Good day, and welcome to the Curaleaf Q3 2021 Earnings Conference Call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Carlos Madrazo. Please go ahead.
Good afternoon, everyone, and welcome to Curaleaf Holdings Q3 2021 Conference Call. Today we're joined by Boris Jordan, Executive Chairman, Joe Lusardi, Executive Vice Chairman, Joe Bayern, Chief Executive Officer, Neil Davidson, Chief Operating Officer, and Ranjan Kalia, Chief Financial Officer. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions, including the successful integration of acquisitions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were applied in drawing a conclusion or making a forecast in such statements.
These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found in the company's filings and press releases on SEDAR and the Canadian Securities Exchange. During today's conference call, Curaleaf will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as adjusted EBITDA, the definitions of which may be found in our earnings press release. Please note that all financial information is provided in US dollars unless otherwise indicated.
With that, I'd like now to turn the call over to Executive Chairman Boris Jordan.
Thank you, Carlos. Good afternoon, everyone, and thank you for joining us. Let's begin with an overview of our Q3 results. We delivered record revenue of $317 million in Q3 , representing 2% sequential and 74% year-over-year growth. Note that our sequential growth was all organic. Our adjusted EBITDA was $71 million, representing a 22.5% margin, and we generated positive operating cash flow of $52 million. While we face some transient challenges in the Q3 , mainly related to legislative headwinds in the Northeast and some one-time costs largely associated with integrations, we continue to execute well against our strategic initiatives. As a result, we expect to achieve our $1.2 billion to $1.3 billion annual revenue guidance, albeit at the lower end of the range, growing over 90% year-over-year.
Despite the headwinds we faced in Q3 , the U.S. cannabis market remains extraordinarily strong and is primed for significant growth over the next several years, projected to increase from $25 billion this year to over $43 billion by 2025. In this context, I think it's important to reiterate our long-term strategy and market differentiation and why we are so excited about the future of this company. Our strategy has always been to build the largest cannabis company in the world, both organically and through M&A, selling our nationally recognized trusted brands across the widest distribution footprint. We are still in the early innings of our industry's growth and believe the right strategy for all our stakeholders is to focus first and foremost on gaining market share. We believe this is what makes Curaleaf unique and what will enable us to be the winner in this industry.
Of course, in order to achieve this goal, it's critical that we have a presence in all of the largest US markets, and today we operate in 23 states, representing the broadest footprint in the industry. Many of our markets, like those in the Northeast, are more established and generate very strong margins for us. Others are newer, like California, Colorado, and Michigan, which we refer to as our investment markets. While our investment markets naturally generate lower margins today, they are critical to Curaleaf's long-term growth as they are some of the largest in the country with massive upside potential. We have a clear path for profitable growth across all our markets, and as we continue to execute, improve our operations, and gain scale, our margins in our investment markets will inherently expand toward those in our more established states.
We are making strong progress against this initiative, which we believe will result in a strong 2022 and beyond for Curaleaf. Our Q3 results reflect our strategy. We kept our foot firmly on the gas pedal by investing in our global distribution, brands, and products, enabling us to gain share and further position Curaleaf to capitalize on the significant growth opportunities we see coming. We expect our margins to improve in the Q4 and to achieve an adjusted EBITDA margin of 25% for the full year. Longer term, we are targeting steady annual margin accretion as we prioritize growth coupled with ongoing operational efficiency. Let me now provide you with a little more detail into what we are seeing in the market and how we are executing against our strategy.
As we previewed on our last earnings call in May, we witnessed a general slowdown in the cannabis market in the Q3 , which we believe was largely a factor of the broader softening of U.S. consumer spending. Personal consumption expenditures increased just 1.6% in Q3, according to recent GDP estimates, compared to a 12% increase in the Q2 . We believe the cannabis industry followed a similar path. According to Headset and BDSA, the U.S. cannabis market was essentially flat sequentially in the Q3 compared to an increase of between 14% and 15% in Q2 . While the slowdown was greater than we expected, Curaleaf posted total revenue growth that exceeded BDSA and Headset numbers, and we gained market share in several of our key states like Arizona, Pennsylvania, Michigan, Florida, and Maryland.
At the state level, I mentioned earlier some legislative headwinds in the Northeast. In New York and New Jersey, the time gap between the approval of adult use in these states and the formal rollout of their adult programs was effectively allowed the illicit market to proliferate. This has reduced new medical card applications and renewals more than previously anticipated. In addition, New York did not approve whole flower in the medical market until just last month versus our prior expectation for sales to begin in the Q3 . While the timing of legislation impacted our results, looking ahead, there are several meaningful near-term catalysts in the Northeast that will have positive effects on our business. In New York, the Cannabis Control Board has approved the sale of whole flower to the medical market, and we began selling on October 26.
We witnessed strong whole flower results in our first weeks of sales, which gives us increased confidence it will be a catalyst to our revenue in the state beginning in Q4 and into 2022. With respect to adult use, we continue to expect this program to begin in 2023, and we are making strategic investment in anticipation of this significant growth opportunity. We greatly appreciate Governor Hochul's decisive actions so far in advancing the implementation of adult use program in New York. We also have line of sight to New Jersey commencing its adult use program in the Q1 of 2022. With our leading market share, the strategic location of our dispensaries near the border of Pennsylvania, and the investments we have made in building our inventory and capacity, we are fully prepared for New Jersey adult use.
We expect to benefit significantly from the upcoming growth of adult-use sales in New Jersey, a market which is estimated to expand in aggregate to approximately $2.1 billion. In Connecticut, we believe the adult-use program could be up and running by 2023 and are making investments in our operations and expanding our capacity to be ready for this event. Overall, as we have discussed, the combined tri-state area has a potential annual market opportunity of $8 billion, and we believe we have the right tools in place to win a significant share of this market given our leadership position in these states. We also continue to believe Pennsylvania and Maryland, where Curaleaf has a strong presence, will likely be among the next major states in the Northeast to approve adult-use cannabis. These states are estimated to represent another approximately $4 billion annual market opportunity.
In California, as you know, the market is facing a supply-demand imbalance and increased competition from illicit players. Similar to what transpired in Colorado and Oregon, we expect this dynamic to continue to play out over the next 12 to 18 months. As a result, we recently divested our Eureka grow facility to rationalize our supply chain and improve our margins. We are also working on a more comprehensive strategy for our California operations, and we'll communicate that to the market in the next couple of months. We are confident that we will not only continue to win share, but improve our margins in the state and deliver profitable results in California in 2022. In Colorado, we closed the Los Sueños Farms acquisition in October, adding over 2.5 million sq ft of outdoor cultivation capacity and two retail dispensaries.
With Los Sueños, we are now one of the largest wholesalers in the state. We believe this acquisition will help us drive significant market shares gains in Colorado, and our vertical integration will contribute to margin expansion in the market beginning in the Q4 and into 2022. I would also like to touch on Florida, not only because it's an important market that gets a lot of attention, but because it's a great example of how our strategy leads to strong results. In Florida, our focus has mainly been on expanding our cultivation footprint and improving our genetics and quality. As a result of our efforts, we have doubled our market share in the state to approximately 15% since the beginning of the year and continue to gain share at attractive profit margins.
We see significant future growth opportunity in Florida, and we'll make the necessary investments to continue gaining incremental share at appropriate margin levels. As I mentioned earlier, we will continue to advance our growth strategy both organically and through strategic acquisitions that add to our top line and are accretive to our margins. In that regard, we are very excited to announce today our agreement to acquire Tryke Companies, a vertically integrated MSO operating in Nevada, Arizona, and Utah. Tryke brings to Curaleaf an extensive and highly complementary vertical portfolio of retail and wholesale distribution licenses and cultivation assets. Tryke owns and operates six highly trafficked dispensaries under the Reef brand, with four retail stores in Nevada and two in Arizona.
The company's products are also sold in over 50 additional locations across its wholesale distribution networks. This is a highly strategic acquisition for us. By combining Curaleaf and Tryke's assets, we will substantially bolster our already leading position in Nevada, Arizona, and Utah. We will also gain vertical integration in Utah, which will be a positive for our margins in that state. Tryke's overall business has a very attractive financial profile. Upon close, the acquisition is expected to immediately accretive to Curaleaf's margins and cash flow. We anticipate the deal to close in 2022, pending approval from the Nevada Cannabis Compliance Board. In addition to the progress we are making at the state level in the U.S., we are also cautiously optimistic that positive changes are forthcoming at the federal level.
There are multiple avenues for cannabis reform in both chambers, including Senator Schumer's comprehensive reform bill and the SAFE Banking Act. The SAFE Banking language has now been passed through the House of Representatives multiple times, and most recently was attached to the National Defense Authorization Act, which passed through the House in September. This month, we expect the House Republican-led coalition to introduce a common sense reform bill that would legalize cannabis. This is yet another strong signal that cannabis is not a partisan issue, and there is broad support across both parties to resolve the federal conflict on cannabis. The USCC, along with our government relations team, is in constant contact with our elected leaders and their offices, and we feel we are very well-positioned to have a legislation addressing cannabis passed by the end of this legislative session.
Looking to our European business, we saw several positive developments in the Q3 , particularly on the regulatory front. In Germany, the largest European market for medical cannabis, we believe adult use legislation could be part of the new government's overall legislative agenda. Also, Portugal and Spain continue moving forward with political processes around possible legalization of recreational use. We are encouraged by these recent developments in Europe and believe Curaleaf is well-positioned to capitalize on the long-term growth opportunities in a market that has the potential to be twice as large as that of the U.S. Finally, I'd like to touch on our 2021 outlook. Based on our Q3 results, as well as the market factors I discussed earlier, we currently expect to deliver full-year revenue of approximately $1.2 billion within our guidance range initiated back in March.
In addition, we expect our full year 2021 adjusted EBITDA margin to be 25%. With that, let me turn over the call to Joe Bayern.
Thank you, Boris. As Boris mentioned, we faced some headwinds in the Q3 , but we continued to successfully execute our strategy for long-term growth with a focus on strengthening our four pillars of competitive advantage, research and development, product commercialization, national distribution, and marketing and brand building. Our strategy is leading to positive results. In the Q3 , we gained share in seven of the 11 states tracked by Headset and BDSA, namely Arizona, Florida, Illinois, Maryland, Michigan, Pennsylvania, and Oregon. In Florida specifically, as of the week ending October 23, our market share based on state-released data of milligrams dispensed was approximately 15%, double our market share of 7.5% at the end of January. This was done with minimal additional store openings. Most notably, our Florida state margins continue to stay above our company targets.
We see strong growth potential in the Florida market and expect continued share gain by staying focused on the fundamentals of our business, providing high-quality flower with a growing variety of strains, introducing new and differentiated products like Squeeze and Cliq, and providing industry-leading customer service. As mentioned on our last call, we expect to reach a total of 60 dispensaries in Florida by the end of 2022. In terms of our Q3 EBITDA margin, as Boris pointed out, we faced some legislative headwinds in the Northeast which impacted our revenue growth in these higher-margin states. We also incurred some non-recurring costs that Ranjan Kalia will discuss in more detail.
In addition, we made increased investments in new store openings and in our marketing efforts to support the growth of our new product rollouts. Pricing was only a small piece of the overall impact in Q3. Looking forward, we expect the headwinds we faced in Q3 to begin to reverse in the Q4 and into 2022. The addition of whole flower in New York and adult use in New Jersey will accelerate our growth in these higher-margin markets, and our new store openings and product rollouts will begin to bear fruit. We are now vertically integrated in Colorado, and we divested our Eureka, California Grow, which will improve our margins in these states. In addition, we have rationalized our head count for recently completed M&A.
All of these factors will contribute to stronger performance into next year. Moving to our distribution platform. At the retail level, we continue to strategically expand our leading U.S. footprint with a focus on quality over quantity. We opened two new dispensaries in the Q3 , including one in New Jersey and one in Maine, and added two additional dispensaries in Colorado through our Los Sueños acquisition in October, bringing our total U.S. dispensary count to 111 as of today. During the remainder of 2021, we expect to open an additional six new Curaleaf retail dispensaries across Arizona, Pennsylvania, and Florida. From a financial perspective, our retail revenue grew 1% sequentially and 66% year-over-year in the Q3 . Including both adult use and medical use, our total number of retail transactions remained healthy, growing 80% year-over-year.
In addition, the total number of patients continued to grow, expanding by 7% from June through September. At the wholesale level, our revenue grew 3% on a sequential basis and 105% year over year, driven primarily by expansion of our distribution platform. We grew our number of U.S. wholesale accounts by 6% sequentially during Q3, exceeding 2,100 active accounts at the end of the quarter. In California, we reached a record high 430 wholesale accounts. In our central U.S. states, we grew our wholesale active accounts by a strong 12% sequentially, and we currently expect to exit 2021 with approximately 2,400 wholesale accounts in total. In terms of cultivation capacity, we are on track to meet our prior guidance to organically add 275,000 sq ft of flower canopy by the end of the year.
Unfortunately, we have not yet received Illinois State approval to open our Litchfield expansion despite its completion, but we're hopeful that we'll receive approval by the end of the year. With the acquisition of Los Sueños, we've added our total cultivation capacity by 2.5 million sq ft to approximately 4.4 million sq ft in total. This additional capacity will enable us to support our growth plans both in the near term and the long term, as Los Sueños provides us with a platform to serve the US market on a national scale once interstate commerce is allowed. As Boris mentioned, in anticipation of adult use in New Jersey and New York, we continue to make strategic investments to capture more than our fair share of the market.
In New Jersey, we tripled our cultivation capacity with our new Winslow facility in June and expect to double our capacity again with a nearby facility in the next 12 to 24 months. In New York, we are in the process of expanding our Ravena, New York facility and expect to add over 100,000 sq ft of new capacity before the end of next year. Furthermore, we're already looking at additional real estate for new retail locations in the state. Curaleaf is by far the leading provider in New York, and we are one of only two MSOs with the cultivation capacity to effectively supply the market. We expect to see a disproportionate benefit from both whole flower sales in the near term as well as adult use once the program starts. Moving on to product commercialization and research and development.
We successfully launched new products across several markets in the Q3 , driving new customers and product interest across our retail and wholesale operations. In Q3, we continued to introduce our Select Squeeze product in several new markets, including Michigan, New Jersey, and New York. We also introduced our new Select Bites and Select Nano Bites gummy product lines, which feature improved taste and faster onset times, and we have seen strong early traction in key states like New Jersey, Arizona, Michigan, Nevada, California, and Maryland. In September, we launched our Cliq by Select vape system. This unique hardware design features a proprietary pod and stainless steel casing that uses premium oil. We introduced Cliq in California, Oregon, and Nevada, and Arizona in Q3 and plan to roll this out to several additional markets by year-end.
In October, we further expanded our suite of innovative products with the launch of Select Snooze Bites in Arizona and Nevada. This product combines a unique 1:1 ratio of fast-acting THC, utilizing our nano emulsion technology and long-lasting CBN to help our customers experience a more restorative sleep experience. We will continue to roll out Snooze Bites in additional markets throughout Q4 and into 2022. Our focus on R&D is a key differentiating factor for Curaleaf. So far this year, we have introduced 113 new products in our markets, and approximately 11% of our year-to-date revenue has been generated by new products launched in the last 12 months. We will continue to invest in new innovative products to ensure our position as an industry pioneer.
Lastly, on the marketing and branding front, in October, we introduced Grassroots premium flower brand, complementing our Curaleaf brand for health and wellness, and Select brand for adult use. We also continued to roll out our B Noble co-branded products to dispensaries in six additional states, including Arizona, Illinois, Maine, Michigan, Nevada, and Oregon. Since introduction in July 2021, B Noble is now available in eight states. We were also pleased to announce last month the expansion of our co-branded Rolling Stone by Select line to additional markets across the U.S., including California, Arizona, Massachusetts in early 2022. Moving on to Curaleaf International. We are pleased with the progress we continue to make scaling this business. In the U.K., we generated revenue growth of 40% sequentially.
We sold just over one ton of cannabis flower to Israel in Q3 and anticipate increasing our sales to Israel sequentially in Q4. In Germany, we secured our GDP or Good Distribution Practice certification, which allows Curaleaf to now release our products directly to the German market. Finally, on November 1st, we rebranded EMMAC to Curaleaf International, establishing the Curaleaf brand in the European market. With that, I'd now like to turn the call over to Ranjan to discuss our financial results in more detail. Ranjan?
Thank you, Joe. Let me start by summarizing the results of our Q3 2021. Revenue reached a record $317 million in the Q3 , representing sequential growth of 2% and year-over-year growth of 74%. Our Q3 revenue came in below our expectations, primarily due to performance in some of our Northeast states. Retail revenue was $225 million, an increase of 1% sequentially and 66% year-over-year, representing 71% of total revenue. Our year-over-year retail revenue growth benefited from new customer acquisition and increase in repeat customers, as well as opening of 17 new stores in the last 12 months and an increase in e-commerce penetration following the revamp of our digital marketing tools.
Our wholesale revenue grew 3% sequentially and 105% year-over-year to $92 million and represented 29% of total revenue. Our year-over-year wholesale growth was driven primarily by the addition of new accounts and an increase in sales productivity. At the end of Q3, we had over 2,100 wholesale accounts, more than double our accounts from the same period last year. Our gross profit was $144 million for the Q3 of 2021, an increase of 61% from $90 million in the Q3 of 2020. Gross profit margin was 45.6%, compared with 49.6% in the prior quarter and 49.7% in the Q3 of 2020.
The sequential change in gross margin includes a one-time loss on inventory related to our Eureka, California cultivation divestiture, as well as a write-down on inventory in two of our other states. Our gross margin in the quarter was also impacted by revenue change at higher margin Northeast states and a fire incident at our main cultivation facility, partially offset by ongoing cultivation and process efficiencies. Excluding the one-time impacts and unprecedented incident, which totaled approximately $6.6 million, our Q3 gross margin was 47.7%. While we expect our gross margin to increase over time, it may fluctuate periodically based on our investment cycle as we focus on top line growth.
SG&A expense reached $102 million in the Q3 , primarily driven by increased headcount in support of new store openings, high travel costs as revenue-facing travel resumes, and marketing in support of new product rollout. SG&A as a percentage of revenue was 32%, compared with 28% in the prior quarter and 40% in the year-ago period. Our Q3 SG&A also included approximately $13 million of one-time expenses, primarily comprised of accounting and professional fees, bad debt write-off, and employee severance costs mainly related to the Eureka, California facility divestiture and our Grassroots acquisition. Excluding these one-time costs, SG&A represented 28% of total revenue in the Q3 . Adjusted EBITDA was $71 million for the Q3 of 2021, an increase of 69% from $42 million in the Q3 of 2020.
The year-over-year increase was primarily driven by our revenue growth. Adjusted EBITDA margin was 22.5% compared with 27% in the prior quarter and 23.2% in the prior year period, primarily reflecting the change in revenue at our Northeast states, the unexpected fire incident, SG&A in support of new store openings, and other marketing initiatives aimed at future revenue growth. In the Q3 , we recorded $39 million of other expenses, up from $19 million in the prior quarter and $7 million in the year ago period. Other expenses primarily included $16 million of net interest expense, $10 million of interest expense related to lease liabilities, $5.7 million of impairment charge related to Eureka intangibles, and a loss of $5.6 million on asset dispositions.
Provision for taxes in the Q3 was $60 million compared to $43 million in the prior quarter and $19 million in the year ago period. The increase in income tax expense was primarily due to an increase in gross profit subject to 280E tax treatment, a higher state income tax, and certain discrete items totaling $10.6 million. Discrete items included the write off of certain California net operating losses and the year to date accrual for late tax payment. Consolidated Q3 net loss allocated to Curaleaf Holdings was $57 million compared to a loss of $7 million in the prior quarter and $9 million in the year ago period.
On a year-over-year basis, our bottom line was primarily impacted by $42 million of higher tax expense, $25 million of higher other expense, and $8 million of higher interest expense. Turning to our balance sheet and cash flow. Our balance sheet remains strong with cash and cash equivalents of $317 million as of September 30, 2021. At the end of the Q3 , our outstanding debt, net of unamortized debt discounts, was $342 million. We have engaged a set of financial advisors to help us refinance our current debt facilities and expect to reduce our cost of debt materially. In preparation for our growth opportunity over the upcoming quarters, we continue to build our inventory.
In Q3, our inventory reached $346 million, an increase of $42 million sequentially, inclusive of $20 million of biological assets adjustment.
Therefore, our business inventory grew by $22 million. Our Q3 cash flow from operations was $52 million as we continue to manage our net working capital. We currently expect to be operating cash flow positive in Q4 as well as for the full year. Net capital expenditures during the quarter were $44 million. Our investments continue to be focused on expanding cultivation and processing capacity, as well as selectively increasing our retail presence in strategic markets. Capital expenditures for full year 2021 are expected to be approximately $160 million as we continue to invest in cultivation, processing, and our retail footprint. Turning to our acquisition of Tryke. As announced today, we have agreed to acquire Tryke Companies using a combination of cash and Curaleaf common shares.
The acquisition is structured as $150 million in cash and 17 million Curaleaf shares, both payable over the next three years, with the share payments commencing in 2023. $40 million of the cash component will be paid at closing, with the remaining $75 million payable over three years. Additionally, the deal includes an incremental earn-out payable in shares in 2023 based on Tryke's business achieving certain EBITDA targets. We expect Tryke to be accretive to Curaleaf margins upon close. The exact timing of closing is contingent upon regulatory approval expected in the H2 of 2022. Looking beyond 2021 by continued focus on our strategic objectives, we expect to grow faster than the market organically, along with adjusted EBITDA margin expansion and positive operating cash flow. In addition, we will continue to pursue strategic tuck-in acquisitions.
With that, I will turn the call back over to the operator for questions. Operator?
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Vivien Azer with Cowen. Please go ahead.
Hi. Thank you. Good evening.
Hi, Vivien.
I appreciate the color that you guys offered not only around your retail account presence currently, but then your target for wholesale accounts by year-end. I was wondering if you could offer some context around that. In traditional, you know, CPG parlance, we would talk about ACV or all channel volume. Obviously, that doesn't just represent the number of doors that you would wanna access. There's obviously some SKU math around that. But if we just kinda think about the target from 2,400 or the current 2,100 today, presumably you don't want to be in every dispensary. What percentage of attractive dispensaries does that 2,400 get you to and how are you thinking about that for 2022? Thank you.
Yeah. Hi, Vivien. This is Joe, and you're right. You know, we're used to managing business through ACV, where we're trying to get our SKUs in the most important outlets. It's a little hard to measure that in our industry. I've seen statistics of anywhere from, I think, 8,000 dispensaries in the U.S. So that would put us at slightly over 25%, 30% of the dispensaries. I don't think we could weight that on ACV. I mean, I'm just not sure how you would do it in our industry. You know, obviously, we'd like to get to the highest level of ACV as possible. Our ultimate goal is to try to be in every dispensary we can.
I think it's a little bit different than it would be in traditional CPG because just the scale of the number of outlets that you'd have to call on to get to a 50%, 60%, 70% ACV weighting. You know, for us, you know, there are key markets that we're gonna focus on, like California, which has a large number and growing number of outlets. New Jersey, New York are gonna, I think, you know, impact that number dramatically over the next couple of years. If they go out and build, you know, even 1,000 or 1,200 dispensaries in each one of those markets, we you know, we wanna have a high penetration in those outlets. You know, it's a great question.
I'm just not sure how we would measure it on a traditional CPG basis because there is no weighting of. Now, what we are seeing, as you know, are more multi-store operators popping up in the industry, and that's a good thing for us. Because as we work with multi-store operators, not only are we getting increased distribution, but I think we're getting a different level of professionalism on how we do merchandising standards, promotion, pricing that could be coordinated, you know, with one call point as opposed to ten, you know, individual call points. I think it's happening in our industry. It's just, you know, pretty early on to try to, at least for us, to draw that analogy.
Understood, and I appreciate the transparency around that. If I could just squeeze in a related follow-up. Understanding that ACV is clearly not the perfect definition, as you well explained, Joe. But how do you philosophically kind of think about your portfolio penetration in third-party doors? Like, is it by category or by SKU? Like, so, you know, because flower is just so fragmented, right? Is it flower, check the box, and then really focus on the novel form factors? Or are there a targeted number of flower SKUs that you would wanna see present in third parties? Just trying to get a philosophical understanding.
Yeah. No, I think you have to look at both. I think you have to look at which categories that we have presence in and then how deep or what is your SKU count in each one of those categories, right? We're always looking, as you know, to get the, you know, not only horizontal distribution, but vertical distribution in those accounts because obviously it's more effective to sell more into your existing accounts than try to go out and get new accounts. We wanna be in the most important categories. I think we're excited about launching Grassroots flower because that's gonna be. We believe that'll be a potentially better wholesale opportunity than Curaleaf flower, which by and large is sold through our retail outlets and a couple of different third-party outlets.
I think, you know, having a branded flower brand like Grassroots will give us distribution opportunities for sure in flower. Then we wanna continue to innovate in important segments like vape. Obviously, that's a big category, edibles, and eventually, you know, we're keeping an eye on beverage because it will be big one day, but it's still an emerging category. As we look at, you know, distribution goals, you know, we have targets just like you would in traditional CPG, which is we wanna be in 25% of our accounts in the first 30 days, 50% of our accounts in the first 60 days, and that's how we manage our wholesale distribution roll-outs. We're trying to bring a traditional approach to getting distribution across the marketplace.
Makes perfect sense. Thank you for the color.
Our next question will come from Camilo Lyon with BTIG. Please go ahead.
Thank you. Good afternoon, everyone. Boris, you and the team mentioned the impact of New Jersey and New York on the business in the Q3 . I was wondering if you could give some context in other states that you've seen the expectation for onset of adult use and how that transpired with the medical patients and how quickly those markets recover. I can't imagine that medical patients would likely wait a year for re-upping their medical cards for New York to commence its program, but I'd love some context on how you think about those programs starting to recover. How do you think about the acceleration of whole flower in that market that could actually recharge and catalyze the market for you?
New York and New Jersey kind of, you know, hit what I would call the perfect storm, right? You had, you know, a reduction because of share of wallet across the country. We saw that, as I said, in BDSA, where, you know, BDSA and Headset together show a like 0.5% decline quarter-over-quarter between Q2 and Q3 . You know, we've been telling the market this since last May, that this was happening, and it accelerated in the Q3 , obviously.
On top of that, you had both of these states announce these adult use programs. They decriminalized, and with decriminalization, medical patients, instead of having to spend $100 or $150, depending on the state, for their medical card, they're just going to the street 'cause now they can. They can have their cannabis, particularly flower. They can buy their flower, and they don't have to carry a medical card and pay the additional cost of carrying a medical card. We definitely saw this in Massachusetts.
You know, Massachusetts is a very good example because it's the only state that had a long transition period from the time that the ballot initiative was passed to the time they actually launched the adult use program was almost three years. We definitely saw the same thing. We saw a rapid fall-off in medical patients in the stores. We saw you know, the illicit market's very efficient, so the cannabis immediately heads to that state from California and Oregon and starts supplying the state. I mean, in New York, you could go to almost any bodega, anywhere on the street, any you know.
There's trucks driving around New York, and you can buy every single brand you can think of right now, and nobody's stopping them because it's been decriminalized. That's the phenomenon we're facing. The longer we wait, the more ingrained the illicit market becomes. That's the bad news. The good news, of course, is that as we saw in Massachusetts, the minute they allow us to open up our businesses, we do see a pretty fast recovery because people do actually prefer to go to dispensaries where they can get cannabis for, you know, that's tested and that's safe. They prefer to buy it in a store that's, you know, regulated than a store than an outlet that's not regulated.
We did see a very fast recovery once Massachusetts engaged. You know, New York and New Jersey, for instance, in New York, the minute we got a whole flower, we definitely saw patients start to come back as well. There was a dramatic increase in activity in our stores on the back of whole flower. That shows you, again, that they'd rather buy it in a dispensary than on the street. If they can't get it in a dispensary, they're gonna go to the street, especially now that it's decriminalized. Listen, that's why I'm calling this a transitory quarter for us because we saw the New York effect with whole flower. Our traffic increased quite dramatically in our stores.
Our revenues in the first couple of weeks almost doubled in those stores on the back of whole flower. That's a very positive development. In New Jersey, you know, we have line of sight. We believe adult use is gonna be in the Q1 . That's the latest information we're getting from the regulators there. We don't have any reason to believe that that's not true. We know they wanna get the program off the ground. In New York, we saw whole flower increase traffic. Now, you know, obviously, I think New York is gonna be more delayed on adult-use. I think that it's gonna be early 2023. We'll have to live with whole flower, but we all saw what happened in Florida, you know, when they introduced whole flower.
Medical, the medical business did increase quite dramatically. We're kind of bullish on New York next year. We're very bullish, obviously, on New Jersey next year. That was the real hit to our numbers was New York and New Jersey. I mean, if you look at, as Ranjan goes through the numbers in detail later on with all the analysts, he will show you that was the bulk of the decrease in, particularly in margin and in revenue in our business, was the East Coast, the Northeast specifically.
That's great color. Thank you. Then just segueing into Florida, you've been very vocal. You talked about the market share gains that you've seen there. You've been investing in market share through gross margin. Can you just give us your views on what is the target share that you're thinking about? What's your end goal here? Was this more of a one-time sort of, you know, quarterly experiment in terms of how much traffic you could drive? Or is there a persistent strategy here that is going to be in place for some time to come from the investment perspective?
No, this is a very long-term strategy. Our gains have been quite even over the three quarters. It started in January. We kinda called it. We told everybody on the Q4 , in the Q4 that we were gonna start launching our new growth facilities and our new products. We saw very steady growth in the Q1 , Q2 , and Q3 . There was no change. I know there's been a lot of talk about price competition. You know, I will tell you, it's one of our strongest gross margins and one of our strongest EBITDA margins in all of our states. All this talk that, you know, that margins in Florida are getting decreased because of Curaleaf's market share gains is absolutely not true.
We actually have very, very strong above average margins, well over 30% on the EBITDA side in Florida, and we're very happy with those margins. When we continue to grow our share largely, and we're doing it on, you know, on 1/3 of the stores of some of our competition. We're just being very, very efficient in Florida, and we mapped out that strategy last year. We televised that strategy to the market, and we executed on it this year.
Fantastic. I'll turn it over. Good luck with the rest of the year.
Thank you.
Our next question will come from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.
Thank you. Boris, if I may, you know, regarding the Nancy Mace draft, I mean, you touched on your expectation that reform will happen before this congressional term. Yeah, I'm sure your team has had a chance to look at her draft. If you can just comment on common areas between that draft and the Schumer draft, and the big differences. Related to that, what gives you confidence that there will be an agreement? As part of all of that, it's interesting that both drafts have the feature of interstate commerce. If you can comment on that in general. Thank you.
Yeah. Listen, I think that what we like about her draft. I'm not gonna go into the details right now, Pablo. I'm happy to do it later. Her draft, what we think is much more business oriented and much more concise. We think the Democratic bill was kind of a basket of everything thrown in without a lot of transparency. We like the approach of what I would call the moderate Republicans on this issue. They've got both, obviously social justice issues. They've got tax issues. They've got interstate commerce issues in there. You know, they are moving a little bit faster on import than we would like to see.
However, you know, we think that this is also gonna be negotiated. The real sort of positive on this, Pablo, is that the Republicans are trying to seize the one issue that's the most popular issue in advance of the midterms, and that's cannabis. It is the biggest bipartisan issue in this country. Both the Republicans and the Democrats want legalization. They all want safe banking on this thing. You know, the Democrats got elected a year ago and basically have done nothing except talk. The fact that we're seeing now the moderate wing of the Republican Party step in and start to push cannabis legislation, we believe is gonna force the Democrats to also start to push this. Because if the Democrats go into the midterm elections without cannabis legislation, they're gonna pay dearly.
As it is, they're having a rough time right now. It's my personal opinion that this bill coming out of a conservative South Carolina Republican congresswoman is a major deal in Washington. I can tell you, I got off a call today at noon, and the talk is very, you know, rampant in D.C. right now, and there's no way the Democrats are gonna want the Republicans to run away as the leaders on cannabis reform. I think this is all very good for the industry. The fact you've got both parties now pushing legislation and both parties wanting to be looked, seen as leaders in reforming the cannabis sector. You know, this is probably the most. You know, as you know, I'm very cautious usually on these things.
This is probably one of the most positive things I've seen happen, and this is gonna push Schumer, Wyden, Booker to move on their legislation as well. I think we could get a compromise. How it's gonna happen, whether it's gonna be in the NDAA or is it gonna come as an attachment to something else, I can't tell you right now. I can tell you the talk in Washington right now is definitely on cannabis. We've been told by the Democrats that as soon as they can get reconciliation done, this and voting are gonna be their two highest priorities for the spring of next year. You know, with now the Republicans coming in on the back of it, I think it's a very big positive for the industry.
Just a quick follow-up on the same topic, and I'll pass it on. Obviously, both parties want interstate commerce, right? It seems that that's a definite, and it could come, you know, sooner than most people were expecting. I assume when you talk to investors, what matters is that you have, you know, capacity that you can export from state to state in the right place, like Los Sueños, you have the brand portfolio and the distribution network, right? Just again, handicap, is it fair to assume that interstate commerce is pretty much a done deal?
Yeah. I think my gut on this, Pablo, is that even if we get interstate commerce, it's gonna take years before it's put into effect, right? They're gonna have to write the rules. They're gonna have to come up with how they're gonna do it. I personally think the compromise is gonna be where I think if the one thing that gets compromised on will probably be in the short term, interstate commerce, because of pressure from the states, governors, and attorney generals to keep it isolated in the states. I still think that even though I'm not opposed to interstate commerce, there are many that are. I'm not opposed to it. I wanna make that point clear. I don't think that that's gonna be. That's probably one issue that could get negotiated out of the bill.
I believe we have a better chance now of getting a bill by April of next year than we did, you know, a week ago because of this. I still think interstate commerce is the one thing, that and import, that's probably gonna get negotiated out of the bill.
Thank you.
Our next question will come from Owen Bennett with Jefferies. Please go ahead.
Good evening, gents. Hope all well. I just had a question relating to share trends. You highlighted the seven states where you are performing well. I was just hoping maybe you could talk about some of the key states where trends are not going as well as you would like, and then perhaps some of the issues that you're facing in those states. Thank you.
Yeah, that's an interesting question because in many states, we don't have a data source like BDSA or Headset to measure share. When we reference the shares that are growing in those 11 states, it's really because that has measured data. That doesn't mean we're not growing share in other states, you know, which we believe we continue to do. I think the key to that growth is new product innovation and better distribution of our products. I think it's pretty fundamental in how we look at the marketplace. I think some of the challenges in other states have been supply.
You know, we've just gotta make sure that we're getting the right supply in every market and we've got the right supply chain in every market. I think Colorado is a good example where, you know, we haven't had tremendous share gains in 2021, but we feel it's gonna be a great market for us in 2022. Now that we have Los Sueños, we have vertically integrated supply chain, we have the right cost of biomass going into our products. You know, we're looking forward to grabbing significant share in markets like Colorado for next year. We've gained share in Michigan, but we think there's a lot of head space in Michigan to gain share, if we get our supply chain right there. As you know, we alluded to, we've gotta get our supply chain right in California.
Although we had share gain, slight share gain in California, it's nowhere near our expectations of what we wanna do in that marketplace. We've alluded to the fact that we wanna come back with a holistic view of what we wanna do in California to gain significant share there. I think those are, you know, the big potential markets for us. New York and New Jersey, you know, we're optimistic about that for 2022. I think the one market that we still have some work to do here, and it's really just building out our capabilities is Massachusetts. Another opportunity I think to grow our wholesale business there.
Because we were selling primarily, you know, bulk goods in Massachusetts over the last 12 months, we haven't really built out the same type of wholesale distribution system for branded products that we have in other states, but we're building that out now. So there's no reason to believe we can't have the same level of performance in a market like Massachusetts as we do in the other states.
Yeah. We were supply constrained in Massachusetts as well, and now we're not. You'll see Massachusetts on the wholesale side really start to accelerate into the H2 of the Q4 and into the Q1 of next year, as we've now built out the capacity in order to be able to supply the market fully.
Yep.
Okay, great. That was very helpful. Thanks, guys.
Our next question will come from Matt Bottomley with Canaccord Genuity. Please go ahead.
Yeah, good afternoon, everyone. Thanks for taking these questions. Just wanted to take a step back. I know we talked about Florida a bit, but maybe some of your key markets in absolute dollars, just to name a few, you know, Florida, Illinois, Pennsylvania. Can you give any color on the dynamic you're seeing, particularly on the pricing side? You know, putting aside the fact that you still have strong margins, what are you seeing at the retail level in terms of pricing? And is some of the flatness we've seen in the market data, just a function of lower consumer spending, or is there, you know, more competition with whether it's illicit channels or just more retail stores opening in some of those places?
I think it's twofold. It's what I said in my comments earlier. I think one is that we definitely saw a reduction in consumer spend. We saw it in alcohol. I mean, don't forget that the difference between cannabis and alcohol which are quite similar is that alcohol in-store sales obviously dropped like a stone. We saw that in a lot of the alcohol companies' earnings, but their consumption in restaurants and bars really went up, right? Because they have that outlet. In cannabis, we don't have that outlet, right? We're only in stores. You definitely saw a reduction in activity in the stores. I indicated this again last May.
Many people thought that I was off my rocker when I was saying that, but we, having a 23 store footprint, we saw that happening in May of last quarter. It accelerated into the Q3 . There was no question about it. I think that was probably the main driver, share of wallet. You know, a lot of people are talking about price competition. I have to say, we're not really noticing it except really heavily in California. There's some price competition in Florida, but I think, again, as I said, you know, I don't have any problem selling product at a 30%+ EBITDA margin. I don't consider that price competition in Florida.
The only thing that happened in Florida is that margins come down from 45% to 50% EBITDA margins down to 30% to 35% EBITDA margins, which we think are totally acceptable in terms of growing your market share. As I said, we've doubled our market share in Florida. On the East Coast, you know, it's just a reduction of the amount of customers coming into stores in New York, New Jersey, and Connecticut, largely driven by the fact that all three states, you know, have announced adult use programs, have decriminalized, but haven't launched the adult use program. The illicit market is very, very strong in those three states, and it's definitely taken customers away from the stores to the street, as I'd say it. I, as I said, I think it's very transient.
We're already starting to see an improvement in the numbers in the Q4 . We think that going into the Q1 , we'll see even more improvements. I mean, the other problem typically in Q4 is what we call Croptober, right? You have all the illicit cannabis is harvested at the end of September and into October, and is usually sold in the Q4 and the beginning of the Q1 . That obviously creates substantial competition for regulated players because that cannabis is sold at a discount to, you know, the price that is charged by regulated players. Then we see that dissipate late into the Q1 , and definitely there's a shortage of product always in the Q2 and Q3 . I really do believe we had heightened use of cannabis during COVID.
We saw a slight change in that practice in the second end of the Q2 and Q3 . Now I think we've gotten back to a normal base, and we'll start, all of us will start growing from that base as the customer base and the products improve and the customer base expands to new customers in the sector. As states like New York, New Jersey, Connecticut go to adult use, Maryland, Pennsylvania, which we think are next on adult use, Florida, that will increase the TAM in the marketplace. Again, we think this is a one and a half quarter thing, and we'll start to recover into growth going into the Q4 and Q1 . We're already seeing that if you look at our October numbers.
Yeah. Thanks, Boris. I appreciate those comments. Just one more question on my end, just maybe pivoting over to Tryke. Just wondering if you can comment on the growth prospects of that entity, particularly, you know, Nevada and Arizona. Certainly after closing, it's gonna be integrated into your national platform, but $110 million, I believe in the press release for this year is pretty impressive from a six-store footprint, and then I guess penetration with 50 others. Could you just comment on what those prospects are, particularly in Nevada, and then maybe the share between retail and wholesale that gets to that $110, assuming you're allowed to say anything? Appreciate it.
Yeah. We're very careful because the deal's not closed yet. Obviously, it's a binding agreement signed, but we have to go through regulatory approvals. Usually the reason regulatory approvals are a little bit longer term is because Nevada is notoriously slow in terms of its regulatory approvals. Most deals take, you know, anywhere from six to nine months to get approved, and that could slow the process of integration of that deal, or we're talking to the company about how to best run it as we speak. We're anticipating those markets to grow at somewhere between, you know, 20% to 25% next year. We're pretty comfortable with those numbers.
What's really good about this transaction again is that it really fits in. We have a business in Nevada, we have a large business in Arizona, and we have a very good store in Utah. Now we're vertical in Utah because they're providing us a grow. We're adding two great location stores from them into our Arizona business, so there's a lot of synergy there. In Nevada, it's very synergistic, right? Because we have a large scale outdoor grow. We had a very small indoor grow. We're gonna expand their indoor grow, almost double it in size. We're gonna build a very large store across the way from where they have their store now.
It'll almost create a large cannabis corner with Planet 13 and Curaleaf right next to each other. We think that's gonna be very exciting. This is gonna be a very big, really sort of a destination store that we're gonna build right there. We're very, very bullish. We think that that's probably, as I said, a 20% growth business on the back of our already existing platform, plus the synergies that we'll get from combining all of those businesses with our existing businesses. The structure of the deal is very good too. We're very pleased with that transaction, as I think are the owners of Tryke.
Sure. Thank you.
I think that they're at a very good multiple. I mean, it's gonna be immediately accretive to our earnings. You know, we like that, we like this transaction a lot.
Thank you.
Our last question will come from Matt McGinley with Needham. Please go ahead.
Thank you. You affirmed that you'll be at the lower end of the guidance range of around $1.2 billion in 2021, but if you actually hit $1.2 billion, that would imply that revenue could actually be down sequentially in the Q4 . Is that kind of what you're alluding to, or are you off to a strong enough start that the momentum and the trend that Boris talked to you about in October would make the Q3 more of an anomaly and the Q4 look better in terms of the revenue growth?
I think we'll definitely have growth in the Q4 . You know, given everything that's been going on in the Q3 , we're trying to be cautious with our numbers, but you're gonna see growth in the Q4 .
Okay. Based on the production capacity that you added in the H1 , you should have had a substantial decline in average unit costs that would've pushed gross margins higher in this quarter. I know you stated that gross margin, or rather, promotion wasn't the big driver of that gross margin decline and it was more of New York and New Jersey. Either way, when I look at that top line and margin rate reported in the Q3 , it, whatever happened here doesn't appear to be an effective strategy from where I sit.
You mentioned that whole flower in New York could be a driver of margin into the Q4 , but you also have these expansion projects underway in New York and New Jersey and Connecticut and I think a couple other states that will likely press your margins, you know, until those assets become operational in 2022. I'm kind of wondering like what are the big drivers that get the gross margin higher into the Q4 and into 2022? You guys didn't provide formal guidance on gross margin, but you had alluded to, you know, 52% to 54% would be a kind of normal range. Is that still a viable target or is that no longer something you could hit given what you're seeing broadly in the market and the strategy that you're pursuing?
Yeah, Matt, I think you know the mid 50s% gross margin target continues to be a viable target. Look, in Q3, we gotta understand there were a couple of one-time events that happened. You know, there's the impact of the Northeast states. These are high margin states. When you have a revenue decline or a revenue change in there, that disproportionately impacts the gross margin. I think Boris is trying to make you understand that, look, once that picks up with the New York flower coming back up, that's gonna help gross margin. That happened in Q3. You had the Eureka divestiture in the quarter. That's not gonna repeat itself, so that's really gonna help the gross margins coming back up in there. We had some other inventory write-offs. You know, we do a really good cleanup in our inventory records.
We did that this quarter. That really impacted it. It was very unfortunate in our main facility, we had a fire. We had couple of different events, one time events that took place in our gross margin this time. You kind of back those out. Really, there was a change in gross margin quarter-over-quarter. I look at that to be only about like 200 basis points. We really need to climb back 200 basis points, not necessarily the 400 basis points that actually shows on the gross margin line item. We believe climbing that back is really New York flower coming back, the, you know, Massachusetts revenue coming back. That in itself is really gonna help it over and above.
New Jersey
New Jersey. Over and above the operational efficiencies. Actually, even in the Q3 quarter, which is getting masked and we really don't talk about, in the Q3, we have cultivation operational efficiencies that happened in Q3. They're just getting masked by a lot of these downsides right now. You will start to see them in Q4, Q1 because they're ongoing.
Matt, we had old CBD write-offs in our Kentucky facility tied to the old CBD business that we were in. We were holding that for some time, you know, hoping we could use some of that product. As the states liberalize, we decided to take a write-off on that product. You know, we had product with our Eureka facility in California that was shut down because we can now buy flower at a fraction of the price in the supply chain that we could do it there. We had some inventory write-offs there. We had a substantial, you know, total loss fire in Massachusetts in our main grow facility there, which we're now rebuilding. That obviously took a hit on the gross margin side.
There were one-time events that took place in this quarter that we applied that hurt the gross margin, but we fully expect to start that recovery between the Q4 and Q1 . Listen, New Jersey, you have to understand that once adult use, if adult use gets launched like they're saying in February, you know, with our inventory build up and our positioning in that marketplace, you're gonna see not only growth in revenue, but you're gonna see, you know, dramatic expansion in margin as well on the back of that. We've seen that in every state that transforms from medical to adult use. You start to see, particularly underserved states like New Jersey, you see not only substantial revenue growth, but you also see expansion of margin.
The last thing I will tell you is that we also have a very large brand new built facility in Illinois. You probably have heard this. I believe some of the other MSOs are having the same problem of the regulators slow-moving approval. I mean, the facility is fully functioning, open. You know, at least in our case, we didn't actually plant flowers. We understand one of the other MSOs actually fully planted the facility and the government came in and ripped the plants out. You know, there is the Illinois situation as well that we have to deal with. That's a regulatory issue. We are working with the regulators to get that approved, but they're definitely slow-crawling the approval of that very large facility.
That would double the size of our Illinois business, overnight, but it hasn't been approved. It's fully open. It's ready to go. It was approved. All the plans were approved by the state, but for some reason, they're slow moving the approval piece.
Okay. Thank you very much.
This concludes our question and answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.