starting in December and accelerating every month from that point on. So we will be bumping up into some supply constraints toward the end of this year, but we do expect to work through that coming into the middle of Q1. We also are working with some of our peers in the state to make sure that our retail stores are supplied and we're able to meet the demand that we think is forthcoming.
Matthew Pallotta (Analyst)
Thanks, and then quickly, just on the percentage of sales breakdown, you know, I think last quarter, my notes, it was around 90% from Illinois, Pennsylvania, and California. This is on reported revenue, not pro forma. I was wondering if you could provide the breakdown of how much of revenue those three states comprised during this quarter, and when you expect to see that sort of diversify with, you know, Ohio and Michigan and revenue from those states sort of start to pick up, relative to the three largest markets that you're in at the moment? Thanks.
Charlie Bachtell (Co-founder and CEO)
Thanks, and Ken will take that.
Ken Amann (CFO)
Yeah, thanks for the question, Matthew. In terms of those three core states, Illinois, Pennsylvania, and California, that did represent over 90% of our overall consumer products revenue again, this quarter. However, we're starting to see some positive momentum in other states, certainly Arizona, Ohio, at the top of the list. As those existing markets start to mature, we expect that to continue to be a larger percentage. You'll see a material shift once we begin to close acquisitions such as Origin House and Tryke, and again, taking a much larger market share within those other states.
Matthew Pallotta (Analyst)
Okay. Thanks, Ken.
Operator (participant)
Thank you. Our next question will come from Scott Fortune with Roth Capital Partners.
Scott Fortune (Analyst)
Congratulations, and thank you for the questions. I just have one focus on California. I know you rolled out a nice marketing campaign. Being here in California, I'm seeing it, and you're grabbing eyeballs and kind of mind share here. But just kind of step us through the strategy to grow in California from a distribution, cultivation, and kind of retail, along with the brand development, kind of as you allocate capital to California, kind of step us through where you see the growth coming from on that side. Thanks.
Charlie Bachtell (Co-founder and CEO)
Yeah, thanks, Scott. You know, and appreciate the comments on the marketing campaign. You know, we've prioritized that state of California. As everybody, you know, acknowledges, it's the largest cannabis market in the world. And if you want to be a premier operator and player in this industry, if you want to be top two, you need to have a robust and developed California plan. And in Origin House, you know, definitely is our vehicle in which we believe gives us the highest likelihood of success in establishing that meaningful and material position in that state. So I think you'll continue to see us invest in that marketplace, not only from a capital standpoint, but from a resource standpoint.
You know, that effort deserves a lot of hands-on and a lot of touch points from leadership and the executive level management bandwidth. We expect to, you know, see significant revenue increase as we mature into that marketplace. You know, as much as I would like to think the out-of-home has, you know, an immediate impact on a market of that size, it takes repeated time, effort, and dedication to really substantiate the position. But we're definitely looking forward to it and, you know, we've got a great great partnership that we've created with the Origin House team. It's important for us to note, you know, it's not only just the distribution arm out there, which is Continuum.
There's a, you know, the cultivation asset of Origin House, which is called FloraCal, is one of the premier cultivation operations that we've come across. And they're gonna be a great asset, not only in California, but they're a great addition to our leadership team across the entire platform. So I think it's a you know, tremendously accretive on many levels, and look forward to closing the transaction.
Scott Fortune (Analyst)
Okay, great. Thanks for the color.
Operator (participant)
Thank you. Our next question comes from Jesse Pytlak with Cormark.
Jesse Pytlak (Equity Research Analyst)
Hey, good evening.
I just want to come back to a comment Ken made, I think, in his prepared comments that kind of just referred to some transformational M&A still being in the pipeline. Just want to, number one, make sure that I did hear that correctly, and if so, can you maybe just elaborate on that? Just, you know, how should we kind of think about that, given what happened with VidaCann, just the current funding environment, and then, you know, just kind of the clear focus you guys have on going deeper in your existing markets?
Charlie Bachtell (Co-founder and CEO)
Yeah, thanks, Jesse. Ken will take that.
Ken Amann (CFO)
Hi, Jesse. I guess what I would say with respect to M&A is, you know, with the current eleven-state footprint, which we believe is the most strategic among our peers, that gives us access to about 60% of the overall addressable U.S. market. But our focus right now is about going deeper in our existing states, trying to drive material market share. You know, we'll continue to evaluate strategic M&A opportunities that present attractive financial returns, that strengthen our overall competitive advantage, which is really the key to sustainable financial results, but no immediate plans to jump into any large-scale M&A transactions at this stage. We'll plan to be more opportunistic as those opportunities present themselves.
Jesse Pytlak (Equity Research Analyst)
All right. Thank you. That's all for me.
Operator (participant)
Thank you, and our final question will come from Alan Brochstein with New Cannabis Ventures.
Alan Brochstein (Founding Partner)
Let me wish you a happy Thanksgiving.
Charlie Bachtell (Co-founder and CEO)
Likewise, thanks, Alan.
Ken Amann (CFO)
Thanks, Alan.
Alan Brochstein (Founding Partner)
Just two quick ones. So first of all, congratulations on the sale-leasebacks. And I just want to verify, because your counterparty has kind of a two-tiered pricing, from what I understand. And if you could shed some light on two aspects. Number one, the rate, if you can divulge that, as well as, are there any sort of corporate guarantees involved?
Charlie Bachtell (Co-founder and CEO)
Thanks, Alan. So with regard to the specifics of the terms, I think our counterparty will be issuing their own press release on that. But I can tell you that they're right in line with market, what's been disclosed before, in this sector and with them, they're right in line, and I'm sorry, could you repeat part two of the question?
Alan Brochstein (Founding Partner)
Just corporate guarantees. I don't think that you had a corporate guarantee before. I just wanted to make sure that you weren't. It's just on the assets and not on the whole corporation.
Charlie Bachtell (Co-founder and CEO)
Uh, correct.
Alan Brochstein (Founding Partner)
Okay. And then my other question is kind of big picture. I understand that you guys might be opportunistic and that you're focusing on your core markets. And I'm just wondering that you guys are better capitalized now than almost all your peers. And I'm wondering if you're starting to see the dynamics within those markets change, if you're actually seeing some of the competitive forces disappear or come to you begging to be bought out.
Charlie Bachtell (Co-founder and CEO)
Yeah, thanks, Alan. This is Charlie. So sure, you know, I think, you know, there's. The world has changed, right? From Q1 of 2019 to where we're at today, in most respects, the industry is different and the opportunities are different, the access to capital is different.
You know, not only does that require, you know, us and our peer set to perform at a certain level and dedicate resources to certain things and make tough decisions. I mean, when you're talking about people, you know, and operators that are single state operators that didn't go public that don't have even the access to capital, the limited access to capital that's available for the larger, you know, arguably, better positioned organizations, that creates a strain on their operations and on their opportunities. So I would say that, has our phone been ringing more often in the last 60-90 days? Absolutely.
I think there's also a realization, too, of you know single state operators that maybe had visions of you know growing a footprint and becoming larger players in brands in California that you know have always adhered to the motto of build a brand in California, and you can you can take over the world. I think there again realization of the difficulties of managing the regulatory complexities of this industry and especially layering on top capital difficulties of this industry are starting to materialize for them. Yes, long answer to a short answer of yes, it's different.
Alan Brochstein (Founding Partner)
All right. Sounds good. Good luck, January first, guys.
Charlie Bachtell (Co-founder and CEO)
Thanks, Alan.
Ken Amann (CFO)
Thanks, Alan.
Operator (participant)
Ladies and gentlemen, thank you for participating in today's question and answer session. I would now like to turn the call back over to management for any closing remarks.
Charlie Bachtell (Co-founder and CEO)
You know, very quickly, just wanted to appreciate, let you know, guys know, we appreciate you taking the time to get on the call and wanted to wish everybody a very, healthy and happy, Thanksgiving and holiday season. So thanks, everybody.
Ken Amann (CFO)
Thanks.
Joe Caltabiano (Co-founder and President)
Bye, everyone.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.