Cresco Labs Inc. (CRLBF) CEO Charlie Bachtell on Q1 2020 Results - Earnings Call Transcript

Cresco Labs Inc. (OTCQX:CRLBF) Q1 2020 Results Conference Call May 28, 2020 5:00 PM ET

Company Participants

Aaron Miles - Vice President, Investor Relations

Charlie Bachtell - Chief Executive Officer & Co-Founder

Greg Butler - Chief Commercial Officer

Ken Amann - Chief Financial Officer

Conference Call Participants

Derek Dley - Canaccord Genuity

Vivian Azer - Cowen

Michael Lavery - Piper Sandler

Jesse Pytlak - Cormark Securities

Robert Fagan - GMP Securities

Russell Stanley - Beacon Securities

Scott Fortune - ROTH Capital Partners

Pablo Zuanic - Cantor Fitzgerald

Glenn Mattson - Ladenburg Thalmann

Graeme Kreindler - Eight Capital

Andrew Semple - Echelon Wealth Partners

Operator

Good day, and welcome to Cresco Labs' First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded.

I would now like to turn the conference over to Aaron Miles, Vice President of Investor Relations for Cresco Labs. Please go ahead.

Aaron Miles

Good afternoon, and welcome to Cresco Labs' first quarter 2020 earnings conference call. We look forward to speaking with you today and discussing the great progress we have made as a company. I am joined on the call today by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our Chief Financial Officer, Ken Amann; and our Chief Commercial Officer, Greg Butler who will available for Q&A.

Prior to this call, we issued our first quarter 2020 earnings press release. This document has been filed with SEDAR and is available on our Investor Relations website at investors.crescolabs.com. We plan to file our financial statements and MD&A for the 3 months ended March 31, 2020 on SEDAR by May 29th.

Before we begin our remarks, I'd like to remind everyone 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 provision 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 of our forward-looking statements and risk factors can be found under Risk Factors in Cresco Labs’ public filings 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 U.S. dollars, unless otherwise noted; and all interim financial information, including disclosures for any pending acquisition, is unaudited.

And with that, I will now turn the call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

Charlie Bachtell

Good afternoon, everybody. And thank you all for joining us today. Since we held our Q4 earnings call a little over a month ago we're going to keep our prepared remarks on today's call on the shorter side, and leave more time for your questions. I'm going to start off with some of the highlights for the first quarter, then take a deeper look at the most substantial opportunities for Cresco this year, and discuss how we're executing on those opportunities so far. After that Ken will provide highlights from our financial results and discuss our capital position in more detail.

In the current environment, it is more important than ever to have strong fundamentals, a successful business model and a responsible capital agenda. As an organization we know that you win this industry by building the most strategic geographic footprint and by gaining meaningful material positions in those markets, and vertical integration is key in the short-term. But the greatest opportunity for creating long-term shareholder value is achieved by prioritizing the middle two verticals of the value chain.

Q1 was a great quarter. Despite all of the challenges associated with scaling our business, integrating M&A and operating in a global pandemic, we hit our internal budget, and the first quarter of 2020 was the most productive quarter in Cresco’s history. In Q1, we generated 18% sequential revenue growth on the exact same asset base as pro forma Q4 and we delivered our fourth straight quarter of positive adjusted EBITDA. Q1 top-line growth is actually 26% when you account for the revenue that would have been classified as intercompany between Cresco Labs and Origin House in Q4. We achieved these results while making substantial investments in the business that has set us up to deliver consecutive quarters of growth throughout the remainder of 2020. While I'm very proud of our performance in Q1, this quarter was about building, staffing, integrating and refining our operations in the largest and most important cannabis markets in the U.S. and we are very well-positioned to see the fruits of that labor in the coming quarters.

While recognizing the benefits of our expanding retail operations, we continue to prioritize the middle two verticals of the value chain, branded products and wholesale distribution of those branded products. Building capabilities in these two verticals takes more time and can be a slightly longer path to realizing revenue growth compared to a retail-first strategy. However, the evidence from well-established global CPG industries has continually demonstrated that branded products and wholesale distribution capture the majority of margins and offer the most long-term value. Cannabis will be no different and Cresco remains the foremost operator in these two verticals.

Using our strategy of operating in strategic states and creating meaningful material market positions in each, there are five specific ways we're delivering growth and return on invested capital in 2020. First is by dedicating our resources to markets with appropriate regulation and strong consumer demand. In Illinois, even with a full month of stay-at-home orders and social distancing, April cannabis sales were the highest they've ever been. Based on the current trend that the Illinois market will be between 3.5 times and 4 times larger in 2020 than in 2019, resulting in a nearly $1 billion industry in its first year and an estimated $3 billion to $4 billion market at maturity. In Pennsylvania, it's a similar story. The feeling of consumer demand is yet to be seen and is limited only by supply, which continues to support our thesis for investing in wholesale capacity.

While regulatory holdups has stagnated growth in Massachusetts and Nevada, we're able to adjust our focus and continue driving growth. This is why having a diversified and strategic geographic footprint is crucial. Earlier this week, we announced our transaction with Verdant Creations in Ohio. This is another perfect example of our strategy of work going deep in regulated, populated markets. Ohio's average weekly cannabis sales grew 33% from February to April. The additional burden would increase our vertical integration and market share in the seventh most populated state in the country. It's important to note that of our nine operational states, six of them are in the top 10 most populated states in the U.S.

Second, we're materially scaling our wholesale capacity to gain disproportionate market share in these states. I mentioned that in Q1 revenue grew sequentially on an identical asset base, but now we're shifting into a higher gear. To meet the outside demand in Illinois, we recently completed cultivation expansions across our three facilities, bringing our combined capacity to 215,000 square feet of cultivation space, the largest capacity of any operator in the state. The expansion represents a 6x increase in cultivation capacity from what we sold into the market in Q1. This additional canopy does not only increases our quantity of supply, but also gives us the flexibility to use different product forms to adapt to market conditions and consumer preferences, as this market matures. With a limited amount of incremental capacity reaching the market in Q2, the majority of this additional supply will be harvested and sold on a rolling basis through Q3. Despite not having any of this additional supply online in Q1, we still sold more units of flower than any other operator in the state.

In Pennsylvania, we recently completed the expansion of our cultivation and manufacturing facility in Brookville, bringing cultivation space to 88,000 square feet, which marks a 4x increase. Like Illinois, a limited amount of the incremental production will hit the market in Q2, with the remaining new supply to be harvested and sold on a rolling basis through Q3. As we roll off these major CapEx investments, the expansions in Illinois and Pennsylvania will display our operating leverage by significantly growing our revenue, our market share and profitability, with a limited need for additional SG&A.

Third, we're generating growth on the retail side of the business with increasing same-store sales and also with new store openings. Our total retail revenue grew 87% quarter-over-quarter, bringing our retail share of our total revenue to 43% in Q1. While COVID has upended most traditional retail industries, our customer throughput has never been higher, even compared to the first week of the year when adult use was legalized in Illinois. We believe the true test of the company's COVID response will be seen in the Q2 results, not in Q1. In Illinois, our order fulfillment is up by nearly [40%] since the pandemic started. We quickly learned how to adapt to the new normal of a modified retail environment and build better tools to support omni-channel ordering.

In April again with the same operational footprint we realized our highest ever share of the Illinois retail market because we developed our Sunnyside platform to fulfill COVID requirements and consumer needs. With an expected doubling of our retail footprint in Illinois by year end, we're poised to gain even more retail market share in the state where we also have the largest wholesale advantage.

As we recently announced, we just opened our sixth and seventh Sunnyside retail stores in Illinois. Sunnyside Illinois is the first adult-use only dispensary in the City of Chicago and Sunnyside Danville is the first adult-use only dispensary in Eastern Illinois.

In Pennsylvania, our revenue growth rates have returned to pre-COVID trends and our category mix is improving with increasing flower availability. We witnessed basket sizes jumping nearly 25% when the pandemic set in, but we've also been able to sustain those purchase levels all the way through Memorial Day. We licensed for three more retail locations in the state and expect our next store to open in Philadelphia during Q3. For the nine stores across our footprint that were opened in Q1 of '19, same-store sales increased 144% in Q1 of 2020. And based on these strong results, we're pleased that our newly improved owned retail model is offering strong returns and outperforming historical averages.

Fourth, we're executing in California. Q1 was the first quarter that we consolidated earning California assets into our results. While this boosted revenue, it also temporarily impacted margins as we worked to tailor the assets to function in line with Cresco's California growth strategy. As mentioned on our last call, our team has worked to further optimize the distribution platform, capturing synergies, lowering costs, and growing the operating leverage within the state. In addition, we've also optimized fleet logistics, implemented business intelligence tools to better understand cultivation costs, and enhanced accounts receivable measures.

As a result of our team's efforts, we expect to not only grow revenue on the Continuum platform, but also generate an increasing contribution to adjusted EBITDA throughout the year. As we've turned to lower performing partner brands on the platform, the result has been a significant increase to the overall sales growth. Excluding bulk and exited partner brands Continuum was up 36% sequentially in Q1. The growth was driven by owned brand up 38%, with Cresco brand leading the charge up [40%] quarter-over-quarter.

As an organization we know that to build a truly national cannabis brand winning in California is a prerequisite. We've said all along that the acquisition of Origin House gives us the best cannabis distribution platform in the largest cannabis market in the world and this has remained true. Our California team has done an incredible job on the integration. And we look forward to seeing these efforts reflected in our financial performance in the quarters ahead.

That said, we're focused on operating more efficiently across all of our markets as we scale. As demonstrated by our results in Q1, we've driven organic growth in our wholesale business by our ability to flex cultivation and manufacturing assets and drive more revenue from the same base. Simply put, we’ve become a better operating company since the beginning of the year. Continuous improvement is key, especially as you scale the business. Getting more juice from the same squeeze is the sign of operational execution. To highlight a few examples of recent successes, in Pennsylvania with the same amount of FTEs and resources, we've been able to increase plant quoting by 195%. We've increased packaging throughput of flower by 140% and we've increased packaging of capsules and lotions by more than 50%. In Joliet, we ramped up edibles production increasing throughput by 50%, while simultaneously reducing the number of shifts. In California, we've increased our delivery success rate to 96%. And with much credit to the cultivation team members who have joined us from FloraCal, all of our cultivation facilities across the country are beginning to produce a greater volume, quality and consistency with each success of harvest.

In summary, it's been an extraordinarily productive few months at Cresco. I couldn't be more proud of our Cresco family for what we've been able to accomplish in Q1, how we've come together, how we've taken care of each other and the mountains we've moved year-to-date. The steps we've taken so far this year have put us on the path to grow revenue and achieve true cash flow profitability in the second half of the year. We're focused on the most strategic markets with the strongest consumer demand for capitalizing on opportunities in those markets by increasing our wholesale capacity. We're executing in California. We're operating more efficiently across the business. We're generating growth from new and existing retail stores, and we're establishing meaningful material positions in our markets.

I'll now pass the call to Ken, our CFO, to provide highlights from our financial results and to discuss our capital agenda.

Ken Amann

Thank you, Charlie, and good afternoon, everyone. I'll begin by reviewing the financial highlights from the first quarter, then discuss our balance sheet and capital agenda. Please note that all numbers are stated in U.S. dollars. As Charlie mentioned, Q1 was the most productive quarter in Cresco's history. We achieved record revenue and adjusted EBITDA and we did so while making substantial investments to secure our financial success. With these investments behind us, no material M&A transactions pending, increased capacity coming online in Illinois and Pennsylvania and additional dispensaries opening, we expect to deliver significant revenue profitability and growth in 2020.

Revenue in the first quarter was $66.4 million, up 215% compared to the same period of the prior year, an 18% increase quarter-over-quarter on an identical asset base as pro forma Q4. While we're pleased with this top-line growth, as Charlie mentioned, 18% sequential increase is actually higher when factoring in the $3.4 million of revenue that would have been considered intercompany between Cresco and Origin House in Q4. And in another words, if Origin House was consolidated in Q4, the combined business grew sequentially by 26%. While we do not intend to break out intercompany revenues going forward, it is important to highlight the growth of our position in California in Q1.

Overall, this growth was achieved without having any meaningful production capacity come online or any new dispensaries open. It was driven by our ability to squeeze growth from our existing assets. We generated 86% of our revenue in our three core states of Illinois, Pennsylvania and California in the first quarter. And while we believe these markets continue to represent the greatest near-term opportunities for Cresco, we're encouraged by the progress we're making in Ohio, Arizona and Massachusetts now that the adult-use sales have been reactivated earlier this week.

We have now completed our ambitious construction projects in both Illinois and Pennsylvania that have increased our cultivation capacity by 6x and 4x respectively. We will realize the effects of these expansions starting in Q2 and ramping up as we harvest new rooms on a rolling basis through Q3, which will provide for substantial revenue growth and increase Cresco's market share in both states.

Operational gross profit in Q1 was $32 million or 48% of revenue, compared to 51% of revenue in Q4. As we detailed on our last call, we did see an anticipated reduction in gross profit margin this quarter as a result of consolidating Origin House, but this was largely offset by improved margins in our two largest states, Illinois and Pennsylvania. We expect to return to 50 plus percent gross profit margins over the course of the year, especially as we leverage our infrastructure and continue to optimize operations in California.

First quarter SG&A expense was $46.7 million. During the quarter, we incurred $11.8 million of one-time costs, primarily associated with closing our outstanding acquisitions as well as $1.4 million of non-cash costs related to share-based compensation. Removing these one-time and non-cash costs, our operating SG&A was $33.4 million or 50% of revenue. SG&A was flat compared to Q4 as a percent of revenue. But as revenue ramps in our key states and we continue to make operational improvements across the business, we expect that SG&A as percent of revenue to decline materially in future quarters.

I'm proud to say that we delivered our fourth consecutive quarter of positive adjusted EBITDA of $3.2 million in Q1. During the quarter, we invested in both CapEx and OpEx to continue building our lasting positions in the middle two verticals of the value chain. Looking ahead, we anticipate increased profitability in the remaining quarters of the year, as we bring additional supply to market and continue to rationalize and grow the California business. Net loss in the quarter was $13.4 million. As net income includes the impact of biological assets, depreciation and amortization, taxes, interest and one-time charges, we continue to believe that adjusted EBITDA is a best measure of our performance. For further detail, we've provided a reconciliation of adjusted EBITDA in our earnings press release.

Turning to the balance sheet. We ended the quarter with $68.6 million in cash and cash equivalents. As anticipated, cash utilization was elevated in the quarter as we completed significant investments that will drive Cresco's future growth. Q1 CapEx was $41.7 million, driven by the expansion projects in Lincoln, Kankakee and Brookville as well as several other simultaneous construction projects across our platform. We also had $46 million in outflows in Q1 associated with the cash consideration to close the acquisitions of Valley Ag and Hope Heal Health. That said, we now have no material M&A transactions pending and forecast significantly less cash outflows from investing activities in the remainder of the year. Any incremental CapEx for cultivation expansions will be funded through sale leaseback transactions, similar to the one we've recently completed in Michigan, which added $16 million in non-dilutive capital or some positive cash flow from operations expected in the back half of 2020. It's important to note that there is also a timing difference on the reimbursement of a tenant improvement allowance for one of our cultivation expansion projects, which resulted in us receiving $10 million in payments subsequent to the end of the quarter.

Cash flow used using operations was $40.1 million in Q1, which includes approximately $11.8 million in one-time costs, mainly associated with the closing of 3 acquisitions and our credit facility and $8.2 million of investments in working capital substantially related to increased packaging and hardware inventory. When COVID-19 began, as a precaution, we took steps to shore up our supply chain to ensure that we have sufficient resources to weather a potentially prolonged disruption. Thankfully, we haven't seen any meaningful disruptions to our supply chain to-date, and we started drawing down on this inventory.

Our efforts during the first quarter have set the stage for strong continued growth for the remainder of 2020 and beyond. In light of the COVID-19 pandemic, now more than ever is the time for financial prudence and laser focus on the markets offering the highest returns on invested capital. We have an enviable footprint with ample organic growth opportunities and we're focused on gaining meaningful, material positions within these markets. The greatest opportunity for creating shareholder value is achieved through vertical integration and prioritization on the middle two verticals of the value chain. And looking ahead, we expect to drive substantial revenue and profitability growth as we execute on our strategy.

Thank you for your time today. I'll now hand the call back to Charlie for final remarks.

Charlie Bachtell

Thanks, Ken. Despite the challenges presented to the industry as a result of COVID-19, we remain confident in Cresco's growth trajectory this year. Our work over the last six months has culminated in the completion of some of the largest indoor cultivation expansions ever seen in the sector. And we're so thankful to have these projects behind us. Consumer demand is strong and we're serving more retail customers today than we were in the pantry loading phase leading into the stay at home orders. From a regulatory perspective, the industry has experienced positive outcomes at the state level with governors reaffirming the status of cannabis as an essential business, and at the federal level, with the SAFE Act being included in the house with latest CARES 2.0 bill.

Thank you again to the Cresco family for managing through what has been an incredibly unique and challenging set of circumstances. 2020 is going to be an exciting year for Cresco. And I very much look forward to speaking with you again on our Q2 call. As always, we appreciate your support. And we hope you and your families are safe. Thank you for your time today. I'll now ask the operator to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Derek Dley with Canaccord. Your line is now open.

Derek Dley

Can you just talk about what you saw in Illinois within the adult-use market in terms of the physical restrictions that were put in place during COVID? Wondering if you can kind of break down what you saw in terms of basket size, traffic size, and even if you could give us some colors in terms of the penetration of your customers that were walk-in, that were curbside, that were using your online platform et cetera?

Charlie Bachtell

Thanks for the question. As it relates to the impact of COVID at a retail level and sort of the physical components of it, without a doubt, there were a lot of process modifications and physical components to the process modifications too that needed to be put in place to appropriately manage the environment and the safety of the team members and the customers. In that of course social distancing is probably the overarching component of it. So, matters were put in place to ensure social distancing. But across the board as you could expect, it modified the way that we engaged with the consumer, and it required that we minimize to the greatest extent possible sort of the face-to-face interaction and shift into this omni-channel sort of approach, a virtual approach. Luckily for us, we’ve built the technology over the last year or so, for really a live -- a real time online ordering platform that was tied to inventory so you didn't have scenarios where people would order online and then they'd show up and it was gone. It was ordered online, it was removed from inventory, it was set aside and then they were notified when it was ready to be picked up.

So I think what you'll see from -- and Greg is going to add some additional detail to this, but what you saw from us was a pretty marked improvement in figuring out how to do that as we got more and more comfortable, and we had real life data to be able to analyze. So we had -- we identified a few different levers that we could pull on to really increase throughput and increase the success rate, also the online ordering platform. Walk ups were minimized to the greatest extent. And on the medical side, we still allowed for walk up orders and in person ordering, but we switched to 100% of adult-use ordering to online. Greg, do you want to add any additional color?

Greg Butler

Sure. And thanks, Derek. I think I’ll hit quickly on your specific questions around do we see anything on major ticket transaction changes and usage, to Charlie's point, what we saw in medical markets is the medical market actually stayed relatively constant since we restarted the year, both on average transactions per week and average basket side -- basket sizes, clearly saw a little bit of growth. Mid-March as I think people were worried about what was going to happen with stores, were they going to close. And so they started buying inventory and then that kind of washed out in the following week and then we're back to a stable perspective on medical. And on adult-use, to Charlie's point, absolutely correct. We did see in the first couple of weeks some pullback on people going to the stores but I will tell you we are now starting to see some of our best days ever as now customers are coming back. We're fulfilling both through online ordering, pick up at our stores and drop-in for medical patients. And so, we are getting pretty close back to where we were coming into the COVID crisis. And so, it emphasizes two points. One is, demand for cannabis in Illinois remains incredibly strong. And the more that we can safely allow patients and consumers to access product at our stores, we will be able to continue to drive incremental growth.

Operator

Thank you. Our next question comes from Vivian Azer with Cowen. Your line is now open.

Vivian Azer

Hi. Thanks so much. I hope everyone continues to be safe and healthy. I just wanted to touch on California, Charlie. Nice growth concerning there wasn't distribution expansion. So, the question and the follow up or a two part question if you will. Number one, as you guys worked through the disruption in California, can you offer any incremental color around just the operating landscape there? We've heard that's been a challenging market broadly with COVID. And then the follow up is, can you just remind us where you are from a distribution perspective, ACV as a measure that we would traditionally use in traditional consumer packaged goods. And so, probably what percentage of targeted dispensaries are you in now and how do you see that evolving? Thanks so much.

Charlie Bachtell

Thanks Vivian. I'm going to hand that question to Greg. He has most line of sight on it.

Greg Butler

Hi Vivian, thanks for questions. So, let me take each part of your question by parts. I think your first one was just color on the California market. As you know, California still remains the largest cannabis market in the world and probably one of the most competitive markets in the world. But I think one thing that's often overlooked when we talk about the complexities of California is that, the illegal market is still healthy and growing. And if you look at Q1 of this year, this is coming from BDS' most recent data, not only California is a market with quarter-over-quarter growth in Q1, but you're also seeing sustained month-over-month growth in the market even during COVID. So, similar to the conversation we just had on Illinois, demand in that market is still there. Retail is figuring out how to service that demand and overall we're seeing really good quarter-over-quarter, month-over-month growth in the market. And also, if you look at kind of pre-COVID, I guess you might say COVID start and COVID now, you are seeing average daily sales increasing across counties, across the state with SoCal experiencing the highest growth. And so overall, we are some on a upward trend in the California market that we think is being sustained as we look into future quarters.

From -- I think your second part of your question was ACV percentage. Absolutely, we track that. So two things that we do with our portfolio is, brand velocity and distribution percent ACV. Velocities on our brands continue to grow. So, we're really encouraged by that, because I think as we talked last time Q1 was launch our brands. But now as we're seeing brands get the doors, velocities increase and customer orders repeat, those are all really encouraging signs for new brands. And from an ACV perspective, right now, the Continuum platform reaches about 80% of customers in the state. And already in Q1 we're getting to at least 50% of that portfolio on continuing with our brands.

Operator

Thank you. Our next question comes from Michael Lavery with Piper Sandler. Your line is now open.

Michael Lavery

Thank you. Good evening. You mentioned your strategic priorities, and one of them is turning California into a center of profitable growth. Can you just give us some sense of how far it might be from profitability and what are the key things you need to get there?

Charlie Bachtell

Thanks, Michael. I appreciate the question. We're going to give that to Ken.

Ken Amann

Sure. Since the closing of the Origin House transaction, we have been focused on capturing cost synergies and optimizing our operations across California. The teams have come together and are executing on our plan for cost reductions. Since the close of Origin House in January, we've identified over $8 million of annualized cost savings, which will be realized beginning in Q2 and we'll really see the full impact of those exercises in Q3.

Charlie Bachtell

Greg, do you want to add some more color to that?

Greg Butler

Yes. I'm going to add more color. I think if I just conclude that, as you looked at where we are from the last call, we said that our goal was that we wanted to achieve a $7 million on run rate savings. We've executed against that to-date. And so we are -- that $7 million will continue. As we now move into the next area, we think there's incremental dollars for us to go get focused on two areas, one is some incremental labor opportunities we have around territory and back office synergies. But also we are now entering the phase where we'll be doing some facility efficiencies and so that also will help drive incremental cost savings to that $7 million that we have executed.

Michael Lavery

Okay, great. Thank you. And just on the sales split, you added Origin House, but then still have your share of sales from dispensaries actually increase. I assume that's driven by Illinois. But can you give us a sense of how you expect that split to look going forward? Is the first quarter pretty indicative of how the full year may look or is that going to continue to shift?

Charlie Bachtell

Thanks Michael, and this is Charlie to start. Some of that definitely has to do with the fact that we launched adult-use here in Illinois without the benefit of any of our own incremental additional capacity coming online. So, while others have completed some smaller expansion projects when it comes to the supply side, that brought more products into the marketplace but it wasn't ours, but that also gave us more products on our shelves to be able to sell. So, I would also be remiss if I didn't say that the new sort of leadership team and approach on the retail side has outperformed. It is phenomenal new ways of working, new processes in place. It's really refining our footing on the retail side more so than we ever had before. So, very encouraged by what we've seen there. And I think Ken has some additional details.

Ken Amann

Hi, Michael. This is Ken. So, the revenue split in Q1 was 57% wholesale, 43% retail. That was the highest percentage of retail that we've seen to-date, and that was largely based on the transition to adult-use in Illinois that did have a material impact on the overall quarter. But we do expect to return to roughly around 65%, 35% wholesale versus retail, with additional cultivation coming online in the back of the year.

Operator

Thank you. Our next question comes from Jesse Pytlak with Cormark Securities. Your line is now open.

Jesse Pytlak

Hey, good afternoon. Just on the operational gross margin. I appreciate the color you provided in terms of the step back with Origin House integration. But in terms of kind of the second quarter and as we go forward, like is it safe to think that the first quarter might represent a trough level or kind of still remains quite depressed in Q2 as well?

Charlie Bachtell

Thanks, Jesse. We’ll -- Ken will answer that one.

Ken Amann

Hi, Jesse, it’s Ken. So we did see a slight dip in our operational gross profit margin quarter-over-quarter. As we said earlier, that was very much anticipated with the consolidation of Origin House. However, as we work to integrate Origin House, we do expect margins to return to the 50 plus percent range as we optimize those operations in California and we bring on additional scale in Illinois and Pennsylvania. And then I think longer term we expect our margins to be consistent with the CPG category of roughly 55%.

Jesse Pytlak

Okay. And then just as a follow-up, I know you called out the kind of the 11 million of add back in the adjusted EBITDA reconciliation. But if you take out kind of the non-cash component, is the balance almost entirely acquisition related costs or are there some other chunks in there as well?

Ken Amann

Yes. That was primarily related to the three acquisitions that we closed in the quarter plus the credit facility. So you had an increase -- a spike in legal costs, professional fees, and advisory fees, all hitting Q1 associated with those transactions, which are now largely behind us.

Operator

Thank you. Our next question comes from Robert Fagan with Stifel GMP. Your line is now open.

Robert Fagan

Charlie, I think you mentioned some interesting statistics about Continuum platform growth during the quarter and I think I might've missed this, but if you could just maybe give us some comments around how -- I think you mentioned something like 36% sequential growth but excluding bulk sales, just to get a read on Origin House’s performance as the overall organic growth may suggest somewhat of a flat type of performance there if you could just add color would be great?

Charlie Bachtell

Yes, Robert, thanks for the question. I’ll have to pass to Greg to best answer.

Greg Butler

Yes. So let me give some context on how our different brands are performing in California quarter-over-quarter. Overall the platform from Q -- I think you saw this in the numbers before, from Q3, Q4, we saw a dip as we were rationalizing our brand to really get to a profitable platform, which has been our focus for that business. As we now look from Q4 to Q1, the platform is growing on a quarter-over-quarter basis. Cresco Labs brands is driving that growth up about 40% on that Q4 to Q1, but also one of the jewels of the deal that we got was also the incredible FloraCal brand, which also now we've been able to really generate some life into that as well. And we saw a growth of 30% on a quarter-over- quarter basis. So it’s some really strong growth of our “own brands”, but also of the partner brands that have stayed on the platform also showed really healthy growth on a quarter-over-quarter basis, driving double-digit growth.

So as we look to where we are, yes, we've rationalized down to what we now think is our healthy SKU mix and brand mix going forward, which clearly you're starting to see in this quarter’s results. But as we look to the future, we expect to continue that growth on those brands. And then also as we get to a healthy platform, we continue to look for other additional partner brands that are going to offer a scale.

Robert Fagan

Okay, great. And given the reopening of the recreational stores in Massachusetts very recently, I understand but can you guys give us your insight into what kind of pent up demand you're seeing, is there a huge rush for customers to come back to the stores? Any insight there would be great?

Charlie Bachtell

Yes. Thanks, Robert. This is Charlie. So at a high level very excited to see Massachusetts come back online with adult-use. That said, it's a modified adult-use, right, it’s curbside pickup only. That is different. That is a barrier to throughput. That again, you've got to create ways to optimize. We're lucky there. We've got a fairly good setup with our building and parking situation there where we can get pretty good throughput. But we're looking forward to the day that in-store transactions can resume. And we're bullish on that market. So I think that market coming into the summer now reopening to the extent that it has, the momentum is there, it's moving in the right direction from a pent up demand standpoint. Greg, you've got great line of sight on that.

Greg Butler

Thanks, Robert, for question. So just kind of building on what Charlie was saying. A couple things we're seeing. So obviously, we’re only a couple of days since we got back into allowing adult-use. And so, there's considerable noise in the data. But I can tell you from our own retail stores, amid that past, we've seen rates pick right backup on interest orders. And so clearly, there's consumers looking to consume and now coming back to the market. To Charlie's point, we're incredibly bullish on Massachusetts. We think there's great potential for us in retail and in wholesale. As we come back from COVID restrictions, coming into COVID, our wholesale business, we just started a launch and we saw a great traction across stores. Now that we're able to get back into those doors, we think we have a really competitive position in Massachusetts because of our portfolio. We're offering a portfolio of brands and forms, which our competitors don't have today.

And a prime example of that is our liquid live resin forms, where we think our brand has a great position to be a lead in that market and really define next gen vape products in Massachusetts. So to Charlie's point, demand is there, it's going to come back as more of the stores open up. And we're really excited about our retail position and our retail growth that we have ahead of us, and then also our wholesale position with our portfolio of brands to take some meaningful share in the market.

Operator

Our next question comes from Russell Stanley with Beacon Securities. Your line is now open.

Russell Stanley

First on the retail and I apologize if I missed it but can you provide I guess the latest timelines on Illinois sites 8 through 10 and the same with Pennsylvania. I think you mentioned filling in Q3 but what about sites five and six there?

Charlie Bachtell

Yes, sure and this is Charlie. I'll take that one. So, we were pleased to get number six and seven open here in the States. We announced over the past couple of days that Danville location did really well, yesterday was nice. It was a good opening. You always like to see just the execution and the ability of the team to handle an opening. So that was good, today's opening in River North, I swung by there this morning. We’re very excited to get that store open, just to sidetrack a bit. The opening of that River North store is really the sum of the culmination of our mission, right? We started this company 5 years ago or so with initiative normalizing and professionalizing cannabis and to be able to open up what will be a flagship type location at the corner of -- and Clark in Downtown Chicago and River North with literally sharing a wall with a Starbucks. I think I said 5, 6 years ago, one day we'll be opening up dispensaries right next to Starbucks and to be able to do that today, it was quite an achievement. And again, the way that it worked, it was in conjunction with the social equity focused adult-use law here in Illinois, a ton of community engagement, involvement and participation to get that open. It was a monumental occasion for us. And the team just continues to perform well here in Illinois. Friday was I think one of, if not the best day that we had year to-date. So it was a great momentum that we have on the retail side. As far as locations, 8, 9 and 10, we are looking to be able to open 8 and 9 here shortly. I think if not in June or right at the beginning of Q3.

Russell Stanley

Q3?

Charlie Bachtell

Q3. Right at the beginning of Q3. And then the 10th location is still TBD, that's our second location in Downtown, Chicago. I'm not a 100% sure there. That one was definitely impacted by the COVID delay in local approvals. We -- for example on that even the River North location, that location was ready to open mid-March, right when COVID hit. So the fact that we're opening it today, you can see even something that was teed up, ready to go, ready to open, already inspected, there was about a two to 2.5 months delay that was put on top of that. So, the second Chicago location was nearly as far along. So, that one is still TBD.

In Pennsylvania, yes, again, Philadelphia location beginning of Q3. Locations 5 and 6 still marking for this year, likely Q4.

Russell Stanley

That's great color. And just a bigger picture question around purchasing patterns and what you're seeing so far given the macro environment, are you seeing any sort of notable product shifts either in your own brands or on third-party brands that you carry in store? Are you seeing any shifts out of higher price products into a more mainstream priced products at this point?

Charlie Bachtell

I'm going to give that to Greg.

Greg Butler

Thanks. And thanks for the question, Russ. So, I'll try to give you some highlights on what we're seeing from consumer demand. I think as we moved into COVID, a lot of the hypothesis in this industry was that we were going to see a shift out of inhalables as more consumers were concerned about the respiratory impacts from COVID and perhaps that shift into other forms like edibles. As we've now gotten more weeks under our belt and looking at what's happening on consumer behavior, we're not seeing that. Inhalables continue to grow and continue to represent a meaningful share in the market. Edibles continue to grow in other forms, but they're not growing share per se. So, if you look at the consumer behavior from the major segments, you're not seeing significant share shifts between those as we go through COVID. Now, we're clearly seeing growth because cannabis across our markets in particular continues to grow, but not as significant in the data shift. From a price perspective, we always look at pricing and particularly we look at more established markets like Colorado, Oregon and California to understand if there's any significant price decline. And from a price per unit perspective you're not seeing significant shifts across the different price segments. And clearly in our stores as well, demand by price tier has stayed relatively stable as we as we continue to go through each week.

Operator

Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Your line is now open.

Scott Fortune

Good afternoon. Thanks for taking the questions. Real quick on M&A side of things. Can you provide a little more color on Ohio acquisition for retail stores, bringing max total five and your cultivation footprint to serve the Ohio market, kind of what level are these stores at? And then this is kind of the strategy for M&A going forward as you continue to look at Arizona and some of the other states to go deeper in those States?

Charlie Bachtell

Thanks, Scott. This is Charlie. Yes I'll answer the last part of that first. I think this is a really good example of the current M&A strategy. It just fits perfectly aligned with our overall strategy, right, which is that strategic geographic footprint and material, meaningful positions in each of them. We like having the highest market share in Illinois, highest market share in Pennsylvania. That's our story. And so we're going to keep executing on those lines. The additional four dispensaries that we'll be bringing on in Ohio, the structure of those, had to be structured in this way. Ohio has restrictions on the transferability of ownership within a year of a license becoming operational. So we worked with the regulators there. I think some of -- some other transactions had been announced last year in the Ohio market. And I think there were some ruffled feathers over the way that those were done. So this was done in conjunction with the regulator to make sure that everything was correct and they were comfortable with it. So, those are operating dispensaries, we've from the beginning sort of assisted to certain extent in helping them get off the ground and been there to make sure that they've been successful. So we'll be closing when we're permitted to close, we'll be closing on fully functional operating dispensaries there. And as you mentioned, that’ll bring us up to the max five in Ohio. I think it's important to note, in Illinois we've got 10 dispensaries. We'll be opening the max here is 10. In Ohio we’ll have five, in New York we've got the max four, in Massachusetts we’ve got one of max three open, but we will be opening a three. And then in Pennsylvania, we've got three open, fourth to be opened soon, licenses for six, but you could have up to 15 there. So we look forward to exploring opportunities to further our footprint in depth in the Pennsylvania market as well.

Scott Fortune

Thank you. And then real quick, is your cultivation footprint, I think you’re about what 60% penetrating dispensaries in Ohio as you look to add there or continue to penetrate more dispensaries in Ohio?

Charlie Bachtell

Yes, absolutely. I think that's a case of us optimizing our operations there. We mentioned in the report that we were doing some upgrades to that facility. The upgrades to that facility are going to allow us to increase production materially and with increased production you'll see that penetration rate increase, and it'll be in line with what you've seen from us in other states.

Operator

Thank you. Our next question comes from Pablo Zuanic with Cantor Fitzgerald. Your line is now open.

Pablo Zuanic

Thank you. One for Charlie and one for Ken. Charlie, maybe this is a concern for more medium, long-term. But looking at April data for Michigan, that market now is almost as big as Illinois. And I understand it would be a while before the Western states of Illinois or even South will be rec. But 25% of sales of Illinois rec market are going to out of state residents, right? And I suppose people in Indiana, Ohio can go to Michigan now and I think there's almost 95 stores there. So two part question for you. Is that something we should think about in terms of projecting the demand growth of Illinois? You could -- the market could lose part of that 25% that’s going to out of state residents, especially with Michigan becoming so big. And the second part, I didn't hear much of all your plants in Michigan. I mean I know it's into our portfolio, but what comes next, as I say it's a market that's as big as Illinois?

And then very quickly for Ken. Ken, I don't know if that question came up but any color in terms of cadence for the second quarter, it's a flat quarter, sequentially good given the context with COVID? And for the back half I know you've talked about 6 times, 4 times capacity expansion in Illinois and Pennsylvania. But in terms of run rate, assuming double capacity in terms of what you can get in terms of throughput of cultivation in Illinois and Pennsylvania. 2 times versus 1Q would that be conservative, or is that the right way to think about it? Thank you.

Charlie Bachtell

Thanks, Pablo. So, Michigan, I'm thinking back, so just I want to confirm that I've got these in order. So as it relates to Michigan, you're right the Michigan market has almost caught up to the Illinois market. But I would also say, if you think about Michigan market has been adult-use for longer than Illinois. Illinois is really supply constrained. The growth potential here in the state is significant. And Michigan has historically had one of the more I would say flexible medical programs, their legacy program there has been one of the more flexible. So Michigan has always served as an option for residents in the Midwest. So I'm really encouraged by what you're seeing from Illinois’ perspective of being a viable program and Michigan has always been that, I would say the more accessible option for anybody who lived in the Midwest. So I'm encouraged by Illinois’ strength coming out of the gates. I don't think Michigan will really serve as competition to it. I think Michigan has always been competition to it. So I wouldn't expect that to be increased.

As far as the Michigan market, you're right, that definitely is part of our portfolio and we did announce a sale leaseback earlier which is allowing us to move forward with the build out of the cultivation facility there. We absolutely are excited about our ability to deepen our footprint in make Michigan more of a material component of our platform. Like I said earlier, six of our nine states are in the top 10 from a population standpoint, Michigan is the 10th most populated state in the U.S., it's going to be a really nice market.

With that, I'll pass it over to Ken.

Ken Amann

Hi, Pablo. It's Ken. In terms of the Q2 guidance, you know that historically we haven't provided guidance in the current situation, with COVID it makes that process even more challenging. But I'll provide some thoughts based on results that we saw in Q1. Obviously, the 26% sequential growth that we experienced quarter-over-quarter is a large number that was driven primarily by the transition to adult-use in Illinois, and we won't get that same level of increase again. Also, the adult-use sales in Massachusetts were closed for much of the quarter and then recall that much of our cultivation capacity doesn't come online until the end of Q2 and then rolling through the end of Q3. But I think from what you've heard from us today, we have momentum building some of the largest markets in the country and we have significant supply coming online over the coming quarters to deliver material growth in the back half of this year.

Operator

Thank you. Our next question comes from Glenn Mattson from Ladenburg Thalmann. Your line is now open.

Glenn Mattson

Hi. Thanks for taking the call. So, most of my questions have been answered at this point. But given the opportunity, Charlie perhaps if you could just give your thoughts on what you're hearing as far as the latest -- or what your thoughts are as far as regulatory reform in some of your key states and just if you have any thoughts on the national picture as well? Thanks.

Charlie Bachtell

Yes. Thanks, Glenn. As I'm sure you would expect, I think there's a lot of momentum at the various states levels, right? You've got states that are looking at holes in their budget that weren't expecting to have holes in their budget and the states that already have medical programs that have been either successful from an overall size and scale standpoint, or at least from the perspective of “the sky didn’t fall.” It's a nice regulated program. There's professional operators in it, which gives sort of the ability of legislators to have that discussion about maybe a next phase of modification to an adult-use type program. We're encouraged by still in New York. I think New York, Pennsylvania are definitely viable states when it comes to migration towards adult-use. I think you'll see Ohio also starts to take a look at it, Arizona looks good for November. So it's all encouraging signs and it should be. I mean, it's so logical, it's so rational that more access to cannabis and especially the tax revenue that can be generated from it. The job creations are potential partial solutions to some big and pretty big problems that these states are going to have. I think you could have the exact same discussion on a federal level. My newly appointed role is as Chairman of NCR, which is an honor and I'm happy to be involved at that level. I can tell you that the conversations are happening. And again, like I said, as they should, it's not out of left field anymore. This is a logical, rational conversation that should be happening. This is an industry that can create a lot of jobs and a lot of tax revenue.

Operator

Thank you. Our next question comes from Graeme Kreindler with Eight Capital. Your line is now open.

Graeme Kreindler

Hi. Thanks for taking my question. One thing I wanted to follow up on, in the prepared remarks you mentioned that you're seeing higher basket sizes continue and you saw that go through to Memorial Day. So, I was just wondering if you could elaborate a little bit on the drivers of that. Is the adoption of delivery curbside pickup or online ordering help to keep that basket size higher or is this more just the changing consumer behavior that you see? Some more details on that would be helpful. Thank you.

Charlie Bachtell

Thanks, Graham. Greg is going to take that one.

Greg Butler

Hi, Graham. Thanks for the question. To give some context on that, from our remarks, we are seeing baskets grow. I think your point on curbside pickup and whatnot is certainly helping with tickets. So, if you thinking about tickets times baskets, equals our retail revenues, so that helps with tickets. For the basket driver really is as supply comes online in the market and we have access to more supply in market, not only total volume, but also across categories, what we know is consumers will buy across categories in the basket. So that's really what's driving the big chunk of basket growth in the market.

Operator

Thank you. And our next question comes from Andrew Semple with Echelon Wealth Partners. Your line is now open.

Andrew Semple

I just want to get your thoughts on SG&A for the remainder of the year, and your comments in the prepared remarks that you expect this to decline materially as a percentage of revenue. So I guess I have a two part question here. The first one being, is it fair to say that you expect SG&A costs to still grow but at a slower pace than revenue? And the second part of that question being, if I could just pull out Q2 and focus on that, where you have cultivation operations ramping up, but you're not getting there offsetting revenue, you’ve got a full quarter of the acquisitions you’ve completed and perhaps some COVID-19 related costs. Is that a comment that's more applicable to the latter half of the year? Or where would you expect SG&A as a percentage of revenue to kind of trend down linearly?

Charlie Bachtell

Thanks, Andrew. Ken is going to take that.

Ken Amann

Hey, Andrew, this is Ken. Thanks for the question. The increase in SG&A that we saw in Q4 was mainly driven by some investments that we made ahead of the adult-use in Illinois. On an absolute basis, there will be some step costs related to the opening additional dispensaries. But overall we expect OpEx to fall as a percentage of revenue over the course of 2020 and certainly accelerating as we get to the back half of the year as we complete that integration with Origin House and then we generate significant economies of scale in Illinois and Pennsylvania. I think, I guess what I would add to that as well is just in terms of free cash flow, what that means, from a top-line perspective, we detailed increased capacity leading to significant revenue growth in future quarters and we expect to gain leverage on the gross profit line with increased scale and optimization efforts.

Again, most of our infrastructure is already in place. There'll be some step costs related to those dispensaries but SG&A will decline in the back half of the year and this just leads to a situation where a higher percentage of each incremental dollar of sales should drop to the bottom line and drive free cash flow.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Charlie Bachtell for any closing remarks.

Charlie Bachtell

Yes, in closing, again, I just want to reiterate how proud I am of the team for what they've been able to put together here year-to-date. We all can understand this has been an incredible start to the year for all of the reasons that we mentioned on the call. Again, appreciate the support. Thanks for attending the call today. Hope everybody stays safe and we are looking forward to talking to you in Q2. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.