Debra Borchardt
The Green Market Report sat down with Curaleaf’s CEO Joe Lusardi at last week’s MJ Biz conference in Las Vegas NV. This interview has been edited for grammatical purposes.
Debra Borchardt: The Select deal – you brought those numbers I guess to a new reality. Where are you now with that transaction? Because you’ve pretty drastically changed the valuation on that.
Joe Lusardi: I’m not sure I’d characterize it that way. What I would say is that we reduced the base consideration. The transaction, if they do what we think they’re going to do, will be 90 million shares. So it’s just, we restructured it to de-risk it and make some of the consideration an earnout. And we thought that that was the prudent thing to do given what was going on in the vape environment.
Now you’re maybe aware that the Massachusetts vape ban lifted today. The CDC is saying that we’ve already reached the peak of people showing up with lung disease. And that started the decline, which all points to the fact that the problem is largely from the black market. So we’re actually pretty confident in that category overall, and that consumers are going to come back to that form factor, and we feel pretty good about the transaction, to be honest. And I think it’s also important to know that the Select brand is not just the vape brand, it’s a family of products. So you’re going to be seeing a number of new products from Select over the coming months. One is a gummy that’s now available in a couple of markets. You’re going to see a spray, a tincture, and a couple of other novel form factors in the Select brand. So we feel good about the transaction.
Debra Borchardt: Were you surprised at all with any of the Select sales numbers when you really started to peel back some of the layers on Select? Because I had heard a lot of rumors out in the market about Select before you guys got interested in them.
Joe Lusardi: There’s no manipulation of the numbers. I mean we did a pretty thorough diligence of the business. What I would say is that they clearly felt the impact of the vape crisis. We did a thorough vetting of the transaction before we did the deal. We’re very optimistic. Again, I said that consumers are becoming more aware that they should buy regulated products. Select’s whole brand ethos is about safety and quality, and I think you’ll continue to see that as they pioneer new hardware and new products. So I think we felt very good with the transaction. We’re trying to close it on January 2nd. We’re working with regulators right now. We’ve cleared the DOJ HSR review, which is a pretty big event. So everything looks to be on track for early January close.
Debra Borchardt: You just put in a new executive, Joe Bayern, a president that was from INDUS Holdings, but he seemed like he had mostly a CPG background. We’re seeing a lot of that within the cannabis industry, this whole hiring of CPG executives. What is the thought process for you guys behind that?
Joe Lusardi: I would characterize Curaleaf as an early-stage consumer product company. And I think people that come out of that industry, that have a depth of knowledge and building brands, building infrastructure and taking companies from small to bigger is highly relevant for where we are in our growth curve. So I’m ecstatic that he joined the team. He’s a bit of a unicorn in that he also had cannabis experience. But that’s not why we hired him. We hired him for his experience before cannabis.
It’s helpful that he’s been in the industry for 11 months and we don’t have to explain Cannabis 101. But we hired him because he has worked on some very significant transformations of businesses, including Cadbury, Dr. Pepper, Snapple, he was on the senior team that built VOSS Water, which is now a premier global water brand. So he’s a very capable executive, has skills that I certainly don’t have. And it’s going to be a huge addition to the team.
Debra Borchardt: So you just mentioned that Select has got new products coming out. What’s really your strategy then for 2020?
Joe Lusardi: The marketing people would kill me if I say too much more. But what I’ll tell you, we really think that consumers are coming to cannabis and they’re looking for a variety of form factors. So you know, flower already represents less than half the sales and in most states, vapes are coming out strong and the edible category continues to grow. And so I think that’s where you’re going to see a lot of development in 2020, particularly for brands like Select. And I think that those products are really exciting because they’re consumer packaged goods, right? And so they lend themselves to marketing, form factors, predictability, consistency, and really brand building. So that’s why we’re really excited about what we have ahead of us.
What makes Curaleaf unique is that when we close Grassroots in the spring, we will have a platform unlike any other cannabis company really in the world. And what’s really exciting is we’re going to take the number one brand from the West Coast and move it all across the United States. So Select will be the number one brand in most major markets in the country for 2020, and no one else is going to do that.
Debra Borchardt: When you look at Illinois and Michigan, everybody’s saying Michigan is going to be the next big market. Oh no, it’s Illinois. Which is it?
Joe Lusardi: It’s Illinois.
Debra Borchardt: Illinois?
Joe Lusardi: That’s not debatable, it’s 13 million people in 55 stores. The numbers stack up really well. It’s just math, I’m not a genius.
Debra Borchardt: But I’m sure you’ve heard people say the same thing like, “Oh, Michigan is going to be the big one.”
Joe Lusardi: Look, I think Michigan is a really interesting market. It has a very prolific caregiver market that has a huge amount of patients in the state. It’s really, really going to come down to how the market structurally changes, because you have a lot of what I would say, activity, that hasn’t always necessarily fit within the framework or the regulations. There’s been a lot of caregivers and a lot of dispensaries that are operated that were not fully licensed by the state. And so if they can corral all that activity and really push it out through the regulated channel, unlike California, then Michigan has a chance to be a very big market, a regulated market. There’s no denying that both Michigan and California are big cannabis markets, that’s for sure undeniable, but can they be good regulated markets? We’ll see. California clearly is struggling with that concept.
Debra Borchardt: And Massachusetts recently started their adult-use sales. Everybody was saying, “Oh, all the New Yorkers are going to go across the state lines, and that really doesn’t seem to be happening. I think a lot of people thought that Massachusetts was going to be the domino that was going to tip a lot of the other Northeastern states. And that doesn’t really seem to have happened.
Joe Lusardi: Massachusetts. My home state has clearly not lived up to expectations in 2019. I would say that that was largely driven by factors out of the operator’s control. It was really driven by how the government rolled out the program. I think that only now the state has 30 stores open. So this…
Debra Borchardt: And they’re disappointing. I’ve been in a couple of them and I’m like, “You got to be kidding me.” But I’m used to going to California dispensaries, and such.
Joe Lusardi: I mean California has had a 20 years quasi-legal marijuana market. So you’re not going to get there tomorrow. But it’s also true that because Massachusetts has been, I’ll say deliberately in rolling out the program, it’s supply constraint. So you don’t have a diversity of manufacturers. You don’t have a diversity of growers. You don’t have a diversity of stores, there isn’t a really prolific wholesale market.
It’s a very challenging operating environment right now. The early numbers are promising. I think 2020 will be a big year for Massachusetts. It will be a big leap forward. We just opened our first adult-use store in November. We’re going to open up two more, one in Provincetown, we think in early 2020 and then another in the state. So it’s going to be a good year for Curaleaf and I think that as more operators get open, the market will develop, there’ll be more specialization in manufacturing. There’ll be more products, and the shelves will fill up, and it’ll be a more wholesome retail experience, but it’s unreasonable to expect it will be like California. It’s just, we don’t have that history. Right? The East Coast has been very deliberately rolled out with a limited number of players, very capital intensive.
Debra Borchardt: Very, very conservative.
Joe Lusardi: So it’s going to take time. But I mean anecdotally, if you go to the stores out in the Berkshires and you’d go in the parking lot, there’s a lot of New York license plates in those parking lots. And what I would also say is that I do think it will be a catalyst in 2020 because it’s putting a lot of pressure already on Connecticut. If it had rolled out the program faster, the pressure would have been greater. But Connecticut clearly needs to address a massive budget shortfall and I think they’re going to look to cannabis as one avenue.
Maine is going to go adult use this spring. Governor Mills has been fantastic and is really driving the program. So you’ll have two Northeast states, Connecticut is under a lot of pressure. New York, the dialogue is going to be very active in January through March, I mean the Lieutenant Governor came out today and said that it’s long overdue. So that’s interesting. And Governor Murphy in New Jersey said he’s going to take another crack at it, so it’s going to happen. Governor Wolf in Pennsylvania supports it. Progress is not linear or sometimes quick, but I genuinely feel like maybe the dominoes are falling, not as fast as people hope, but they’re going to fall.
Debra Borchardt: So it sounds like you’ll be ready to put a close to 2019. 2020 looks a lot more promising.
Joe Lusardi: I have to say for Curaleaf, despite the pain in the equity markets, this is a fantastic year for our business. We had a major inflection point in Q3 we showed 30% top-line growth for the second quarter in a row, we’re adjusted EDITDA positive two quarters in a row. We’re opening stores, we’re executing on our business. We’re turning all of the investment we’ve made into cash-generating assets. So this is the best year in our company history. I mean, it was really a great year, operationally. 2020 sets up to be even better.
