Good morning, ladies and gentlemen, and welcome to the Trulieve Cannabis Corp.'s third quarter 2021 financial results conference call. My name is Jamie, and I will be your conference operator today. As a reminder, this conference call is being recorded. At this time, I'd like to introduce your host for today's conference, Christine Hersey. Ma'am, please go ahead.
Thank you. Good morning, and thank you for joining us. During today's call, Kim Rivers, Chief Executive Officer, and Alex D'Amico, Chief Financial Officer, will deliver prepared remarks on the financial performance and outlook for Trulieve. Following the prepared remarks, we will open the call to questions. Steve White, President, will also be available to answer questions. As a reminder, statements made during this call that are not historical facts constitute forward-looking statements, and these statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecasts, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A, Risk Factors of the company's annual report on Form 10-K for the year ended December 31, 2020.
Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During the call, management will also discuss certain financial measures that are not calculated in accordance with the United States generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for Trulieve's financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that is an exhibit to our current report on Form 8-K that we furnished to the SEC today and can be found in the Investor Relations section of our website.
Lastly, at times during our prepared remarks or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future. This morning, we reported results for the third quarter of 2021. A copy of our earnings press release and an accompanying PowerPoint presentation may be found on the Investor Relations section of our website, www.trulieve.com. An archived version of today's conference call will be available on our website later today. I'll now turn the call over to our CEO, Kim Rivers. Please go ahead.
Thanks, Christine. Good morning, everyone, and thank you for joining us today. We are thrilled to report our fifteenth consecutive profitable quarter, driven by continued outperformance and record revenue. As we approach the end of the most transformative year in our company's history, we remain firmly on offense with an unrelenting focus on executing our strategy. Just over 6 weeks ago, we closed the Harvest acquisition, the largest U.S. cannabis transaction to date. As we outlined during our call on October first, this deal solidifies our position as the largest and most profitable public multi-state cannabis operator in the U.S. On a pro forma basis, the combined company's third quarter results would have been approximately $316 million in revenue and $121 million in adjusted EBITDA, the strongest among any reporting MSO this quarter.
On a standalone basis, Trulieve reported third quarter results of $224 million in revenue, representing an increase of 64% growth compared to last year. This growth was achieved with an industry-leading gross margin of 69% and Adjusted EBITDA of $98 million. Trulieve operates in 11 states across three hubs, where we now have a total of 155 dispensaries, 40% greater than our nearest competitor. Importantly, we now operate 47 dispensaries outside of Florida, compared to two just one year ago. Our industry-leading retail network is supported by over 3.5 million sq ft of cultivation and processing capacity. With market-leading operations in Arizona, Florida, and Pennsylvania, we are well-positioned to build additional scale and depth in our cornerstone states while redeploying profits to open and expand into new and emerging markets.
While our teams were working to close the Harvest acquisition, we did not slow down during the third quarter. Trulieve alone opened 7 new dispensaries, closed the Keystone Shops acquisition in Pennsylvania, launched new products, including the first line of concentrates using hydrocarbon extraction in Florida, introduced a new brand portfolio with Cultivar Collection, Momenta, Muse, and Sweet Talk product lines, announced a pending license award in Georgia, acquired an additional retail license, and launched wholesale operations in Massachusetts, and became the first operator to commence cultivation activities in West Virginia. Concurrently, the Harvest team opened 6 new dispensaries, purchased an option to buy a license in Arizona, secured sale-leaseback financing for the Hancock, Maryland facility, and arranged the sale of the duplicative license in Florida for $55 million in cash. Since the end of the third quarter, we've kept the momentum going.
In October, we opened a new affiliated retail location in Pittsburgh, Pennsylvania. In the past week, we were first to market in West Virginia, opening the first two medical dispensaries in the state in Morgantown and Weston. In Florida, 14 legacy Harvest dispensaries reopened as Trulieve-branded locations throughout the month of October. Those dispensaries are carrying Harvest-branded products such as Alchemy, Co2lors, Modern Flower, and Roll One, in addition to the extensive portfolio of Trulieve products, totaling over 750 SKUs across a wide variety of form factors. For Harvest stores that were open more than one month as Harvest and subsequently converted to Trulieve post-acquisition, we have already seen a 35% increase in their revenue run rate thus far. With the conversion of Harvest stores in Florida completed, we are focused on additional locations.
As of today, Trulieve operates 108 dispensaries in Florida, and we expect to open another 5 dispensaries by year-end. During the third quarter, Trulieve maintained the top position in our home state of Florida. Trulieve remains the largest operator in Florida as measured by every conceivable metric, including volume of product sold for flower and oil, number of SKUs, range of product categories sold, number of patients served, total employees, open retail locations, cultivation and manufacturing capacity, revenue and profit. According to data published by the Department of Health, between July 2 and October 1, Trulieve alone sold over 32,000 pounds of flower and more than 1.1 billion milligrams of oil respectively, amounting to more than 200% and 275% greater than our nearest competitor.
While we are proud of our achievements and acknowledge these impressive statistics, we are committed to continually setting the standard for operational excellence while remaining focused on delivering exceptional customer experiences. We are forging ahead with a series of initiatives centered around broadening access to cannabis products in Florida, capacity expansion and technology investments designed to further advance our leading position. First, we are proud to lead the way, further expanding access to cannabis products in the state of Florida with the first available concentrates manufactured using hydrocarbon extraction. Since the initial launch in September, these products have been very well received, so much so that we recently quadrupled hydrocarbon extraction capabilities and are building out additional capacity that will come online through the beginning of 2022. In addition, we continue our cultivation expansion efforts while also adding manufacturing capacity across several other product lines.
During the third quarter, we began operations at our new 55,000 sq ft Tampa production facility, which includes a larger edibles kitchen. We expect the new kitchen will be fully ramped by year-end, freeing up existing space for increased production. As the market leader in Florida with roughly 50% market share for over five years now, we have collected and analyzed data for roughly half of the total transactions in the market to date. This data offers us valuable insights into customer preferences and behavior that informs our decision making. One point of differentiation for our organization is continued investment in technology, including our SAP enterprise software system and customer data and analytics platforms. These tools afford Trulieve the ability to capture and utilize data company-wide, aid in SOX compliance, and enable patient and customer appreciation and retention tools.
We aim to maintain our position as the leading operator and purveyor of high-quality cannabis products with a customer-centric approach. We will continue to invest in Florida, adding cultivation, manufacturing and retail capacity so that we can deliver high-quality products and best-in-class customer experience to patients across the state. Florida remains one of the most attractive medical markets in the U.S., demonstrated by continued growth in 2021 on top of the accelerated growth experienced during 2020. Patient growth in the third quarter remained strong despite the end of telemedicine consultations in June, with an average of over 2,600 patients added per week. Due to our existing scale and depth, additional investments in Florida continue to deliver fast and favorable returns that we can redeploy and invest in future growth opportunities ahead of catalysts, including adult-use sales. Turning now to Pennsylvania.
In July, we closed on the acquisition of Keystone Shops, adding three affiliated medical dispensaries in the Philadelphia area to our retail presence. As we indicated during the October first call, we were not required to divest any affiliated cultivation or retail assets in Pennsylvania as part of the Harvest acquisition. In October, one additional affiliated medical dispensary opened in Pittsburgh. Pennsylvania presents a significant growth opportunity both within the existing medical market and with the potential future expansion to include adult-use sales. As of mid-August, Pennsylvania reported over 360,000 active patient certifications and more than $2 billion in cumulative dispensary sales since the program's inception. We remain optimistic that mounting bipartisan support will ultimately lead to legislative measures to allow adult-use consumption in Pennsylvania. Finally, rounding out the discussion of our key markets, let's turn to Arizona, our cornerstone state in the Southwest.
The Arizona market continues to develop and has outperformed our expectations since the launch of recreational sales in January. Since Harvest reported second quarter results in August, the team opened our sixteenth dispensary in North Mesa, purchased an option to acquire our twentieth license, and made considerable progress on developing a new upcoming retail location, which will be the only dispensary in downtown Phoenix. This market provides both an anchor to our operations in the Southwest and an opportunity to glean valuable insights in this growing recreational market. We are continuing to invest in Arizona, and as the largest retail operator in the state, we are well positioned ahead of the coming winter months and return of tourists and snowbirds. Following the recent debt offering and repayment of high cost and short-term Harvest debt, Trulieve has ample cash to fund our growth initiatives within this generational investment opportunity.
Over the next few quarters, we will continue to invest in our cornerstone markets, adding depth in our retail reach and scale in our cultivation and production assets. By fortifying our leadership position, we will increase branded products through branded retail stores while continuing to build our wholesale channel, broadening our reach ahead of future catalysts. In the coming year, more than 20 locations will be rebranded Trulieve outside of the state of Florida, creating a consistent experience across markets. In addition, we will strategically invest in emerging markets that offer attractive returns. While we continue to invest in further developing assets across our existing hubs, we are open to completing additional tuck-in and expansive acquisitions. Our hub strategy allows us to add bolt-on assets in our operational hubs, supported by our existing teams and infrastructure.
In new regions, our M&A activity centers around adding both teams and assets, as we did with the Harvest acquisition in the Southwest. Again, we will remain disciplined with our M&A strategy, pursuing profitable growth where we have an opportunity to acquire strategic assets in attractive markets at an appropriate price. In addition, we will continue to pursue opportunities in new markets through organic license awards. We remain focused on markets with attractive regulatory structures that will allow us to achieve optimal scale with consistent supply, quality and branding as part of our commitment to delivering exceptional customer experiences while pursuing profitable growth. Our third quarter results and recent actions demonstrate our commitment to our strategy and to our goal of building a sustainable and scalable business engineered for success. As a reminder, our fourth quarter results will include the full quarter contribution for Harvest.
Absent any contribution from Harvest, we remain confident in our 2021 guidance of revenue in the range of $815 million-$850 million and Adjusted EBITDA in the range of $355 million-$375 million. We will provide full year 2022 combined guidance when we report fourth quarter results in March. With that, I'll turn the call over to Alex for more details on our third quarter results.
Thank you, Kim, and good morning, everyone. This has been a tremendous year so far, highlighted by significant progress along several fronts, including operational execution, organic growth and expansion initiatives, and acquisition and integration efforts. We'll continue to build on this momentum through year-end and into 2022. As we fully integrate the Harvest acquisition, we'll be leveraging expanded capabilities across our organization, supported by a deeper bench to help successfully navigate the rapidly evolving landscape within our industry. We're proud of how far we've come and excited to keep it going into next year. As Kim highlighted earlier, we reported third quarter revenue of $224.1 million, an increase of 64% year-over-year compared to $136.3 million during the third quarter of 2020.
Third quarter revenue increased sequentially compared to $215.1 million during the second quarter, further adding to outsized growth in recent quarters. Trulieve ended the third quarter with 101 dispensary locations. As of November 15, Trulieve owns or operates 155 dispensary locations. The company achieved gross profit of $154 million or gross margin of 69% in the third quarter, compared to $144.5 million, or 67% during the second quarter. During the third quarter, we employed a targeted pricing strategy to preserve margin and retain the value of our brands and product offerings. In addition, gross margin was positively influenced by increased flow-through of material to finished goods despite macroeconomic labor constraints and the onboarding of additional capacity in all markets.
This was partially offset by increased third-party product sales and the inventory fair value step-up brought on by the acquisition of Keystone Shops early in the quarter. As stated in prior quarters, we expect gross margin will continue to fluctuate quarter to quarter, depending on inventory flow-through, product, and market mix. Turning now to operating expenses. SG&A expenses in the third quarter, excluding depreciation and amortization, were $79.9 million or 36% of revenue, compared to $61.5 million or 29% of revenue during the second quarter of 2021. Third quarter expenses included approximately $16.1 million associated with one-time share-based compensation and transaction acquisition and integration costs. The increase in share-based compensation expenses related to the one-time exchange of outstanding warrants to restricted stock units. The transaction, acquisition, and integration costs were primarily related to the Harvest acquisition.
Excluding these one-time costs, SG&A was 29% of revenue. As we continue to build scale and depth in cornerstone markets while expanding in new markets, we expect quarterly fluctuations in operating expenses as investments are made ahead of increases in revenue. Operating income for the quarter was $66.3 million, compared to $76.3 million earned in the second quarter. Net income was $18.6 million for the quarter, compared to $40.9 million for the second quarter. The sequential decline in operating and net income reflects the aforementioned one-time operating expenses and higher estimated tax provision for the third quarter. We expect quarterly fluctuations in estimated taxes, particularly within our high-growth industry. We generated earnings per share of $0.14 on a fully diluted basis. Absent one-time expenses, earnings per share would have been $0.26.
We expect transaction and integration costs will continue to impact reported EPS for the next few quarters. Turning now to adjusted EBITDA. For the third quarter 2021, adjusted EBITDA was $98 million or 44% compared to $94.9 million or 44% during the second quarter. This is attributable to the flow-through of our increased gross margin, partially offset by the increase in sales and marketing expense associated with our growing retail footprint. We ended the third quarter with a cash balance of $213.6 million, bolstered by $75.1 million in operating cash flow through the first nine months of the year. Subsequent to quarter end, we completed a $350 million private placement of 5-year senior secured notes at 8%, representing industry-leading terms for U.S. plant-touching cannabis companies.
We have retired $270 million of high-cost and short-term Harvest debt and $18 million of Trulieve notes payable. Our strong cash generation and financial profile provides flexibility to quickly capitalize on expansion opportunities, invest in organic growth, and go deeper in states where we operate. Company-wide capital expenditures year to date averaged just over $21 million per month in accordance with our plans. Expansionary CapEx investments will continue through year-end and throughout 2022 as we build scale and depth in line with market growth trends.
Fourth quarter investments will include allocation of capital to newly acquired Harvest assets. In closing, I'd like to express how proud I am of the team here at Trulieve, and how tremendous it has been to see firsthand the growth and continued evolution within the organization. I look forward to carrying this positive momentum into next year. With that, I'll turn the call back over to Kim.
Thanks, Alex. This has been an exceptional year to date at Trulieve, underpinned by the transformational acquisition of Harvest. We are exiting the year as a larger, stronger organization, well-capitalized and ready for the next phase of growth. While we have accomplished a great deal, it remains true that our story is just beginning. We are still in the early innings for Trulieve and the U.S. cannabis industry. The continued efforts to advance significant cannabis reform through legislation such as the SAFE Act, MORE Act, and the newly introduced States Reform Act highlights the increasingly mainstream acceptance of the cannabis industry in this country by the broader population, business and political leaders. In our view, it is only a matter of when and not if change will come.
Even as federal reform continues to build momentum, advancements at the state and local level are accelerating over time, broadening the opportunity set and delivering greater access to cannabis to an eager public. For reference, the U.S. legal cannabis market is expected to grow to $48 billion in 2026, up from $26 billion in 2021. The markets in which we operate today represent over 50% of forecasted sales and are expected to grow over 65% in the next 5 years. Within this context, Trulieve is uniquely positioned to meet the promise of this generational investment opportunity with an enviable combination of unmatched scale, operational excellence, strong financial profile and world-class team. Trulieve is poised and ready to define the future of cannabis. Thank you for joining us today, and as I always say, onward.
At this time, Kim Rivers, Alex D'Amico, and Steve White will be available to answer any questions. Operator, please open up the call for questions.
We will now begin the question and answer session. To ask a question, you may press star and then one using your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. Our first question today comes from Derek Dley from Canaccord Genuity. Please go ahead with your question.
Yeah. Hi. Good morning, and congrats on another set of strong results. I wanted to focus in on two states in particular. One, let's start with Pennsylvania. We've been hearing from some others about price competition in Pennsylvania, from what I get, namely on the value end. Can you comment on what you're seeing within that? The second part of that question, just in terms of incremental capacity coming online in PA, is your capacity online now? I would assume that would focus on the higher end cultivar side.
Thanks, Derek. As it relates to pricing in Pennsylvania, I think to your point, there's been a lot of conversation around pricing. What we believe and what I believe is that pricing in Pennsylvania started exceptionally high, and what we're experiencing is a normalization of pricing that happens over time and should happen over time in any market. Certainly value products appear to be more affected, which makes sense as, of course, quality separation occurs among pricing tiers. In Pennsylvania, historically, through our acquisition of PurePenn, we have been focused on premium products, and so we certainly have experienced, I believe, less pricing pressure than maybe some of the peer set. You know, moving forward, we do plan to bring additional capacity online.
As noted, we weren't required to divest any of the Harvest retail or cultivation affiliated assets in that state. Really the focus in Pennsylvania will be to bring increased branded products through branded retail over time. We believe that will provide significant upside as it relates to margin in that state, along with, of course, increased product availability that the customers are looking for from our brands.
Okay, great. That's helpful on Pennsylvania. Secondarily, on Arizona, and maybe you know, Kim or Steve can answer this one, but as the markets entered adult use here, what are the typical consumption patterns of customers in that space? Are you noticing that there's a material difference between new adult use customers and perhaps the previous medical customers?
Thanks, Derek. Generally the customers, the adult use customers look a lot like the medical customers. What you will see over time, and this is generally true, I think, of all markets that add adult use sales, that the recreational sales, the basket sizes tend to be a little bit smaller than the medical sales. Over time, you see a transfer of customers from patients over to adult use customers. In other words, the number of medical patients decreases as the recreational customers increase. We are seeing those patterns in the state of Arizona.
Okay, great. That's very helpful. Thank you very much.
Our next question comes from Andrew Partheniou from Stifel GMP. Please go ahead with your question.
Hi, good morning. Congrats on the great results, and thank you for taking my questions. You know, maybe thinking about Pennsylvania and Massachusetts, especially given, you know, you just entered Massachusetts wholesale market. You know, if we leverage Headset, we kind of see that the pricing in both markets at the retail level is similar. But at the same time, you know, we are seeing some pricing normalization, I think, as you put it in Pennsylvania, but Massachusetts seems to be a little bit more stable, even though it's on the limited license market there. I'm just wondering if you have any thoughts around that. You know, why do we see a kind of difference in trends in both of those states? And if you could, you know, provide any of your thoughts and color on that, would be helpful.
Thank you.
Yeah. Thanks, Andrew. So I think that first I would just caution against you know relying on any single dataset as we certainly have found some inconsistencies there. But you know understand that we deal with the best available that we have. You know I think that it goes back to what my comments previously around the fact of where things started in Pennsylvania and we may in fact be seeing you know a bit of a sort of pendulum swing there as again differences in tiers are established.
I do think in Massachusetts there are already existing pretty definitive pricing as it relates to quality, on a tiered basis across several categories in Massachusetts. I think that, you know, it's a little bit of a case study in, you know, pricing strategy and in consumer behavior across both markets. That's at least what we're seeing. You know, I think just to add a little additional color, we certainly are seeing the continuation, right, of barbell patterns across both markets. With Pennsylvania, I think part of that barbell is being established, right, which is a bit different than what we see in Massachusetts.
Appreciate that color. Maybe switching gears to new states and your outlook on that, you know, ideas around New Jersey, New York, Illinois, other states in that area. In New Jersey in particular, I believe and correct me if I'm wrong, but you were among the 2019 RFA medical applicants. You know, wondering if you had any updated thoughts around entering New Jersey or any of those other states. Does M&A make sense with the increased visibility on rec legislation and how that market will look in New Jersey or New York?
Yeah, I mean, as you know, we don't comment on, you know, any sort of specifics around M&A. We remain very bullish on the Northeast as a whole. We think and we like our position in the Northeast currently. We also, of course, as we noted in our prepared remarks, have very, you know, specific metrics around deployment of capital, whether it's through organic growth or through M&A. You know, this is in the Northeast. It's depending on how you draw your state lines, but West Virginia that we just opened this past weekend, I was at that grand opening, and I can tell you that there was an exceptional reception to the first store opening in West Virginia.
We served over 240 customers on day one, lines around the block, starting very early and going into the evening. You know, we're excited about our footprint. We are certainly poised to take advantage of additional opportunities as they become available, and remain bullish on the Northeast as a hub.
Thank you for that, and I'll get back in the queue.
Great.
Our next question comes from Russell Stanley from Beacon Securities. Please go ahead with your question.
Good morning, and thanks for taking my question. I guess my first question is just around the integration progress. Congrats on the rebranding of the Harvest Dispensaries in Florida. Just wanted to get your thoughts on how far through what must be an extensive process you are. I know you're only six weeks in, but I guess I wanted to get your thoughts on when you expect to be substantially complete.
Sure. I mean, you know, I think from our perspective, and I'm gonna let Steve comment on this as well. But from our perspective, you know, I think I've noted previously that Steve and I, when we first started having discussions about the possibility of a transaction and, you know, we're in sort of the final wrap up stages of the LOI, we set a priority of alignment across teams as really sort of a defining priority. In other words, through the transaction, through diligence, if things started to get offside, we were gonna have another conversation about whether or not it made sense to continue because that's how important we believe that alignment really is throughout the process. I think that was well served.
Our teams have gotten shoulder to shoulder very quickly and are working together. I think that the evidence there is in the fact that we haven't had any significant departures of what we have identified as key team members. In addition, as you mentioned, stores are being converted, product lines are coming through on a combined portfolio basis, which is again a key thing for us as we get through integration. We'll certainly have additional work to do through 2022, you know, bringing systems together over you know 11 markets is no small feat, and we are certainly heads down working on that as we speak.
Of course, on my prepared remarks, we talked about the fact that we're going to begin store conversions across that combined platform. In addition, we'll be working through increased capacity to bring that branded product portfolio on a combined basis across the combined platform as well. Steve, do you have any other comments there?
Sure. I think, Russ, it's important to remember that
Just for context, that we're actually months away from what the expected close was. In other words, you know, we shouldn't even be having this conversation yet. We did find a number of areas in which the two teams, where we could bring the two teams together more quickly, and we could actually get to the close faster. It's been a point of emphasis for both organizations, obviously, because it's a very big deal. I would say across all aspects, every way that you're gonna look at the integration process, we're very much ahead of schedule and have demonstrated that the teams together are executing maybe even better than they were independently.
That's great. Maybe just one more and I'll get back in the queue. On Massachusetts, I think you've recently entered the wholesale market there. Just wanted to get a sense if you could share perhaps penetration numbers, where you're at and perhaps any targets on penetration, be it by year-end or H1 or whatever you can share on that front would be helpful.
Yeah. Thanks, Russ. You know, as you noted, we just launched our wholesale operations in Massachusetts. We have been focused on making sure that we have the right product mix with both Trulieve branded products as well as our national partner-branded products. We recently brought to market both Bhang and our partner Blue River, which we think are two differentiators for us in Massachusetts, alongside our very well-received Cultivar Collection flower brand and our high-end concentrates brand, Muse. We feel like we have the product mix where we want it at this point.
Now we're ramping production scale to meet demand, as we get to understand what those demand profiles look like for each one of those categories. I can say, and I'm not in a position to share particular numbers on this call, but I can say that we, in terms of number of doors, we are hitting our targets and are continuing to ramp, as again, we bring that capacity online.
That's great. Thanks for the color. I'll get back in the queue.
Our next question comes from Matthew McGinley from Needham & Company. Please go ahead with your question.
Thank you. Based on the pro forma numbers you provided in the third quarter, it looks like Harvest revenue declined by about 10% quarter-over-quarter, and EBITDA dollars would've been down a little bit as well. I assume that was probably mostly Pennsylvania and some Arizona, but can you talk about what happened in those states and I guess how those trends fared in the fourth quarter overall with the Harvest business?
Hey, Matt. Yeah. Keep in mind when we do a pro forma, we're taking out the impact of intercompany. So when you add that back quarter-over-quarter, Harvest was down just slightly over 1%, actually.
Matt, this is Steve. Specific to your questions about Pennsylvania and Arizona, what we can say is that we actually saw a quarter-over-quarter improvement in our retail sales in both of those markets, that the marginal decline quarter-over-quarter was mainly attributable to, or entirely attributable to Nevada sales.
Okay. On the gross margin side, how much of a headwind was labor inflation and labor availability in the gross margin in the third quarter? I know that was something you noted as a bigger issue in the second quarter, and it appears to have largely dissipated in the third, but I'm just kind of curious what that looked like overall, and I guess more importantly, like what does that look like into the latter part of this year?
Yeah. Thanks, Matt. As we noted correctly in Q2, certainly, that was a headwind for us in Q2. It was also, you know, there in the beginning of Q3. We compensated for it by, you know, increasing our overtime, and so the cost of labor for us, you know, was elevated somewhat in Q3. We do see a normalization happen that started occurring in the backside of Q3 and, you know, we would expect that to be back to a more normal rate in going into and certainly what we're experiencing now in Q4.
Okay, great. Thank you.
Our next question comes from Pablo Zuanic from Canaccord Genuity. Please go ahead with your question.
Thank you. Good morning. Steve, one question for you. I hear there in the commentary at the beginning that in Florida, the Harvest stores with the new assortment and changes, sales were up about 35%. Can you give more context about that? I saw that the stores were just rebranded. Is that a number for a month, for a week? And is that a number that we should just slap on top of your Harvest stores in Arizona, Pennsylvania, as you get the benefits of the Trulieve know-how? And then a second one for Kim if I may. Kim, if I, you know, look at the Solevo numbers that were given at the time and our estimates, we think Keystone was about, you know, $10 million for the quarter.
that means that sales were about flat, right? If I'm right, sales were flat and OMMU had said about 8% volume growth in Florida, that would mean that Florida price mix was down about 7-8 points quarter-over-quarter for you. Can you give some context there? I mean, any color would help. Thank you.
Thanks, Pablo. I'll start with the Florida question that you had. When the legacy Harvest stores were required to be shut down and then opened again as Trulieve stores post-close, with the addition of additional products and some additional renovations in the stores themselves, what we saw on an annualized basis is an increase of 35%, between the numbers that the Harvest stores were showing prior to the close down and after. In other words, it's not just a bump, a bump that you saw that was temporary. The days that we calculated out and annualized those days, and so you saw a 35% increase there. Mainly due to the increased product SKUs and some of the additional, like the flow-through work that was done by the Trulieve team.
Just to confirm the numbers, may I ask? Sorry, Kim, go ahead. I'm sorry.
No, no. Go ahead.
No, I was gonna say that 35% number of course is very impressive, but my question is more, was that something you calculated based on results of a week or a month? I mean, I'm just trying to think how we extrapolate that going forward. Is that 35% something that we should assume you will also see as a benefit in your stores in Pennsylvania and Arizona, Steve? Thank you.
Yeah, I don't know whether or not you could apply that pattern across other states or not, but specifically what we're looking at is we are comparing our August legacy Harvest numbers with the annualized numbers post-flip over to Trulieve stores. Whether or not those. I mean, I don't know that you could extrapolate much further in other states because obviously in the state of Florida, the Trulieve SKUs are quite expansive. So we'll see, and we'll report what happens in the other states.
Yeah. I'm gonna try, Pablo. There was a few questions, I think, on the backside of that for me. But just to piggyback on what Steve said, certainly strategically in the other markets, what we're going to be focused on near term is, while we will have additional capacity coming online, we are gonna be focused on getting the product mix, you know, situated through our combined brand portfolio for each market and increasing production of branded product into and through an expanded branded retail channel. That certainly will be the primary focus in both Pennsylvania as well as Arizona in the coming months.
While in Florida specifically, you know, we were able to come in and make an immediate impact by increasing not only product availability, but also, again, a more robust combined product portfolio of both Harvest, legacy Harvest, and Trulieve products into those channels. We will plan to do some of the same in other markets, but of course, we'll also have a different product mix that's appropriate and acceptable, right, to customers in each of those markets moving forward.
Got it. Can you comment, Kim, on my question of Florida? I mean, if you want, I can repeat it, but do you want me to repeat it?
Yeah, I'm not sure. Yes, please repeat it.
Okay. In the case of Florida, the question was, based on my math, Keystone Shops is about $10 million in sales for the quarter. That would mean that quarter-on-quarter, in organic terms, the business was flat. I mean, nothing wrong with that in the current context, but, you know, the OMMU data for Florida had shown about 8% volume growth. Does that mean that the price mix in the quarter was down about 8% sequentially? It would be consistent with all the talk that we are hearing about price competition there, but some color there would help. Thank you.
Yeah, I'm sorry, I'm trying to reconcile the comment as it relates to Pennsylvania to how it relates to Florida. What I can say around the Florida business is that certainly we're very proud of our performance in Florida this quarter. We had, you know, increased inventory flow through into finished good products, which we felt was very important in order to continue to keep up with what we were seeing on the ground, right? As we mentioned, there was promotional activity, however, I think we did a significantly better job this quarter executing on strategic promotional opportunities while maintaining margin, which you saw come through in the results. Certainly making sure that we are offering more targeted promotions across certain product categories.
When you have, you know, promotional activity, it's important that we continue to have the availability to have, you know, increased scale because you have to have additional production, right, to increase because you're selling more units, obviously, at slightly lower prices. I think that this quarter, we really saw, again, a combination of our scale coming through, our production team firing on all cylinders, and our sales and marketing team leaning into more specific strategic promotions that led to our outperformance on our peer set as it relates to Florida, and quite frankly, maintaining, right, over 50% market share most weeks as reported on by the OMMU.
Right. Thank you. Congratulations.
Thanks.
Our next question comes from Aaron Grey from Alliance Global Partners. Please go with your question.
Hi, good morning. Thanks for the question, and congrats on the quarter. First question for me, wanted to double back a little bit on the last one, but kinda talk about it between the lens of kinda retail versus wholesale. You know, I know you haven't historically kind of provided the breakout between retail versus wholesale for the company, starting to shift now with some of the PA acquisitions as well as Harvest coming through. Just wanted to know maybe if during the quarter, you could kind of provide some of the breakdown or maybe if you don't wanna do that, maybe some metrics you used to provide in terms of same-store sales, visits, basket. Just if you could provide some color on how that trended during the quarter, I think that could be helpful. Thank you very much.
Yeah. Thanks, Aaron. Obviously, you know, historically, wholesale has been less of a relevant metric for Trulieve, given our significant presence in the state of Florida, where wholesaling is not an option. However, to your point, we are starting to experience additional wholesale capacity as we expand outside of the state of Florida. You know, important to note that we're not necessarily managing the business this way currently, but we are again continuing to focus on that wholesale channel on a go-forward basis. I think it's important to note that in 2021, if you were to exclude Florida, about half of our business was via wholesale, and we do plan to double that business moving into 2022.
However, I should again reiterate that we do believe that, you know, the best return is through branded product and branded retail, and that will remain a priority.
Okay, great. Thank you for that color. And then just in terms of, you know, some of the competition within Florida and the promotional activity, and you talked about some targeted promotion yourself. Just based on some commentary from peers, you know, if it does persist, you know, we had talked about on this call, you know, in the last quarter, you know, in terms of how long it would last, given the high margin profile within the state. You know, if it does persist in the state, you know, what are you guys looking to do maybe in terms of expanding it beyond just more targeted promotion? Obviously very healthy margins despite some of your targeted promotion during the quarter.
You know, how are you now looking at the state and evaluating the competitive environment in the case of more heightened competition and promotional activity for an ongoing basis? Thank you.
Yeah, I mean, I think that look, we've been, I think very successful in maintaining, you know, static in terms of impact, overall as it relates to pricing and promotional activity. However, what you saw from us this quarter again was an increase, right, as that flowed through to our margins based on our strategic focus. You know, look, if I can put up 69% margin, you know, I'll do that all day. I think that, you know, the proof is in the results, and we like to rely on our results as opposed to go forward statements.
I should note that as it relates to investment in Florida, to be clear, we have the ability over the next 12 months to bring online, you know, an additional 1 million sq ft of cultivation. Again, we'll be making decisions as to whether or not to actually bring that capacity fully online or not, depending on what we need to do and what we see in the competitive landscape. We're not, you know, taking our foot off the gas in the state of Florida. It's an incredible market with incredible continued returns as well as future upside as it continues to grow on the medical front and of course as we continue to position ahead of adult use.
All right. Thanks so much for the color, and I'll jump back into the queue.
Great.
Our next question comes from Camilo Lyon from BTIG. Please go ahead with your question.
Thank you. Good morning, everyone. Just going back, Alex, maybe if you could just help us on the Q3 gross margin and unpacking the moving parts. You talked about a few different puts and takes. Maybe if you could just quantify them to help us understand the magnitude of those buckets and maybe just from a larger perspective or from a higher level perspective, how do we think about the buckets to consider into 2022?
Just keep in mind what we're saying. We deployed that strategic and targeted discounting strategy in the quarter. Helps us preserve margin and protect our brand. You could call that flat to Q-over-Q in that regard. In addition, we continue to build our infrastructure in accordance with our CapEx plan. We onboard additional capacity in all markets this quarter, particularly in Florida. We were able to, as Kim alluded to, navigate some of those labor challenges in our processing centers and increase the flow through of work in process to finished goods. We implemented some additional overtime to do that, and we end the quarter with a higher level of finished goods in the prior quarter.
Those in conjunction, and that was partially offset by the inventory fair value step up that we all know and love, right? Bhang from our Keystone Shops. Those were kind of the buckets for margin.
Was the better pricing action the bigger contributor or was it the higher level of finished goods?
I mean, the higher as you bring on capacity, right? It's a combination. It's a higher level of finished goods, increasing that flow through from WIP, and then you bring on additional capacity. As you know, as we were saying, that was kind of a little bit backloaded in the second half, so we benefit from that.
Got it. Very helpful. As we look to 2022, maybe if you could just remind us what your CapEx projects look like as you have coming online to support some of the you know the market and store growth that you were talking about.
Yeah. We, you know, we'll certainly give additional color on 2022 at the year-end call. I think globally what we are prepared to say today is that we're going to continue to invest in our cornerstone markets, which we're defining as Florida, Pennsylvania and Arizona, to bring on additional capacity, again, with the goal of having increased branded products through increased and robust platform of branded retail stores. Those investments, many of them are underway currently, with additional expansions expected throughout 2022.
Great. Very helpful. Good luck and thanks for the color.
Our next question comes from Graeme Kreindler from Eight Capital. Please go ahead with your question.
Hi, good morning, and thank you for taking my question. We're about to enter what's expected to be a seasonally strong period in Arizona. I was hoping you could discuss if you're seeing any shift of some seasonality here, what that's looking like, as well as the inventory situation in the state, given it was tightly managed earlier in the year at the onset of rec. Thank you very much.
Sure, Graeme. In Arizona, typically what you see is a little bit of seasonal weakness over the summertime months. You see less people in the state of Arizona. Typically, what you see is that trend reverses or starts to reverse around October. In terms of, you know, any supply constraints continuing in the state of Arizona, as you would expect, the supply and/or the wholesale market is less constrained than it was when we originally introduced adult use sales. Additional capacity has come online, and we are starting to see less and less restraints there.
Thank you for that. Just as a follow-up on the Arizona market, we've seen some increased consolidation activity as of late. I'm wondering if you could discuss what the opportunities in the landscape looks like, potentially for further consolidation or where value-valuations are trending, particularly after, you know, it started off the year hot, and now we're seeing some more deals as of late. I appreciate that. Thank you.
You bet. Arizona obviously a cornerstone market and one where we'd be interested in adding to the retail footprint if the price was appropriate. The challenge has always been when the price is appropriate. When you saw the initial passage of the recreational initiative, you saw prices spike. You saw some deals that we were aware of and frankly not interested in paying those prices. It becomes for us, in a state like Arizona, more challenging to get deals done, but we will continue to be evaluating what opportunities are there. If they hit our criteria for acquisition, then we will still execute on deals in the state of Arizona.
Okay, understood. Thank you very much for that.
You bet.
Our next question comes from Kenric Tyghe from Canaccord Genuity . Please go ahead with your question.
Thank you, and good morning. Kim, I wonder if you could speak to, you know, hydrocarbon extraction, and its ramp both as a differentiator and a moat as you look to 2022 and the competitive dynamics in Florida. I'd be interested to hear any insights you may have there with respect to, you know, as said, that ramp and that significance.
Sure, Kenric. Hydrocarbon extraction is an incredibly efficient extraction technique that yields significantly higher quality concentrate products than any of our previously existing extraction methodologies. We are currently in the process of bringing on a number of new SKUs that will be new to the state of Florida that customers have been asking for, that not only will we be able to make available, but we'll be able to make available in a very scaled way, which we believe has always been part of our competitive strategy in the state of Florida.
Products that we've brought to market so far have, among the highest velocity of products of any in our portfolio, and signaled to us that we needed to quickly not just double down, but quadruple down, with respect to our output. That's what we have done. The capacity from that expansion is actually coming online as we speak. Products have been made and are in the testing cycle now with the expectation that we'll have an expanded portfolio available going into the holidays. As I mentioned on the call, we are also, we're not stopping there because our forecast indicate that we're going to need even more capacity to be able to effectively bring online the variety of products that we wanna bring online coming through 2022.
We have additional investments in production equipment that will go into additional manufacturing facilities across the state through 2022. That'll continue to ramp first half of 2022, but we're very, very excited about that particular market segment in the state of Florida.
Thank you, Kim. Just not to mischaracterize, but I mean, it's obviously very useful tool with respect to availability, but it would be a fair characterization that in the context of current promotional activity or potential price wars in Florida, this can and will also provide for a useful additional, you know, sort of arrow in your quiver, so to speak.
Absolutely. I think it's also important to note that the efficiencies and therefore margin pull-through on those products are exceptionally high, and again, allows us significant flexibility as we think about positioning on a go-forward basis.
Thank you. A quick final one for me. Just on Pennsylvania, what to your mind are the risks of any supply imbalance or market sort of dislocation in the second half of 2022 with number of players or yourselves potentially included, adding and needing to add cultivation capacity ahead of adult use? How do we think about the potential pricing dynamics or dislocation there if the market were to move into a position of supply imbalance in anticipation of adult use?
Yeah, I mean, I think that, again, it's important to note that not all supply is created the same, and not all brands or products are created equally. You know, I like our positioning in Pennsylvania, as noted previously. Certainly the way our legacy products resonate with customers has been and continues to be extremely well-received on the wholesale front. On the retail front, you know, as we get more and more capacity availability and product availability that we can provide internally through branded retail, we become, I think, in a more insulated position through 2022.
Strategically, I feel that we're in about as good of a position as you can get, as you look at, you know, again, the combined affiliate footprint vis-a-vis our peer set there.
Great. Thanks, and congrats.
Our next question comes from Scott Fortune from Roth Capital Partners. Please go ahead with your question.
Yeah, good morning. Kim, maybe a pretty good update on the legislative up front, first on the federal side with the Republicans narrative now in play, and we'll hear more later today. There's seemingly pressure to get legislative reform ahead of midterms with a whole lot of focus around safe banking, and then color around that. Progress towards Florida and Pennsylvania movement ahead of adult use. What's kind of the keys as you see going forward with those two states? That'd be great for an update there.
Yeah, absolutely. I mean, I think that I along with probably everyone on this call is very much looking forward to Congresswoman Mace's update today at 2:00 P.M. on her proposed legislation. I, for one, am thrilled to see you know, a female Republican take a leadership position in this conversation. I think that it is doing the job of you know, refocusing the conversation in a bipartisan way which hopefully will lead to something that is actually possible in both chambers as you said before the midterm. We're encouraged by the development.
Of course, we also have you know, our eye on the defense bill this week, and you know, the opportunity potentially at least for safe banking to be in the mix, as that moves forward. I think a lot of positive, at least, movement on the federal side. I mean, importantly, our business remains successful and poised for significant growth as we have been growing over the last five years, regardless of what happens at the federal level. There are a number of state catalysts ahead, and you know, those provide significant opportunity for our business.
To your point, Florida, we are, you know, currently there is a home grow bill that is that's making its way, which would, you know, crack the door, if you will, for legalization. Certainly conversations continue around the posturing for an adult use initiative coming down the pike ahead of elections in 2024. In Pennsylvania, we similarly are encouraged by a recent bipartisan legislation and, you know, think that the conversation in the Northeast as a region continues to accelerate with markets, you know, finally coming online in the adult use space, which, again, we continue to believe will be somewhat of a domino effect across the region.
Great. No, I appreciate the update. The last question for me, kind of where we're at on the loyalty programs, kind of potentially help offset some of the discounting or pricing competition in Florida. Could you provide a little bit of an update on the loyalty side of things and those initiatives?
Sure. I mean, we certainly have a very widely accepted, you know, loyalty program in the state of Florida. When we look at our loyalty metrics, which we review quite often, those remain exceptionally high. We're still around 78%-79% of customer loyalty in the state of Florida. Our customer base is continuing to return to Trulieve time over time to get products that they depend on and incorporate into their everyday lives. We're looking forward on a go-forward basis as we integrate our systems across the combined platform.
The goal certainly is to have a unified loyalty program across the 11 markets that we are in today to offer again that consistent customer experience from branded retail to branded retail location.
Perfect. Thanks for the color. I'll jump back in the queue.
Thanks.
Our next question comes from Eric Des Lauriers from Craig-Hallum Capital Group. Please go ahead with your question.
Great. Thanks for taking my question, and I'll offer my congrats as well on the strong results. Appreciate your comments on the price normalization trends that you're seeing in Pennsylvania and some other markets. Florida does seem to be a bit different, you know, mostly you know, retailer discounts here. Can you comment on some of the pricing trends that you're seeing in Florida across product categories or across the premium value spectrum? You know, are any of these price normalization trends that you're seeing impacting your planned production or branding mix?
You know, with comments on hydrocarbon and Cultivar Collection, it sounds like there might be a increased mix towards premium, but just would love to get your color there. Thank you.
Yeah, Eric, thanks for the question. So we're continuing to see barbell patterns hold true in Florida quarter over quarter with certainly you know increased growth on both the value and on the premium side of the business. What we are seeing is we're seeing you know a little bit of an increase in that mid-tier as well, simply because with certain promotional activity and certainly with the strategy that we deployed this last quarter, margins actually tend to be a bit better in that mid-tier. So when you discount that mid-tier category, right, that value customer is then able to purchase into mid-tier.
There's a little bit of a blended pickup on that front. Overall, I would say that really when we look at premium quarter-over-quarter, it's very consistent. When we look at value, again, with just that color that I gave as it relates to just a slight uptick in the mid-tier, we're seeing value continue along existing trends as well.
In terms of how we're thinking about product mix moving forward, certainly we want to make sure that we have adequate and robust supply on the premium side of things, and that we are continuing to focus on efficiencies and product quality, which, thankfully, you know, the hydrocarbon setup allows us to excel in both of those through those product offerings.
Okay, great. That's helpful. Thank you.
Our next question comes from Andrew Partheniou from Ventum Financial Corp . Please go ahead with your question.
Good morning, and congrats on the results. Hoping for some insights on Pennsylvania retail dynamics in recent months, inclusive of the Harvest business there. Has the pricing normalization we've seen at the wholesale level increased transactional volumes at the stores? Assuming that might be the case, has that volume uptick perhaps been enough to offset pricing? Secondly, where you have seen wholesale price compression, have you seen retail margins expand at all, or has those price savings been mostly passed on to the consumer?
Yeah. I'm gonna give some general color, and then I'll let Steve take it as it relates to the legacy Harvest portfolio in the quarter. What I would say is that I think in general, right, we're seeing a lot of that pricing flow through to the customer. You know, again, in Pennsylvania, I'll just reiterate the fact that it's not universal, right? We certainly are seeing different segments that have different, you know, a different level, if you will, of a bifurcation on pricing. I think that, again, that's really the establishment of more clear-cut tiers of product, which is, again, very normal in really every other market that we participate in.
We think that it's healthy in terms of how the market is responding to create, again, clear-cut tiers of products across different lines. I don't know if you wanna speak to the Harvest legacy.
Sure.
George.
There was, as I mentioned earlier in a response to a question from Matt McGinley, we did actually see an increase quarter-over-quarter in the legacy Harvest stores at the retail storefront. In fact, it was one of our larger increases on a percentage basis across the portfolio. We aren't seeing or haven't seen significant pressures at, you know, at the retail level.
Great. That's helpful. And just a second question, if I may, on the guidance. If I look at the upper end of that guidance range, for the full year for the Trulieve business, it would seem to imply maybe even a slight sequential decline even at the high end of that. Just want to see if you would comment on whether you expect to see any pressures to growth within Q4. You know, I know there's a lot of moving pieces, potentially even intercompany revenues, but you know, just wanna see if there's any potential pressures to the pace of growth, heading into the fourth quarter.
Yeah. Thanks. We, as we've said over time, we're not going to, you know, change guidance on a quarter-by-quarter basis, absent some, you know, significant or material change in the business. We thought that it was important to indicate that we are very confident and remain confident in our ability to hit previously stated guidance, especially given, you know, the sort of this quarter as it relates to our peer set with many folks, you know, changing or in some cases, withdrawing guidance. We felt that it was important to comment on it.
You know, again, it's just to be consistent with our previous practices and that we're not going to necessarily update it in any given quarter. Then again, just a reminder, we will be giving, of course, combined guidance on a go-forward basis at the next quarter call.
Great. Thanks again for the additional color, and congrats on the results.
Our next question comes from Vivien Azer from TD Cowen. Please go ahead with your question.
Hi, this is Harrison Vivas. I'm from Vivien Azer. Thanks so much for taking the question. I know there's been a lot of discussion about pricing, but we'd love to get a better sense of how the pricing environment informs your philosophy around incremental cultivation capacity. With the little evidence that these dynamics are reversing in the near term, have you had to reevaluate your expansion plans in any legacy Trulieve markets or any of the newly acquired Harvest markets? Thanks very much.
Yeah, no, thank you. You know, look, our model and our decision making metrics have a number of inputs. You know, we've built the company to be very bottoms up in terms of how we model and how we look at the business. Certainly as we think about our forward-looking plans, we are evaluating not only of course pricing, but again, we're looking at growth in the market. We're looking at increases in our customer bases. We're looking at our flow through and our current customer metrics at our store levels. There are a number of inputs to our model.
You know, I would say that again, as we look at the future, we believe that in all of our markets, additional capacity is warranted. We are looking at a very robust, we think, forward-looking growth cycle ahead through 2022 on a much more significant platform. We see a number of opportunities for growth that absolutely would indicate that we need to make additional investments in those markets.
Again, we think that, really, you know, one of the big takeaways for 2022 will be that capacity coming through into branded product and branded retail, that will provide, you know, not only, you know, top line, but again, additional margin pickup across the platform as we continue to integrate and optimize, this incredible platform that we now have.
Great. Thank you very much. I'll pass it on.
Our next question comes from Owen Bennett from BTIG. Please go ahead with your question.
Hi, good morning. This is actually Derek Margiotta calling in from Owen. Congrats on the quarter again. Most of my questions have been answered about Florida and Pennsylvania, but just wanted to touch on the Georgia market. You know, you guys have received the notice of award for the class one production license there, one of two licenses. It's a limited licensing environment. I was just wondering if there's any update on timeline that market's gonna come online and kind of comments on the potential of that market. Then I guess the second question would be plans within these more mature markets like Colorado and California, where you know, your footprint isn't as robust as obviously Florida, Pennsylvania, Arizona. What are plans there with obviously they're much more mature and competitive markets? Any color would be great. Thank you.
Sure. We remain very, very excited on the Georgia opportunity. Very normal post-license award for there to be a period of a pause period, as you know, regulations are developed and it's also very, very typical for there to be protest period, et cetera. That's happened in, I think, every market that I'm aware of. That's the period that we're in right now in Georgia. We would hope that by, you know, within the next 12 months, that we would have greater clarity. We certainly have plans in place, are ready to hit go, as soon as we're able to, and as soon as we receive the green light from the state there.
Georgia looks a lot like the Florida market looked at its inception with a big differentiator in the fact that there are already over 18,000 patients registered in the state of Florida awaiting for products to come online. In addition, right, as we think about the other markets, to your point, California and Colorado, what you'll see from us in the next year is you will see in California the rebranding of a number of stores into Trulieve locations. In Colorado, we're continuing to evaluate that market.
We have made some you know smallish investments in Colorado to ensure that our product mix there on a wholesale basis is properly positioned as we think about again that branded product portfolio and getting that into as many customer hands as possible moving into next year.
All right. Thanks so much. We'll pass it on.
Ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor back over to the management team for any closing remarks.
Thank you for your time today. We look forward to providing additional updates on our progress during our next earnings call. Have a great day.
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.