Green Thumb Industries Inc. (GTBIF) CEO Ben Kovler on Q3 2018 Results - Earnings Call Transcript

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About: Green Thumb Industries Inc. (GTBIF)
by: SA Transcripts

Green Thumb Industries Inc. (OTCQX:GTBIF) Q3 2018 Earnings Conference Call November 27, 2018 5:00 PM ET

Executives

Jennifer Dooley - Chief Strategy Officer

Ben Kovler - Founder and Chief Executive Officer

Anthony Georgiadis - Chief Financial Officer

Analysts

Robert Fagan - GMP Securities

Russell Stanley - Beacon Securities

Graeme Kreidler - Eight Capital

Andrew Kessner - William O’Neil & Company

Andrew Semple - Echelon Wealth Partners

Andrew Burke - Burke Equities

Jim Young - West Family Investments

Operator

Good afternoon and welcome to GTI’s Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, a live audio webcast of the call is available on the Investor Relations section of GTI’s website and will be archived for replay. I would like to remind everyone that today’s call is being recorded. I will now turn the call over to Jennifer Dooley, Chief Strategy Officer. Please go ahead.

Jennifer Dooley

Thanks Mike. Good afternoon and welcome to GTI’s third quarter earnings call. I am here today with Founder and CEO, Ben Kovler and Chief Financial Officer, Anthony Georgiadis.

Today’s discussion and responses to questions may include forward-looking statements based on management assumptions. Actual results could differ materially from those anticipated and stated here today. Please refer to the earnings release in GTI’s SEDAR filings for risk factors, which may impact forward-looking statements made on this call. Throughout the discussion, GTI will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA and adjusted EBITDA, which is defined in the press release issued earlier today. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone and how here is Ben.

Ben Kovler

Good afternoon everyone and thank you for joining us. We just completed a highly productive quarter executing on our business plan focused on positioning the business for the long-term. I will provide an update on high level financial results, development of our wholesale and retail businesses, our growing team, recent mergers and acquisitions and key market catalysts. Following, Anthony will provide more detail on our solid financial results.

We generated third quarter revenue of over $17 million, up 26% from the second quarter and over 300% from the third quarter 2017. Both sides of our business wholesale and retail continued to drive growth. New and expanded distribution of branded products drives wholesale where we are growing as the industry expands across our markets. Strong organic growth and new store openings drive retail performance and we expect this to continue. Our positive momentum and track record of allocating capital for attractive returns has put us in the fortunate position to attract growth capital. Since the close of the last quarter, we have completed two bought deals, raising a total of $141 million in gross proceeds. These proceeds will fund the closing of New York wholesale capacity expansion, our robust retail rollout and strategic mergers and acquisitions. Without a doubt, we are in the early innings of an evolving industry. So we are keeping our heads down and focused squarely on execution.

On the wholesale consumer products business, we have been focused on infrastructure build out ahead of some new capacity coming online with initiatives in all 5 of our current operating facilities. In Maryland, we are adding about 30,000 square feet to upgrade our processing and production capacity and build-out in-house cultivation. Pennsylvania is going through significant expansion quadrupling cultivation capacity to support a very healthy market that now has the addition of flower. In Illinois, we recently finalized a phase build-out that increased capacity by more than 60%. And in Florida, we are tripling production capacity in our newly acquired facility. Overall, our goal is to stay ahead of the demand curve. Already in some markets supply of some wholesale product is tight which is why we are investing in capacity expansion not only for today’s demand, but also for expectations for the future. Favorable regulations such as the Illinois Opioid Replacement Act, which takes effect very soon, Pennsylvania, the expansion with flower and the beginning of Massachusetts Tax and Regulate program are likely the first of many catalysts that will drive increasing demand across the country as cannabis moves into the mainstream.

As we build our business, we believe in actively engaging with our consumers and communities and we continue to create success stories by supporting outstanding programs. In October, for instance, we promoted breast cancer awareness month by launching a campaign with our limited edition Rythm for a Cause Vaporizer Pens. These were sold at participating dispensaries in Illinois, Maryland and Pennsylvania and have excellent sell-through. More importantly, it drove awareness of the benefits of cannabis for a population seeking relief from pain and anxiety. We remain committed to these types of integrated and impactful campaigns as we build our brands across the country. Today, our core brands, Rhythm, DogWalkers and the Feel Collection, are building distribution across markets with greater than 90% retail distribution. As we build out and invest in the brand portfolio, we are focused on both immediate opportunities and long-term potential. The more we can connect with our communities, the more likely we are to make a positive impression and develop meaningful and lasting relationships with our consumers.

On the RISE retail business, sales continued to very healthy with strong sequential same-store sales growth well over 50% in the third quarter versus a year ago. Organic growth continues to come from even our most established stores. Our very first store, for example, just celebrated its third anniversary and reported impressive same-store sales over 40%. It’s incredibly humbling to see some of the same familiar faces who continue to be part of that community. While we invest in our current stores, we are also ramping up for continued growth. Subsequent to the quarter, we opened our fourth RISE store in Pennsylvania bringing our total open store count to 14. We have 5 stores in Ohio in our pipeline and our retail team headed by Jennifer Barry, has been hard at work on the rollout. Our first store in Ohio will be in Toledo and is scheduled for a January open. This is one of many in our robust pipeline of new store openings as we plan on more than doubling the number of RISE stores opened over the next 12 months.

To be a leading and memorable national retailer, we need to build a world class team of retail operators and talents. I am very excited about the retail experience we have attracted to our growing leadership roster. We recently hired 8 retail executes who brings GTI at combined 184 years of experience. Their collective expertise spans real estate development, construction management, global branding, marketing and sales leadership, product development and community relations from retail giants such as Nordstrom, Urban Outfitters, Starbucks, Whole Foods, Apple and Nike.

We also continue to deepen our bench of talent throughout the company, a process that is vital to support our rapid growth. We have hired over 100 team members during the third quarter bringing our total headcount to over 420 at quarter end. We are also proud to share that as of today over 150 of our team members are now owners of the company through our employee stock option plan supporting our commitment to shareholder alignment.

Before I cover state specific catalysts, I would like to discuss our recently announced acquisitions, which fit well within our M&A framework and our key milestones in our plan to distribute brands at scale. In a monstrously fragmented market, the ability to drive shareholder returns with strategic combinations and M&A is material. We have enjoyed navigating the market on behalf of our shareholders and remain steadfast in allocating capital with discipline focused on growing through strategic acquisitions that generate long-term shareholder value and not simply being the biggest. Our pending acquisition of Las Vegas based Integral Associates, which we announced just a few weeks ago is a great example of our disciplined approach.

Over the past 6 months, we spent a lot of time evaluating the best opportunity for GTI and are pleased to have found the right mix of assets, operations and team with Integral Associates. Integral is a top Nevada operator with an incredible reputation and track record of excellence, award winning products and strong store economics. The $290 million pending acquisition represents about 11 times current year EBITDA making it very accretive. The transaction was structured with 80% stock creating very close alignment with our new partners. More importantly, it’s a strategic fit for expanding GTI’s brand distribution and retail presence in one of the most vibrant tourism markets in the world.

Included in the acquisition are three high traffic retail dispensaries operating under the Essence brand, one of which is the only cannabis store located directly on the Las Vegas trip. This location was named Business Insider’s number one dispensary in Nevada and a top 25 dispensary in the U.S. The other two dispensaries are also in prime locations, one is in the Tropicana West and the other is in the Las Vegas suburb of Henderson which is one of Nevada’s largest and fastest growing cities. Collectively, these three dispensaries will more than double GTI’s presence in Nevada and give us more than 10% retail market share in the state. The acquisition also boosts GTI’s total licenses for retail stores to 63 across 8 states. And as part of the acquisition, we are also acquiring high-performing cultivation and processing facilities, Desert Grown Farms and Cannabiotix. Combined, the two have 95,000 square feet of wholesale operations, with award-winning genetic libraries and several high times Cannabis Cup victories.

Finally, we are very excited to welcome outstanding new leadership to our GTI’s family as part of this transaction. Armen Yemenidjian, Integral Associates’ Co-Founder and Chief Executive Officer will join the company as President. The company’s other Co-Founder, Alex Yemenidjian, former Chairman of the Board and CEO of Metro-Goldwynn Meyer and Tropicana Las Vegas will join the GTI Board of Directors. We are really excited to have Armen and Alex on the team. Big picture, this acquisition expands our already strong foundation of talent and leadership and elevates GTI’s brand visibility to the 40 million tourists who visit Las Vegas annually.

Turning to the Southeast, earlier this month, we reached an important milestone in Florida by closing on our previously announced acquisition of KSGNF. In line with our strategy to distribute brands across the country, the vertically integrated license for cultivation, processing in up to 30 retail stores gives us an outstanding foundation in one of the most heavily populated and visited states in the nation. The transaction makes GTI one of only 14 companies approved to operate a cannabis business in Florida. The demand for high-quality safe and effective cannabis products in Florida is clearly substantial and rising quickly and the close of the KSGNF acquisition comes on top of our ongoing efforts to ramp up existing operations in the state. We have signed 9 leases for RISE stores in attractive, high traffic locations throughout the state. Before year end, we anticipate having a second wholesale facility in a more centrally located area of the state as well as the execution of a handful of additional retail leases. The team is working hard targeting the open of our first store in Florida in January 2019.

Moving on, we added scale and reach in our Massachusetts and Illinois markets subsequent to end of the third quarter. We closed on the acquisition of Compassionate Organics, adding a fantastic medical retail site to our growing national footprint. The RISE store will be located on Boston’s historic Blueberry Street and is slated to open in the first half of 2019. Finally, we completed the transaction to increase our ownership of 25% to 50% in the Clinic Effingham, a retail store in Southern Illinois. GTI has managed the store since we opened in September 2016.

To sum it up, we have had a very active couple of months on the strategic mergers and acquisitions front expanding our footprint across current markets and entering new ones as we build the infrastructure to distribute brands at scale. With these transactions we have demonstrated that we are a partner of choice and this is particularly important to us in an active, but highly competitive M&A market. As we look forward, we expect that we will continue to partner with companies with aligned visions that focus on people and community. As we grow on both the wholesale and retail fronts, I want to share some key catalysts on a state by state basis beyond what I already mentioned. In Illinois with the passing of the Opioid Replacement bill, we believe the state is at inflection point and is one of the next big cannabis markets.

Newly elected Governor, JB Pritzker, is highly supportive of a Tax and Regulate adult use cannabis market. In New York, prior to closing, our partners are actively building up production and have signed retail leases. We will keep you updated as the business becomes operational in the first half of 2019. And in Pennsylvania, the market continues to be strong hitting 80,000 registered patients in just 6 months. Given the state’s sizable population, we anticipate this market will continue to grow at a healthy clip. We also have applications pending in New Jersey, Nevada, Arkansas, Ohio and Pennsylvania. These are very competitive applications that we will be eagerly awaiting the results of these market expansion opportunities.

And with that, I will turn the call over to Anthony who will review our financial results for the third quarter.

Anthony Georgiadis

Thanks, Ben. I will start off by reviewing the financial highlights for the quarter and then address our capital markets activity and current liquidity position. Please note that all numbers are stated in U.S. dollars unless otherwise noted. It is important to remind everyone that we think about our business in terms of two revenue streams: wholesale and retail. Our wholesale business is comprised of our operating units that generate revenue from cultivation, manufacturing and distribution of consumer packaged goods, including flower, vape, concentrates, edibles and topicals to third-party retail dispensary accounts.

Our retail business consists of sales generated at our RISE stores across the U.S. where we sell wide variety of cannabis products to consumers, including products manufactured by us as well as other wholesale suppliers. Of our 14 stores opened today, 12 of them contribute to our Q3 revenue, one is a non-consolidated JV in Illinois that we manage and just recently increased our ownership stake in to 50%. The other, our 14th store opened in New York, Pennsylvania subsequent to the quarter as Ben mentioned. In aggregate, revenue in the third quarter totaled $17.2 million. This represents a 344% over the same period in 2017 and a 26% increase over Q2 of this year. The $17.2 million of revenue was generated from 5 of our 8 licensed markets, including Illinois, Nevada, Maryland, Pennsylvania and Massachusetts. Strong sales during the quarter were driven by both the wholesale and retail businesses contributing approximately 35% and 65% to revenue respectively.

Our third quarter wholesale revenue grew almost 20% over Q2 and was driven by the opening of our Massachusetts wholesale facility as well as market expansion in Maryland, Pennsylvania and Illinois. It is exciting to see these markets continue to grow and materialize in a way that we underwrote them a few years back. Compared to last year, wholesale shipments were up over 200% driven by the expansion of our branded products portfolio in Illinois and commencement of sales and distribution to retail accounts in Maryland, Pennsylvania and Massachusetts.

Turning to retail, the business continues to strengthen driven by new store openings, steady patient growth and our excessive focus on the consumer. Compared to Q3 of last year, we have 10 new open stores and 2 stores in Nevada that have benefited from the increased demand of adult use sales. This has added substantial revenue to our portfolio. Consistent with last quarter, same-store sales in the third quarter generated strong organic growth well north of 50%. We expect the positive trends in both of these businesses to continue to drive 2019 as we continue to focus on execution of our simple, enter, open scale playbook.

In terms of enter, the next 12 months should generate for the first time in Florida, New York and Ohio. In terms of open, we see openings in both our retail and wholesale businesses across our entire fleet and in every one of our state markets. Our retail ramp is real as we have put the infrastructure in place to more than double retail store footprint over the next 12 months. Finally, we see scale continuing to materialize across our platform driven by substantial investment in wholesale capacity through our 2018 new store openings as well as the M&A we have announced.

Turning to gross margin before our biological asset adjustment, gross profit for Q3 was $7.8 million. This represented approximately 46% of revenue and compares favorable to our year ago gross profit of $2.2 million. We recorded a $700,000 gain in fair value adjustments on our biological assets for the quarter, which was driven by the increase in the number of plants under cultivation. Operating expenses for the third quarter including SGG&A totaled $13.9 million. This compares to $2.8 million for the same period in 2017. Over the last 12 months we made significant investments in building our infrastructure and team to position the business for continued growth.

SG&A expenses during Q3 were primarily driven by $5.4 million in employee-related expenses in support of bringing incredible talent to our growing team, specifically retail headcount in Illinois, Nevada, Maryland, Massachusetts and Pennsylvania as well as corporate staff development. Additionally, we had a non-cash charge of $2.6 million related to equity incentive compensation and $2.9 million in professional fees from M&A and other strategic company initiatives.

Other income for the quarter was $8.1 million, which primarily reflects a write-up in the fair market value of our iAnthus warrant position. Please note that subsequent to quarter end, we divested our iAnthus warrants to an unrelated third-party. As a result, we generated $3.4 million of EBITDA during the quarter. This compares to a loss of $1.2 million a year ago. Excluding non-cash and one-time expenses, adjusted EBITDA for Q3 was $0.4 million. In terms of net income, we generated a net loss in Q3 of $3.3 million which compares to a net loss of $1.2 million a year ago.

With respect to our liquidity and balance sheet, both remain very strong. As of the end of Q3, we had a cash balance of $150 million and less than $8 million in total debt. Since August, we have closed on two successful bought deals totaling gross proceeds of approximately $141 million. This includes a $62 million raise in August as well as an upsized offering of $79 million in October, which included the full exercise by the underwriters of their over-allotment option.

Overall, we are quite pleased with our financial results in current position. This entire year has been a delicate balancing act as on one hand, we find ourselves aggressively investing in people, technology, and infrastructure to handle the tidal wave of growth we are experiencing, while at the same time, prudently managing our balance sheet and P&L in a way that adheres to our longstanding principles of fiscal responsibility and disciplined capital allocation. We continue to evaluate every decision through the simple lens that assesses the impact on our team members, our consumers, our communities and our shareholders. We appreciate your trust and we remain steadfast in our approach. As of today, there are approximately 156 million fully diluted subordinate shares issued and outstanding. That includes the roughly 5 million shares issued as part of the bought deal in October.

One final note relates to the loss of expiration of our subordinate voting shares which is expiring on December 12. We have a fiduciary duty to all shareholders. We will be closely managing the distribution process by making distributions of shares over time. Our initial distribution of 20 million shares will essentially double our float. As you may recall, our management team has been significant investors in GTI since inception and has no plans to monetize any of its holdings in connection with this distribution. Overall, we view the increased liquidity in our stock as a net positive. Having reviewed our strong financial results, growth-oriented balance sheet, and capital markets activity, I’ll turn the call back over to Ben for his final remarks. Thanks, everyone.

Ben Kovler

Thank you, Anthony. As you can see, we are investing in and capitalizing on opportunities across both of our businesses to execute today and more importantly, to set up our wholesale and retail businesses for future growth. We’re seeing the growth already here at GTI, $17 million of revenue this quarter and a lot of action. If we look at our business pro forma with Essence, the business we are managing is over $35 million in revenue for the third quarter with strong EBITDA. It’s big and almost doubles our current run rate, that’s what we’re focused on leveraging as we scale into the future. Looking ahead over the next 3 to 5 years, we will continue to build our business around the same fundamentals: brand building based on consumer insights, a customer-focused standard of operational excellence, speed to market, fiscal responsibility and strong capital allocation. This is how we’re tackling the opportunity to capitalize on what we see as a once in a lifetime opportunity to create real value for our shareholders today and in the long-term.

Thank you for the time, and we look forward to taking your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Robert Fagan from GMP Securities.

Robert Fagan

Hey guys, congrats on the solid quarter. I just thought I would ask quickly about the professional fees in the SG&A this quarter, the $2.9 million. Is that kind of one-time in nature or you see that kind of continuing on a run rate basis?

Anthony Georgiadis

Hey Robert, Anthony here. So, the $2.6 million of equity compensation expense, we expect that to continue. The $2.9 million of professional fees, certainly a portion of that is kind of non-recurring if you look at the business on a normalized basis, difficult to say, because that’s pretty lumpy depending on M&A activity and other kind of strategic initiatives. Obviously, pretty heavy this quarter, but as we look forward, our goal is to kind of manage that number down and we probably look at staffing some additional in-house resources to keep that number at a reasonable level.

Robert Fagan

Okay, great. And I thought I would just ask about Massachusetts, you’ve acquired that extra store, Ben mentioning that it would be, I guess, opening in the first half of next year. Can you give us any update on maybe timeline for roll-out of your, I guess, two other stores under your available licenses and how you kind of want to position those to tap into the Rec market? And also if you can give us some maybe detail on your wholesale distribution in Massachusetts now?

Anthony Georgiadis

Sure. Robert, Anthony here again. So right now, we have a store that’s opened in Amherst, that’s currently selling medical. We anticipate that moving over to Rec certainly within the next several months. We then have the store on Newberry that we acquired is actually another license that went with that acquisition, also in Downtown Boston that we’re working through the regulatory process with and then we also have a few other options in the Western part of the state that we’re also assessing. So we think that will unfold over the first quarter of next year just in terms of which stores we think will actually open given the three-store limit in Mass as it relates to adult use. On the wholesale front, our wholesale facility is up and running and producing product and it’s actually at this point starting to sell to a number of retail accounts. Demand is strong and candidly that market is off to a robust start and we’re already in the position where we’re assessing kind of our capacity in that facility and taking a look at options to quickly kind of increase that capacity. In addition, the product coming out of that facility has been well received by the market and we believe it’s some of the top testing product within the state.

Robert Fagan

Great, okay. It sounds good. Last one I will get in queue. Just wanted to congratulate you guys probably on the Nevada acquisition when we were down and it seems like some really stores, just so it seems like a high level strategy or outlook for the acquisition, any plans for maybe rebranding of either RISE stores to Essence or vice-versa and how do you see kind of like the growth trajectory or strategy I should say going forward?

Ben Kovler

Yes. Hey, Robert, it’s Ben. Thank you. We are really excited about the Nevada market right. It’s one of the only limited license adult use markets. The state is doing approximately $50 million a month in sales. You can see the tax revenue is far above local projections and we believe awareness is in its nascent stage, something like 70$ to 80% of the visitors to Nevada are unaware of the legal regulated cannabis program. And in addition, new licenses are coming we put the business, our business and their business in a good spot. There is no immediate plans to change the flag, we think the market in Las Vegas, particularly is evolving fast. You can read about the concept of adult onsite consumption as that goes. We think it’s going to evolve and grow quite significantly. So we are excited about that as we continue to expand.

Robert Fagan

Great. Thanks guys.

Operator

Your next question comes from Russell Stanley from Beacon Securities.

Russell Stanley

Good afternoon, guys and congrats on the quarter.

Ben Kovler

Thanks Russ.

Russell Stanley

First question I guess on Florida, thanks for the update on ways discussions there, just wondering do you have a target you can share with us in terms of number of store openings for exit 2019?

Ben Kovler

I mean, at this point we don’t have a solid number for that. We signed what we say 9, 10 leases at this point. We anticipate signing a handful more and we will begin the process of construction. We are building inventory, we are building product, branded product that we are excited to have at those stores. And I think you will see us open quite a few.

Russell Stanley

Great. And I guess just some general color around the state, you have obviously had good success so far in signing leases, just wondering how quick local markets are to embrace using entrants and what kind of feedback you are getting so far, which markets are working, which ones are little more cautious?

Anthony Georgiadis

Sure. Hey, Russ, Anthony here. So thus far, we have been at this for a few years and so we have – I feel like we have done a pretty good job of targeting those local jurisdictions that we think we have a simple path to opening. Obviously that remains to be seen, but that’s all part of our process that we embark upon as we kind of identified these locations. So, the proof is in the putting. Right now, we have got our sleeves rolled up. We have got a lot of work to do and it’s something we are focused on. One of the things that certainly will help us we think get stores open is the fact that we have a lot of great relationships within the communities that we already operate in and so where we go to some of these talents in Florida, we can put them in touch with mayors, police chiefs and fire chiefs that we have been working with for several years and they can do nothing, but speak highly about GTI and so we think that should hopefully help us get a number of stores open in 2019.

Russell Stanley

Excellent. Thanks for that color. And just if I could moving on to New York, can you I guess share your timelines there, I think you mentioned some leases have been signed for dispensaries there, I guess how many out of your allotted 4 and can you share a timeline around anticipated build out of those?

Anthony Georgiadis

Yes. So as we previously disclosed we did extend our tender agreement. We have leases executed in three jurisdictions and build out of those has actually already started to commence. And so the ball is already being moved down the field there and we expect that business to become operational here in the near term.

Russell Stanley

Great. And just one last question I will get back into queue just high level wondering given the results of the mid-term elections, what are your thoughts I guess on the likelihood of the states act getting traction and/or any sort of any other federal developments what kind of world are you preparing for at this point?

Ben Kovler

Yes. Thanks, Russ. This is Ben. Our crystal ball is not any better than the next guy. We are building the business into what we see as a trend – a long-term trend to establish cannabis as a mainstream and legalized consumer package goods in several different forms. And this selection was no different. We saw several governors, medical initiatives, reps in Michigan and we think the dominoes are setup for what’s happening. The Farm Bill, the States act, we think these are material events, these are good material events in the capital markets, the material events for consumers to have new and expanded access and we are positioning the business for that. And at the same time, we are positioning the business to not tip over. If things don’t go exactly our way, the balance sheet is well capitalized we can execute on our business plan heads down if the world changes. And so we don’t spend a lot of time worrying about that risk, we are focused on our business plan executing on these rapidly expanding markets, look at our medical markets on the East Coast, I mean, Illinois, Ohio, Pennsylvania, Maryland, New York, Florida, Massachusetts, they are in the single-digit penetration and we think from the illegal into the legal world. And that’s before mass new adoption, so we are really putting the foundation in place to take advantage of that and we see the legislation really going one way. Nevada is destroying the projected tax revenue. The states in the Midwest are virtually bankrupted being downgraded daily or yearly. The opioid problem is very real. People are dying from opioids, because they are being pushed by doctors and they become addicted to it. We have a viable alternative. The Opioid Replacement Bill in Illinois will stabilize over time. The data should prove that and we will be able to demonstrate that and there is no reason that the other states won’t have that. So we think it’s only a matter of time before the facts to show those people in Washington, it’s exciting for me to see the industry working together to come out with one voice to work towards this to educate the community and push this. So, we see this only going in one direction.

Russell Stanley

Excellent. That’s great color and thank you again congrats on the quarter.

Ben Kovler

Thank you.

Operator

Your next question comes from Graeme Kreidler from Eight Capital.

Graeme Kreidler

Yes, hi guys. Couple of questions for me here. First one just to work off your comments here on the Farm Bill, we have seen a few of your competitors work on CBD-specific product lines or strategies, what is the company’s view on having that as a potential avenue for nationwide distribution in the event of a passing of the Farm Bill?

Ben Kovler

We think CBD is very real. We think the combination of CBD with THC is having material impact on patients and consumers lives. So we are putting the business in a position to take advantage of that. We think we can go through partnerships through strategic brand development obviously if CBD-only product can have mass distribution and there is ways to leverage brand through that and we are seeing several people take advantage of that, but we believe in the product we are leading with the consumer we believe in the CBD THC balanced product in order to improve people’s lives.

Graeme Kreidler

Okay, thanks. Just to go back press release mentioned about the desire to double the footprint of RISE dispensaries over the next 12 months. So just looking here in terms of what’s signed in Florida on leases and what is available for ownership in Massachusetts and plans for Ohio potential plans in New York, it seems like that might be a bit of a conservative goal. Is it correct for me to characterize it as such?

Ben Kovler

I mean, certainly if you add up those numbers, you are going to get a number of hires than where we have guided, but I think underestimated is the enter, open, scale is our model and opening in three new markets is often underestimated how tricky it is. Ohio has not yet turned on. And the last thing I want to do is be overly aggressive and come back the other way. We are confident in the numbers we are putting out and we are confident in the stores we can get open, having the product and delivering the team, and that’s where we stand.

Graeme Kreidler

Okay, I appreciate that. Thank you. And the other question for me here, 35%, 65% split on the wholesale retail, is there a certain revenue mix or goal that you guys are aiming for longer term on that end?

Ben Kovler

Well, any sort of goal when we capped off the retail sales would be silly. We are seeing very strong same-store sales growth out of retail and we are putting the pieces in place to materially grow the wholesale business and so none of these things are reaching maturity. We are out of wholesale products, run allocation or have out of stocks and so we are investing in the capacity there. We are not modeling the business to one split or the other. We think the retail business is incredibly exciting. The unit economics are great, but the pipeline of growth is strong, the team is great and the retail experience for consumers is fantastic. On the wholesale brands, I would think these brands are real and we think consumers are attracted to them and we have a lot of demand. So we’re not modeling to one split or the other. We’re certainly watching it and leveraging the business in that way, but not one or the other.

Graeme Kreidler

Okay, thanks. And last question here just to build off that from the gross margin side of things, considering your comments there, how can we expect the gross margin to evolve moving forward?

Anthony Georgiadis

Yes. It’s a really good question. I think a lot of it depends on the state markets themselves. I mean, obviously each state market is a unique animal and depending on the vertical, the mandatory vertical integration in some of these markets particularly, Florida that, that could have a big impact, and so it’s difficult to say in terms of where we see kind of gross margin heading. Obviously, one of the things we’re focused on internally is optimizing gross margin across the entire chain. But I can tell you right now that the gross margin that we generate in our retail stores in one state isn’t totally consistent with what we generate in another state, a lot of it depends on the inherent supply demand economics within that respective state market. So it’d be difficult for us to sit here and present a number that, that we think will hit because a lot of it depends on the – on which state markets end up driving a lot of the revenue for the business and then also within those state markets kind of the supply demand economics.

Graeme Kreidler

Okay. Thanks for that. That’s it for me. Thanks for taking my questions.

Operator

Your next question comes from Andrew Kessner from William O’Neil & Company.

Andrew Kessner

Hi guys, thanks for taking my questions.

Anthony Georgiadis

Thanks.

Ben Kovler

Thanks.

Andrew Kessner

So first on the retail side, can you offer any general commentary around the sales mix between flower and non-flower products, and if there are any notable differences across state markets? And then on the wholesale side, can you also give a sense at all of the product mix and maybe how you see that evolving going forward?

Ben Kovler

Sure. This is Ben. Great question. The basket essentially in a market where everything is allowed will be approximately 50% flower, in some markets you’re seeing it go below 50%, maybe to 40%. Within that flower category is pre-rolls, which is a very real category, and in what is that other 50%, vape, concentrate edibles dominated and the other the smaller piece, the other 5% could be products like beverages, topicals, creams, tinctures and other form factors. Interestingly, we’re seeing a pretty similar mix in the basket from our stores or even other stores and other more mature markets as we go. Obviously, there’s nuances by the market if flower is allowed or not allowed, if edibles are allowed or not allowed and we see those kinds of rules in some of our markets before they are fully open. But the way we look at the business and the way we’ve talked about it on the wholesale side, on the branded side, we believe the place to invest in and what we’re concentrating on is the branded consumer package goods side of the business. We think that’s the most protected margin and we think that’s the product that can create the relationship with the consumer that can be lasting, could be consistent, and can drive them back again. That’s where the pricing power is and that’s where our focus is. So, we’re looking at our mix versus each state mix. We’re tracking our share by category, by SKU, I mean, and in our position with retail and wholesale we have a very unique data. Data drives all the decisions. So we’re in a unique position frontline with the consumers and the chain stores across the country, adult use medical type medical and then producing these products on the other end. And so we believe that information edge should benefit us over the long-term.

Andrew Kessner

Great. That’s helpful. Thanks. And on the M&A front, so I certainly realize that executing on the licenses that you already own is plenty to keep you busy, but as you look at potential acquisition opportunities, are you finding that there is more competition from other potential acquirers for these privately-held assets than perhaps they were 6 months ago? And I guess, generally do you still feel like there are plenty of M&A opportunities in desirable markets that offer an attractive return on invested capital profile or our private valuations becoming prohibitively high in certain states?

Ben Kovler

So I’ll try to take that in pieces. To the last question, there is definitely still very attractive opportunities across the country. This is very fragmented. To your first question on what’s happened in prices the last 6 months, I mean, the world has changed. Look, when we went on the road and went public in May, June, the total U.S. cannabis market cap was under $2 billion, it’s not over $10 billion, and it’s still a fraction where this industry is headed. So pricing, capital markets, buying equities, everything has changed, but that’s okay. We like that. We like the dynamic market. We like going out into the marketplace and looking for one of the best assets. And we are able to create partnerships and acquisitions not being the highest bidder. We believe in partnerships, we believe in the equity we are creating, we try to create a simple balance sheet in order to pay the simple structure to put the business in the position for success for the long-term. So that’s what happens out there and yes, there is more competition, yes, there is more people. There is more sellers, there is more buyers, there is more legalized markets, there is more operators, there is more licenses, there is more business to be had and it just puts the challenge on us on execution and operations and we are going to take advantage of this for our shareholders. We think the industry is growing rapidly and there is very few if any people at scale and we think that this is the opportunity now and so we are really excited about what’s out there.

Andrew Kessner

Great. Thanks a lot guys. Good luck.

Ben Kovler

Thank you.

Operator

Your next question comes from Andrew Semple from Echelon Wealth Partners.

Andrew Semple

Hey, good evening guys. Just wanted to ask there has been a number of regulatory developments over the past month, any plans to enter or scale into these new markets, Missouri, Utah, Michigan or still early days there?

Ben Kovler

Yes, we are following all the developments in each of those markets very carefully. We try to build great relationships with folks on the ground or figure out for us if it enters through an application or a partnership or something like that. And we think all of these new markets are very interesting.

Andrew Semple

Great, thank you. And if I were to ask do you prefer to look at new markets at this point of time or do you have enough on your plate with existing markets or if I were to rework that, would you prefer to deepen your presence in existing markets?

Ben Kovler

I mean candidly the answer is both. It depends on the return. It depends on the other alternative uses of capital and uses of time. We did a good job in Illinois laying a foundation waiting through for years for this to inflect and now we entered New York 3, 4 years later. So we watch these markets and we figure out the right time to put capital into them and what makes sense. So for us, it’s about returns, it’s about delivering on our simple machine, distribute brands and scale is how to win. And so if can accomplish that, the price mix and the partnership works it develops, it’s accretive and it develops attractive returns for our shareholders by creating more value. We want to really look at it.

Andrew Semple

Great, thanks for that. Just one final question going back to operating leverage, I know there is number of build-outs underway currently, could we expect to see little more torque on the operating margins, maybe once significant portion of these buildouts are underway, maybe looking to the second half 2019 or do you have any other color there?

Anthony Georgiadis

Yes, this is Anthony. That’s a great point. I think a lot of it depends on kind of the growth curve of the business and how much additional kind of wholesale capacity we will have to add. Certainly as we ramp these facilities up, we are operating in a relatively high fixed cost infrastructure base and then as revenue picks backup, you have really seen some of the nice operating leverage associated with our business. So I think if we did not kind of continue to do build-outs obviously at the pace that we have over the last 12 months, I certainly would expect our operating leverage to increase whether or not that gets softened by additional kind of build-out that we need to do depending on the market. It remained to be seen, but certainly if we were in the case where effectively we put the expansion of wholesale capacity on hold we just ran these facilities to optimize profitability, then I think you see some nice upside in the numbers.

Andrew Semple

Hey, just to follow-up any timing on that or?

Anthony Georgiadis

Timing on which?

Andrew Semple

Some operating leverage or are we still looking at rapid growth all the way through 2019?

Anthony Georgiadis

Yes, it’s hard right, because with the number of markets we were operating facilities. I mean each facility is at a different place and its different stage of the growth curve. Again I think if we put kind of expansion on hold and just continued to optimize these facilities I think you see a pickup certainly on the gross margin side of the business, but look we try to react to the market. Perfect example, Massachusetts demand continues at the pace if it’s at and where we are sitting on a bunch of out of stocks we are going to have to react quickly to it. And if it makes sense to the shareholders we will go ahead and invest the capacity even if it means in the short-term, we have got slightly lower gross margins than we would like.

Andrew Semple

Great. Thanks for taking my questions and congrats again on the great quarter.

Ben Kovler

Thank you.

Operator

Your next question comes from Andrew Burke from Burke Equities [ph].

Andrew Burke

Hello. I have a quick question. So same-store sales, do you see – so your strategy is when you go in to all these places what percentage of same-store sales each quarter once they are in is the expectation? So once you lay a store and do you expect to be the same-store sales and I guess quarter by quarter would be 8% to 10%, what sort of the expectation you have as the investment on new store?

Anthony Georgiadis

Yes, a lot depends on which market, but in the newer markets where we put in stores we are disappointed with 8% to 10% same-store sales. We are talking same-store sales of 50 to up and above 100.

Andrew Burke

Okay, I am looking at an example.

Anthony Georgiadis

No, I am just giving you some color. When a market is converged from medical to adult use, we see triple-digit same-store sales. Now, it depends on which market, that’s unlikely to last itself with another 100%, but there is definite growth. As I mentioned in the remarks, our store opened 3 years has a 40% comp. And in the quarter, the stores that have been opened in at least the year had a comp well over 50%.

Andrew Burke

What do you think Illinois would be at on same-store sales?

Anthony Georgiadis

I mean, I think the market out there forget our base, but I think the market itself is comping in the 40s, you can look at the business where it was last year to where it is this year on the retail and they give you nice data every month comping itself in the 40s is doing $12 million or $13 million in retail revenue every month, that’s a run-rate of $150 million and we believe the business opioid will add multiples of that as patients and consumers have access to the product. And certainly as the legislation changes, there is room for multiples and multiples on top of that as the business builds infrastructure, there is the opening of opportunity here.

Andrew Burke

Okay, alright. That’s my questions. Thank you.

Anthony Georgiadis

Thank you.

Operator

The next question comes from Robert Fagan from GMP Securities.

Robert Fagan

Thanks guys for a follow-up here. Just sort of maybe some more detail on Illinois will be interesting to have, do you guys have a timeframe when actually patients get to come into the system under opioid replacement therapy and do you have an idea of timeline when we could see next steps from the Pritzker administration like do we see maybe a new bill introduced by the House or Senate in any particular timeframe that you guys are anticipating?

Ben Kovler

Great. Thanks, Robert. The Opioid Replacement bill did a few things. One is it remove the background check and fingerprint process, so it removes a lot of red tape that under the previous administration and really been clogging the system, so that showed up in days wait time for patients who are sick to have access to the product over 100 days and we are seeing that wait time come cascading down. Second piece will be when the patient has an opioid prescription entering a dispensary of medical cannabis facility in order to have access to the product, the date was December 1 I believe it was extended to February 1, I don’t have the exact dates to how that’s put in the system with IP and the systems in place. So we see that in the next 90 days. And that will be an interesting inflection point. To your last question on the adult use, there has been an adult use build the last few years in Springfield. It’s been part of the dialogue. People are talking about it. It’s an interesting market here with 13 million people and we are excited to be part of it. We are operators at an industry in the state that stood up a program that was the first one of its kind really in the cannabis 2.0 regulated market, we have seen many states take the rules and regulations that Illinois has done, places like Maryland and Ohio, Pennsylvania and New York. So we don’t think it’s uncommon that the state – we don’t think it’s unheard of that Illinois could be another model as we go. But to predict what’s going to happen in Springfield is not my business and not going to make any calls there.

Robert Fagan

Okay, great. So there could be and it’s like a reintroduction of existing legislation that was already created for that purpose perhaps?

Ben Kovler

There is a lot of momentum, yes.

Robert Fagan

Okay, great. Thanks guys.

Ben Kovler

Thanks, Robert.

Operator

Your next question comes from Jim Young from West Family Investments.

Jim Young

Yes, hi. And I believe you mentioned in Nevada only that you are like 70% to 80% of the people aren’t aware of the availability? And my question is, have you embarked upon any marketing programs to address this issue and if so are you seeing any results at this time? Thank you.

Ben Kovler

Yes, thanks Jim. We are seeing the results of our investment up north in the Reno area in Carson City where we put dollars into marketing and in Vegas where we are just partnering with the crew there, we think there is a lot of upside to creating awareness, but at this time, I am not familiar with the exact Vegas marketing contribution.

Jim Young

Okay, thank you.

Ben Kovler

Sure.

Operator

There are no further questions at this time. I will turn the call back over to Ben Kovler for closing comments.

Ben Kovler

Great. Thanks everybody for joining us. We look forward to talking to you again with our fourth quarter and 2018 year end results sometime in April. Have a happy safe holiday season and talk to you soon.

Operator

This concludes today’s conference call. You may now disconnect.