Trulieve Cannabis Corp.
Q3 2020 Earnings Call Transcript

Published: 17 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Trulieve Cannabis Corporation's Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. Thank you.

[Lynn Ricci:]

Thanks, Jack. Good morning, ladies and gentlemen and thank you for joining us today. On the call with me today are Kim Rivers, Chief Executive Officer; and Alex D’Amico, Chief Financial Officer. Following our prepared remarks, we will open the call to questions. Before we get started, I would like to note that today’s call is being recorded for the benefit of investors, individuals, shareholders, the media and other interested parties. Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Statements made on this call speak only as of today and we assume no obligation to update any of this forward-looking information. Our financial results are provided in IFRS, also our prepared remarks this morning reference non-IFRS financial measures in order to provide greater transparency regarding Trulieve. Where applicable we may also provide a comparison to GAAP and non-GAAP financial measures to assist investors. Any non-IFRS financial measures presented should not be considered an alternative to financial measures required by IFRS and are unlikely to be comparable to non-IFRS financial measures provided by other companies. Any non-IFRS financial measures referenced on this call are reconciled to the most directly comparable IFRS measures in the company’s MD&A for the quarter ended September 30, 2020, as well as in the table at the end of the earnings press release. We believe that our profitability and performance are further demonstrated using these non-IFRS metrics. Please note that all dollar references are to U.S. dollars. This morning we reported results for the third quarter of 2020. A copy of our news release, financial statements and MD&A may be found in the Investor Relations section of our website, trulieve.com and were also filed on SEDAR. In addition, a webcast of today’s conference call will be available on our website later today. Now, I will turn the call over to our CEO, Kim Rivers.

[Kim Rivers:]

Thanks, Lynn. Good morning, everyone, and welcome to today’s call. Trulieve exceeded consensus for revenues and EBITDA again this quarter, achieving approximately $136 million in revenue representing a sequential quarter-over-quarter increase of 13%. Trulieve's third quarter pro forma revenue increased the Pennsylvania acquisitions that closed last week with $154.9 million. Our adjusted EBITDA was $67.5 million or 50% in the third quarter. This is a 93% increase in revenues and an 83% increase in EBITDA on a year-over-year basis. We are proud of the industry-leading profitability performance.

[Alex D’Amico:]

Thank you, Kim and good morning everyone. As Kim covered top of the call, we had a very strong quarter for revenue and profitability. Trulieve had record quarterly revenue of $136.3 million representing a sequential quarter-over-quarter increase of 13% and 93% increase over the same quarter last year. Unaudited pro forma revenue which includes PurePenn and Solevo and assumes the acquisitions had occurred on January 1, 2020 would have been $154.9 million for the current quarter and $392 million for the nine months ended September 30. As a reminder, this will be our last quarter reporting on an IFRS basis and moving to GAAP there will be a subtle shift in how we report certain items. We will be discussing the GAAP equivalent to key financial line items for the current quarter as I walk through our financial results. Our measuring unique to IFRS is production expenses and cost of goods from third-party suppliers. I would like to remind all of you, that's something that was communicated on our prior calls. This line is not cost of goods sold as you would find under GAAP, it is cost of goods plus other production costs. And accounting election under IFRS allows for production costs or pre-harvest costs to be spent as incurred. Therefore, the additional costs added here and what differs from the cost of goods sold line under GAAP for those of you attempting to reconcile, our dose production cost related to the unsold inventory or said another way, what we call, growth costs for unsold inventory. I am very happy to say that this is the final quarter we will have this financing metric. On a consolidated basis, production expenses in Florida and cost of goods from third-party suppliers in Connecticut and California totaled $34.1 million for the third quarter. Revenue less these production expenses and costs was $102.2 million for the quarter or 75% of revenue. This compares to $91.1 million or 75% in the second quarter. As we stated last quarter, we are continuing to realize the benefits of our efficient production and cultivation processes in conjunction with the fact that we did not do a spring greenhouse planting. It is possible for our gross margin to fluctuate a few basis points in either direction from quarter-to-quarter depending on inventory flow-through and product mix. Under GAAP, we also had gross margin of 75%. Now I’d like to update you on inventory. At the end of Q3 we had a total of $205.3 million of inventory which includes a significant amount of fair value. We also had $34.8 million of biological assets. This compares to $219 million of inventory and $33.3 million of biological assets at the end of Q2. On a quantity basis, we ended the quarter with approximately six months of inventory on hand, down from approximately seven months at the end of Q2, resulting in a $13.7 million reduction in inventory in the quarter. Inventory in biological assets are two of the areas that show the greatest difference between IFRS and GAAP for our business. Under GAAP, we don’t have the cognitive biological assets and all fair value is removed from inventory. As such, the $240 million of inventory and biological assets that we reflect under IFRS would equate to $77.7 million of inventory under GAAP. Our oil inventory levels remain a differentiator, enabling us to quickly respond to challenges such as COVID and catalysts such as edibles. I’ll now turn to expenses. Third quarter SG&A expenses, excluding depreciation and amortization, were $37.9 million or 28% of revenue, compared to $33.1 million or 27% of revenue in the second quarter of 2020. The slight increase this quarter is primarily due to the opening of nine stores in the quarter versus five stores in the prior quarter. We expect increases in operating expenses through 2021 as we continue to add dispensaries, enter new markets and ramp our infrastructure to support our growth initiatives and go forward compliance, but we do not anticipate a material change as a percentage of revenue. Overall, keeping a high degree of financial discipline around expenses is one of our keys to profitability. Operating income for the company was $43.4 million this quarter compared to $37.5 million last quarter. Net income was $4.7 million for the third quarter compared to $6.6 million in Q2 resulting in EPS of $0.04. Under IFRS for net income and EPS it is important to note that if the fair value impact of biological assets and the revaluation of our debt warrants were excluded, net income would increase to $33.3 million for the third quarter compared to $28.4 million in Q2 resulting in EPS of $0.30. Under GAAP, the fair value impact of biological assets accounting goes away, but the revaluation of our debt warrants will remain. As Kim mentioned, net income under GAAP would be $70.4 million resulting in EPS of $0.15 on a fully diluted basis. Focusing now on EBITDA. We believe adjusted EBITDA, a non-IFRS measure, provides valuable insight into our profitability performance. Adjusted EBITDA excludes from net income as reported interest, tax, depreciation, non-cash expenses, RTO expenses, share-based compensation, other income, growing costs related to biological assets and unsold inventory, and the non-cash effects of accounting for biological assets. We report adjusted EBITDA to help investors assess the operating performance of our business. Adjusted EBITDA for the third quarter of 2020 was $67.5 million or 50% of revenue compared to $60.5 million or 50% of revenue in Q2 2020. The $7 million improvement in adjusted EBITDA this quarter is primarily due to the increase in revenue, partially offset by increases in operating expenses and production expenses and cost of goods from third-party suppliers. This is even more impressive when you consider the COVID response costs incurred in the quarter to keep our employees and patients safe and the investments we’ve made throughout our facilities and dispensaries. In this quarter the GAAP equivalent adjusted EBITDA was approximately $65.8 million dollars or 48% of revenue. The primary reason for this difference, relates to the accounting treatment which is under GAAP which was factored in when we provided our increased guidance last quarter. Turning to taxes, as a percentage of gross profit including the net change in fair value of biological assets our tax rate was 25% for this quarter. We continue to maintain a strong balance sheet and cash position. Through the end of the third quarter we have delivered $73.7 million in cash flows from operations for the year, this is the result of our continued quarter-over-quarter profitability. In the quarter itself we had the unique one-time impact of the COVID tax extension whereby we paid $45.4 million in tax payments in July that were delayed from the prior quarter. This was coupled with our standard quarterly tax payment in Q3 to lead to $70.9 million of tax payments in the quarter. The double tax payment resulted in negative $4.2 million of cash flows from operations in the quarter where we would have been positive in both Q2 and Q3 had the timing of the tax payments remained standard. As such it is more appropriate in this case to look at the last two quarters combined where we have delivered $49.1 million in cash flows from operations. We fully anticipate positive cash flows from operations on a quarterly basis for the foreseeable future. We ended the quarter with a cash balance of $193.4 million. Our strong cash position allows us to quickly leverage the foundation we have built to capitalize on expansion opportunities, organic growth and go deeper in the states where we operate. In that regard, we plan to continue ramping our indoor buildings as we monitor the market and respond to the demand for flower. We will invest back into the business with CapEx expenditures through the remainder of the year and throughout 2021 to support our raised revenue guidance for this year and our planned 2021 revenue targets which we will detail for you next quarter. Total CapEx spend for the quarter averaged just over $11 million per month. This includes the buildouts of our Florida production and cultivation facilities as we continue to ramp our infrastructure to respond to the market demand for flower and the construction of our new dispensaries. This amount also includes what we refer to as operational CapEx for dispensaries, equipment utilized for automation and processing efficiencies, security and systems inclusive of upgrades. Finally, we have our buildouts in markets outside of Florida. We expect a similar run rate through the remainder of the year. We also anticipate continuing to ramp our production and dispensary and facilities in 2021 as we support our growth initiatives. As we look forward to 2021 and beyond, we will evaluate market demand and growth in our current markets to determine our expected CapEx. Last quarter, we raised guidance for revenues in the range of $465 million to $485 million and adjusted EBITDA of approximately $205 million to $225 million. While we are not adjusting guidance at the time, we do not expect declines in Q4. Please note that our guidance does not contemplate our recent acquisitions in Pennsylvania where we will have the benefit of approximately a month and a half of revenue in our consolidated year end results. I will end by saying that I am proud of what we’ve accomplished to-date. We have optimized our accounting and finance departments enabling us to fully capitalize on all opportunities as we continually assess our M&A and applications pipeline. We have upgraded our SAP platform which will lead to increased compliance and analytics capabilities for years to come, and we are well on our way in our transition to a U.S. reporting company as is evident by the GAAP metrics provided today. Finally, we have begun the formal buildout of our Sarbanes-Oxley program which will continue throughout 2021. This will enable us to quickly take advantage of uplift opportunities when they arrive. We are looking forward to an exciting end of the year and an even better 2021. I’ll now hand this call back over to Kim for closing remarks. Kim?

[Kim Rivers:]

Thanks Alex. 2020 has been a marked year for change not only with COVID, but in a more encouraging manner, around the social justice conversations we are having as a country, giving back to communities we operate in and supporting diversity, equity and inclusion efforts are part of our core values. In addition to social issues, our team is actively supporting many great causes that are important for our patients and their communities. Making a positive impact doesn't stop there. We understand environmental issues are important, which is why we just issued a sustainability review of where we are and where we will be focused in the year to come. There's more to growing a business than just the day-to-day operations and bottom line. We are growing a socially and environmentally responsible company that is ready for the future, and that future is exciting. As I shared last quarter and throughout our remarks today, Trulieve is on a strong trajectory and we are operating with a clear set of priorities to maintain our leadership in Florida and expand our brand nationally. Our team is highly focused on executing strategic initiatives to support our hub model, and we are excited about not only ending a great year, but also the road ahead, as we enter 2021, bringing the Trulieve brand into new markets. Thank you for joining us today, and as I always say, onward.

[Lynn Ricci:]

Operator, we can now open it up for questions.

[Operator:]

Certainly. Derek Dley with Canaccord Genuity. Your line is open.

[Derek Dley:]

Yes, hi thanks and congrats on another really, really strong quarter. I just wanted to talk a little bit about sort of capital allocation priorities and plans, you guys are obviously in a very fortuitous balance sheet position, and we did see an increase in CapEx this quarter. Should we expect something similar over the next sort of few quarters as you guys execute on what seems to be quite a big number of growth opportunities?

[Kim Rivers:]

I think Derek, our CapEx is really something that we focus on and we strategically evaluate on a continuous basis, and that will continue. It is important for us to make sure that in our core markets we're continuing to invest appropriately, so that we can generate that return on every dollar spent and that is something that we hold ourselves to a very high standard. Clearly Florida has been a market where that investment has a significant return for us and generates cash that we're then able to continue to invest, not only in Florida, but in our other growth markets. So what I would say is that we're not prepared on this call to provide specific guidance on a forward basis related to CapEx, but we do of course have ambitious growth plans, not only for the remainder of this year as it was reflected in our increased guidance, but also as we look into 2021 and as we're putting that plan together which we're going to share with you all on the next call, and it will require of course investments in CapEx, and as we as we build up that platform. So more to come on that, but certainly as you've heard from Alex, you can expect the current run rate in Q4 and really that Q4 as we all know, this Q4 capital investments are really 2021 capital investments at this point because, particularly when we're talking about cultivation and production investments, those require an investment upfront, but it takes a minimum of a quarter for us to begin to realize revenue and output from those investments.

[Derek Dley:]

Okay, thank you, that's helpful. And just in terms of when we think about some of the additional states that you brought on are certainly they're going to play a bigger part in 2021, namely I'm thinking Pennsylvania and Massachusetts, which do have wholesale markets obviously different than Florida. Can you just talk about, I'd be curious to hear your approach to wholesale and how you're thinking about attacking that portion of the market?

[Kim Rivers:]

Yes, we are extremely excited to get in to activate our wholesale line of business, and we have been on the ground in Massachusetts now for quite some time, really feel like we have a fantastic understanding and grasp on that market and clearly in Massachusetts, with and certain number of retail we do believe that wholesale will be an important line of business for us to be successful on. And again it's a tool in the toolbox that we'll need to deploy depending on the regulatory regime of the market. We do understand and I think everyone understands that having a vertical platform is certainly the most profitable and something that we have excelled on, so we will continue to have vertical channels wherever that's allowable. However, we also understand that in some markets, there is limitation to what that channel can provide and so diversifying into wholesale channel where you then have access to ever increasing the slice of the pie if you will, with respect to other dispensaries that are coming onboard is very, very important too. And so, Massachusetts, that plan has been developed, and we're looking forward to launching in Pennsylvania, and specifically we're very excited that we have 100% penetration currently in through the wholesale channel and we'll be looking to maintain that. We are also of course producing enough that we have good depth of product across all product types in stores that are also under the company umbrella.

[Derek Dley:]

Great, thank you very much.

[Kim Rivers:]

Thanks Derek.

[Operator:]

Russell Stanley with Beacon Securities, your line is open.

[Russell Stanley:]

Oh, good morning and congratulations as well. I was just wondering, pardon me with respect to Florida and the dispensary build out there, congrats on reaching your target well in advance. Can you, I guess elaborate just how many openings we might see before year end and if you have any preliminary thoughts on the pace of expansion in 2021.

[Kim Rivers:]

Thanks Russ. We're not going to give a specific number for year end. Like I mentioned, we do have a grand opening tomorrow in Lake City, which is a fantastic location. It's actually off of two primary Interstates, I-75 and I-10, and is I think a great area for both medical and then one day potentially recreational market here in Florida. We continue to monitor of course all of our metrics that lead us to make the decision for store expansion, including of course customer demand, current sell-through rates and wait times on existing dispensaries. And then of course with an eye towards what's to come and that potential of recreational coming to fruition in Florida, which again with the recent activity with the elections across the country and sort of the tone politically, we think certainly has a shot here in Florida in 2022.

[Russell Stanley:]

Great, that's helpful and maybe if I could just around the impact of the testing delays I think there'll still be consensus and certainly our estimates, but can you quantify the revenue impact of those testing delays?

[Kim Rivers:]

Yes, Russ we actually we don't have a specific revenue impact. Obviously that's a multidimensional question, but what we can say is that we have certainly seen the pull through into Q4, which I know that you are all seeing as well, and as we look at the numbers on a weekly basis, and with respect to our performance really the market as a whole here in Florida. So I know we saw those that sort of rates slow down a bit last quarter, and we really do think that that was due primarily to just again product availability. We certainly weren't meeting our targets with respect to depth in certain product categories that we know are drivers for patients and yet what has been very encouraging is that we've seen that demand bounce almost immediately back once we were able to get those products cleared from that bottleneck and back on shelves. So, we are seeing kind of I guess the pull through again in Q4, and I don't have an exact number for you, but we certainly do believe that we could have been higher in Q3 had that not occurred.

[Russell Stanley:]

Understood, that's great color. Thanks again and congrats.

[Kim Rivers:]

Thanks.

[Operator:]

Matt McGinley with Needham, your line is open.

[Matt McGinley:]

Thank you. On the acquired assets in Pennsylvania, it looks like you had pretty strong sequential growth at least from the first half really into the third quarter, but how much of that growth in the third quarter was driven by increases in retail productivity versus cultivation? I'm not sure if I should assume a similar sequential increase into the fourth quarter if the third quarter is kind of like a baseline to model off of?

[Kim Rivers:]

Matt, yes we're not we're not prepared to give any additional depth of color. And as you know, that's, as we've certainly stated those are unaudited numbers at this point, and we'll have additional color for you all, and as we again move into the move into Q4 and year end and get through our audit and so that we can speak with a bit more confidence and specificity around those numbers, but yes we're not at this point prepared to give any sort of breakdown on them.

[Matt McGinley:]

Does the pace of the unit growth in Florida means is that you've been growing like 6 to 8 units per quarter does that feel sustainable into 2021 or do you feel like either internally or externally you're sort of stressed with sustaining that sort of growth rate?

[Kim Rivers:]

I certainly don't think that it's a strain from an ability to execute standpoint and clearly we look at those numbers in a very analytical way. And in terms of pacing to meet demand and making sure that we're within our kind of operating metrics, if you will. I don't think that it's certainly not a stretch from an execution or a team or what our pipeline looks like, from a retail location standpoint, it just would be a question in terms of whether or not it makes sense, given sort of the overall mix and how it fits into our metrics.

[Matt McGinley:]

Okay, thank you very much.

[Operator:]

Pablo Zuanic with Cantor Fitzgerald. Your line is open.

[Pablo Zuanic:]

Thank you. Good morning, Kim. Just, can you give us an update in terms of those Supreme Court cases in the state, one regarding wholesale, what are you hearing, how do we handicap that? And the second one, I think is related to potential ballot for reg, but just if you can give more color and context around those two cases, please and timing, if you have some sense of that? Thanks.

[Kim Rivers:]

Sure. I wish that I had a substantive update for you. I don't. We're waiting on the Supreme Court in those instances, and so nothing new yet. And as a results of the oral arguments, the second round of oral arguments on the, we'll call it the wholesale case, and that, the Supreme Court had oral arguments again in October, and then also nothing on the ballot initiative yet. And so, I really, I don't have anything that you all don't know on either of those. And, but we'll certainly I'm sure be talking once we hear some news from the court.

[Pablo Zuanic:]

Okay, and just a quick followup, a lot of your competitors are talking about adding capacity in Florida, obviously it is a question more for them, but do you have a sense of what's really going on? When I look at the OMO data, I find it interesting that, the number 2, 3, 4, 5 positions tend to shift week-to-week or month-to-month. And other companies are unnecessarily, they don't have the same position in say, oil versus flower. So that seems to be erratic. I don't know how to make sense of that. But any color you can share there?

[Kim Rivers:]

Yes, I mean, obviously, I can't speak to competitors, and what they may or may not be doing strategically, although I can say that if you don't have enough capacity, then you do have to make decisions related to, flower versus oil, and how you're allocating that supply. And, certainly and we've refined our product mix, as well as our growth techniques, and the way that we're allocating different material for different product lines. And it's, a very simple concept to say it gets much more complex in practice. And as you know, we've diversified our grow with, again, the Greenhouse inventory, which gives us a robust supply chain of less expensive input material for biomass for oil products. And then of course, we have our high quality indoor grow, which is delineated between flower and then also higher in concentrates. And so, and I do think that our scale provides certainly a competitive advantage in our ability to continue to keep our product lines fresh and interesting and diverse and while others may be finding themselves into more decision making, having to make more specific decisions around P mix , due to supply constraints.

[Pablo Zuanic:]

If I can have one last one, or maybe more for Alex, but the interest rate guidance you've given for Pennsylvania, so the deal value without loans was $141 million, right? And you said it's below five times EBITDA. So it means, full year run rate of EBITDA about $30 million. If I, assume a 25% margin, that means $120 million in sales next year in your Pennsylvania operation. For this third quarter at about $19 million right, at 76 annualized, it would seem that number is quite doable, and that you could actually beat that number based on the growth momentum in Pennsylvania, any comments you'll make out there or Alex?

[Kim Rivers:]

Yes, I mean, as you know, Pablo we're not providing, guidance. I think specifically said that this year's guidance does not include the Pennsylvania acquisition and certainly as we get into another round of guidance, as we said now potentially coming, as early as the next call, and I think and again as we get through the Pennsylvania audit and really make sure that we've got, clear handle on exactly what that may look like. And then I think we will be in a better position to comment on that specifically. And, but with respect to, what we released about the deal and of course, just to remind everyone, we do have a specific presentation on the acquisition available online @trulieve.com under our investors tab, that the folks there are more than welcome to refer to.

[Pablo Zuanic:]

Thanks.

[Operator:]

Andrew Partheniou with Stifel. Your line is open.

[Andrew Partheniou:]

Thanks for taking my questions. I wanted to maybe discuss on the promotional environment currently in Q3 and Q4. Could you give a little bit of color on how you see that evolving and as well the product mix that you've had in Q3, and how that may or may not have affected average pricing?

[Kim Rivers:]

Sure. So we have very specific criteria that we hold ourselves to, with respect to and with respect to promotions and our, acceptable range if you will, on a monthly basis with respect to promotional activity, we've been within that range every month, and well within that range. And so we feel very comfortable and haven't seen any significant shifts that we've at least affecting Trulieve with respect to the market as a whole certainly. And I think it's a last as Pablo, the last speakers, correctly identified, we certainly see swings among other competitors and in terms of their changes in position, we believe based on our analytics that some of that does have to do with what promotions they're running, or what they're focused on, with respect to particular product classes or segments. And so you certainly may see a higher level of promotional activity, and it may not be overall a higher level of activity, just maybe a higher level of focus on a particular product segment. And again, that may have to do with their product mix, et cetera. So, but overall, I would say globally, as it relates to Trulieve, we're certainly well within our range and have been consistently within that range from a promotional perspective quarter-to-quarter and month-to-month.

[Andrew Partheniou:]

Great, that's very helpful. Thank you. And just on another topic of M&A, you obviously have the ability to deepen your footprint within Pennsylvania, adding more store licenses there. Would you say that that could be a focus for you or how does that focus play with relative to entering even more new markets?

[Kim Rivers:]

Yes, as I've said, historically, we certainly are focused on profitability and increasing profitability wherever possible in markets that we operate in and obviously that's dependent on opportunities that exist and we are opportunistic, with respect to M&A. And on the call, we tried to clearly, identify our priorities with respect to the build outs of our Southeast and Northeast hubs, which we'll continue to focus on as we enter and as we close out 2020 and enter 2021.

[Andrew Partheniou:]

Okay, thank you and congrats on a good quarter.

[Kim Rivers:]

Thanks.

[Operator:]

Jason Zandberg with Pi Financial. Your line is open.

[Jason Zandberg:]

Thanks for taking my question. Just wanted to maybe shift gears on to West Virginia just, first of all congrats for recently being awarded a license in that state on the processing side, just wondering to get your thoughts on pursuing further licenses in that state. How important do you see West Virginia in your roadmap moving forward? Just any color you could give would be fantastic. Thanks.

[Kim Rivers:]

Sure, as an adjoining state as Pennsylvania, and certainly again, as we're thinking about operational efficiencies in that Northeast hub, West Virginia was a natural application target for us. The state of course, this is not through, awarding licenses there and so we'll have again a more complete evaluation of what that market may or may not look like once we're completely through the licensing award process and again and clearly are going to be evaluating and impacts and we'll have additional color and as we look to contribution from that state in 2021.

[Operator:]

Kenric Tyghe with ATB Capital Markets. Your line is open.

[Kenric Tyghe:]

Thank you. Good morning, and congrats on the quarter. Kim, just with respect to edibles in Florida, could you speak to how you see edibles the form factor evolving as a percentage of mix or rather what you see edibles representing let's call it, a year or two down the line? And then the follow-on to that would be what is the read-through in terms your gross margin profiles of edibles as and how should we think about the potential impacts of edibles equips, on your margin profile between here and there?

[Kim Rivers:]

Edibles has been a fantastic addition to our product mix so far and clearly we're in the ramp up phase, and certainly in Q3 and as we were bringing edibles online, and then coupled with our testing bottlenecks, you have to remember that labs were also testing edibles for the first time, which is a whole different, that's a whole different animal with respect to how those tests are performed. And frankly, the number of tests that have to be performed on edibles as required by the state of Florida. So that's why we were hesitant and in large part to give any specificity around those numbers for Q3, because quite frankly, we had a lot of products hung up in testing that then got kind of shaken loose, if you will, towards the end of the quarter. Now we are seeing, very impressive, edibles is at the top of our sell through rate from a velocity perspective. So we are seeing very impressive sell through rates on our edibles. And what that's telling us is that we need to make more of them and faster. So that surrounds our call, the comments on the call around ramping production, making sure that we're fully stocked all three shifts, looking at expanding equipment, adding lines, so forth and so on, because we know that the demand for that product category is here, so we see it as a strong contributor moving into Q4 as well as into early 2021. We haven't, again, given specific, specific guidelines on margin contribution or profile. And I think we all know that, edibles in general are and do tend to have a stronger margin profile. Again, that was tempered somewhat because labs and so forth were trying to get their feet underneath them and actually required additional guidance that was just issued by the Department of Health around and adding some more practical, quite frankly, and we were appreciative of it and guidelines in terms of how many tests that will greatly affect both the cost and the timing flow through of getting edibles to market in Florida. So that's a bit in flex right now and but they are certainly above average with respect to margin performance.

[Kenric Tyghe:]

That's something great insight. Kim just on the velocity discussion you mentioned you've got three shifts a day, very impressive kitchen that you have the 10,000 square feet. But are there regulatory or other constraints that would preclude expanding that? I mean, I appreciate this, there's only so many new lines you can layer into a 10,000 square foot kitchen. How do we think about that? And is there a regulatory constraint for any potential expansion of your kitchen?

[Kim Rivers:]

Yes, in Florida, there's not and there aren't any regulatory constraints across the supply chain, which is one of the reasons quite frankly, it's such an, important market for us and why we've been able to reach the scale that we've been able to reach, which we think of course, will be important because as again, the regulatory landscape shifts across the country, the ability to have to operate and then really understand what it takes to operate at Trulieve scale we think is critical in terms of our ability to actually produce volume. It's one thing when you have a 2000 square foot kitchen and you're running one shift a day, right? It's quite different when you're doing literally we're at a commercial manufacturing level and of course all GMP certified and so forth. So there's not a regulatory constraint and we would think about adding an additional square footage and for a kitchen and certainly are in discussions around that as we think about CapEx when we think about expansion going into 2021. And of course, there's the timing right on that and that of course is a separate conversation, but no regulatory constraint. And certainly, we see it as a strong contributor again as we move into 2021.

[Kenric Tyghe:]

Thank you. Kim, just a very quick followup back on Pennsylvania, please. Your capacity expansion to 90,000 square feet is this largely or entirely to service the wholesale opportunity or is there an opportunity within the Solevo stores or increased penetration or less buying of product, how should we think about that as a direct to the wholesale exclusively, or is there also some additional opportunity within the three stores you have?

[Kim Rivers:]

So right now, PurePenn is selling into Solevo at a fairly low rate, so we definitely believe that there is increased availability to sell through into the Solevo locations. And then of course, in addition to expand our wholesale penetration as well, not their penetration because they're at 100% of the stores, but to increase the mix and to increase the variety and quantity of products that they're also selling to the wholesale market as well. So we think there's upside on both avenues.

[Kenric Tyghe:]

Thank you and nicely done. I'll leave it there.

[Kim Rivers:]

Thanks.

[Operator:]

Eric DesLauriers with Craig-Hallum Capital. Your line is open.

[Eric DesLauriers:]

All right, great thanks for taking my questions and Kim congrats on the strong quarter as well. First off from me is a bit of a follow up on Kenric’s question. So I believe right now PurePenn or Moxie productions is 100% concentrates, I guess, correct me if I'm wrong there. You've also stated that you'll be expanding cultivation from 35,000 square feet to 90,000 square feet and of course, further room for expansion. Should we expect to see some flower production coming from that expansion? And, if you can offer any color, whether it will be Moxie or Trulieve branded, and then any color on the margin profile difference between concentrates and flower? If you're willing to offer it would of course be helpful?

[Kim Rivers:]

Yes, so just a quick reminder on Pennsylvania as we move into 2021 and I know you all know this, but we are in earn out. So there is, we are and we look at we look at that very and as a true partner and so we are in a bit more of a consultative relationship through 2021. That being said, certainly there is an expansion. We are in deep conversations with our partners around product mix and finding different models and considering the different strategic alternatives for the expansion of that 35,000 to 90,000 square feet. Certainly PurePenn in the past has provided flower, so they are equipped to and how to grow very high quality premium flower that has incredible sell through. As we know, the Pennsylvania market of course, does have a current flower shortage, like a lot of markets across the country. So that is part of the discussion. And so, I'm not in a position to comment today on that. However, again, conversations are ongoing. We have a great outlook for Pennsylvania and for that relationship moving forward and look forward to being able to bring a variety of products to the market.

[Eric DesLauriers:]

Okay, that's helpful. And then lastly Kim, regarding the testing backlog in Florida. First, can you comment on how you were able to get edibles out so quickly amid that backlog? And then is there any commentary on whether you expect the testing backlog to improve? I know from my personal experience, that testing backlog is difficult to work through and especially with edibles with the various matrices involved there. So, any comments on whether you're seeing more labs opening or current labs increasing capacity? Just any kind of comments on your thoughts on that testing backlog and how we should think about it going forward?

[Kim Rivers:]

Sure, with respect to our ability to get edibles out the door, and as we've mentioned, now I think you've all literally heard me talk about edibles now for the last three calls or so. So I think we can all appreciate that it's been top of mind and it was no surprise that we were sitting on go related to edibles and what that meant is that we had oil in reserves allocated ready to be batched. We had all of our formulations. Our kitchen was approved in advance. Our amendments were drafted. We kept it very, very simple and what we thought could be approved easily by the department given the statutory requirements that were clearly outlined, and three years ago, in the edible section of this of Florida statute. So preparedness, and then our teams laser focused on being an execution, I mean, the rules came out I believe mid-afternoon, our team worked literally around the clock, until we made that first sale. So it wasn't something where we were looking at it like there were there were 12 hours of time to work in a day. I mean, it literally was an all hands on deck 24/7 push. So and in terms of the labs also, when you're talking about smaller batches, from a launch perspective, that becomes much easier to handle than again, as we ramp up to production level batches and varieties of products. And we're talking about not only, the TruGels or gummies, but we're also talking brownies and cookies and chocolate. And that becomes of course more complex, depending on the form factor. And with respect to how we see that clearing initially, there was not to get too granular here, but initially there was some confusion. And it could have been interpreted that literally over 40 tests were required per batch of edibles. That now has been clarified by the Department of Health. And some of that I would like to think is not only ourselves, but many of the other companies in the state asking for that clarification along with the labs. So we now have clarification, it's actually much fewer than that, so that helps in and of itself. And in addition, we worked with our labs and have just had, we have a high level of transparency. There's literally a report that goes off to them every single day with when they promised it, where they are, and what our expectations are. And so I think it's just that I'm working and making sure we've got good processes in place. And also clear expectations that labs have also increased their equipment, and additional labs to your point are getting certified in the state. So there's a multitude of factors and in terms of what's going on and with that dynamic, but I think as far as Trulieve is concerned, we have successfully cleared that backlog and are now back on track within our, I'll call it pre-testing backlog parameters in terms of sell-through and flow through on our tests.

[Eric DesLauriers:]

That's great to hear. I appreciate the color.

[Operator:]

Aaron Grey with Alliance Global Partners. Your line is open.

[Aaron Grey:]

Hi, I'll add my congrats on the quarter and thanks for the question. First one I mean I just want to kind of come back to edibles. You know I appreciate it's still very much early days, but just on regarding the sell-through rates that you talked about, just wondering if you could give any kind of initial kind of consumer takes that you've had, have you've seen an increased basket for those few who have been taking on edibles? Have they been adding on to maybe the other form factors they've been on been buying? And then also, because you guys have been ahead of the curve in terms of getting edibles on to shelves, have you seen any uptick in terms of new patients that might be coming to Trulieve that had been going to a competitive prior? Because you do have some edibles available even though it might be convenient for you guys? Thanks.

[Kim Rivers:]

Yes and certainly, we have an approximately 90% of product -- of patients that are Florida patients have visited a Trulieve location. And so, they're in our database and they're part of our group that we continually message and get products to. And so, I would say that certainly we continue to see a strong capture rate of patients in Florida. I can't speak again, specifically, because the impact on the quarter, quite frankly, was not significant enough due to what the comments that I made earlier around and when edibles were approved, and then what we saw when we were ramping up in terms of production level batches, and trying to get those on shelves. So I don't have that data specifically for the quarter. But certainly, again, I believe that we'll be able to add some additional data points for you all next quarter as we see that come through in a more meaningful way in Q4.

[Aaron Grey:]

Okay, thanks. I appreciate that. And then just like from me, just in terms of, the store expansion as you guys look to 2021 specifically for Florida, can you just talk about how you think about the locations and store setups, particularly with the potential for adult use maybe coming online in 2022, and how you might think about store locations and the setups differently than maybe you had historically when it was a predominantly medical market a few years back? Thanks.

[Kim Rivers:]

Absolutely, the team is very excited about continuing to look at Florida, not only as a medical but also potentially as a recreational market. And certainly have that as a consideration for stores, through our build outs in 2021. And I think what you'll, begin to see from us is some different store footprints. And so, we kind of have a standard store, and then we'll begin to look at and some flagship or different locations, as we think through and again, try not to be too premature on that making sure that it is timed appropriately and with the market. And but for example, you see, our Daytona Beach store is a larger format store. And we utilize part of that store currently, as more of a delivery platform kind of back of house, but have plants that again, that location will be we believe a very, very strong location from recreational perspective. So could flip that store into a more, we'll call it an experiential location if and when recreational looks to be more certain. And so certainly, we've got some other locations that we have our eye on that would be similarly positioned.

[Aaron Grey:]

Okay, great, thanks.

[Operator:]

Andrew Semple with Echelon Capital Markets. Your line is open.

[Andrew Semple:]

Hi, good morning, everyone and congrats on the results.

[Kim Rivers:]

Thanks.

[Andrew Semple:]

I just wanted to touch on a comment made in the prepared marks, your average reaching $10 million of sales per location. Just want to clarify, is that something that you've already achieved today? And I also want to get your thinking as forward as you continue to open new stores? Do you think there is still a number of underserved markets, where you can continue opening stores that would achieve this level of productivity, if you had any thoughts on that?

[Kim Rivers:]

Sure. So the answer is yes, we have achieved that. And in terms of additional store growth, and certainly, look, we're not a company that is going to open stores. We've never been a company that does things just for the press release rate. And so we don't we're not going to open stores, if we don't think that those stores would be able to be strong contributors to profitability, and/or are needed to make sure that we're keeping our and our customer service, expectations in line for our Trulieve patients. So that certainly is a strong consideration. And but again, we're not going to do something just for the sake of the press release.

[Andrew Semple:]

Understood, thank you for that. Just touching on Solevo and on PurePenn when I look at your pro forma results for the three and nine months, it appears Q3 was quite a strong quarter of those assets. Just wondering if you would be able to provide any additional color on that may be and what the growth drivers there were?

[Kim Rivers:]

Yes and as I mentioned before, and we were not able to provide any additional comments at this time. And certainly, these were an audited performing numbers, of course, we also are happy with those numbers. And it was one of those; their performance is one of the reasons why and we found those assets to be and those partners to be so attractive for us to pursue those transactions. So we're excited about the performance. And we're excited about the growth trajectory ahead. We of course, know that PurePenn has additional square footage coming online in Q1, and that should lead to additional increased profitability. And certainly we believe that Solevo has run rate ahead of it as well. So and, again, I can't give you any real specifics there, but are very, could not be happier to have to have those two companies and really important note is their teams. And the alignment between our companies has just been incredible. And they're actually there's a group of folks that are going to be here for a big meeting later on this week. And, the integration continues to go really well and we're very excited. I think the entire team is excited about what Pennsylvania has to offer in terms of growth.

[Andrew Semple:]

Thanks for taking my questions and congrats again.

[Kim Rivers:]

Thanks.

[Operator:]

Paul Piotrowski with M Partners. Your line is open.

[Paul Piotrowski:]

Hi, good morning, Kim. Congrats on a great quarter. Just one followup on West Virginia. So are you guys looking at all to acquire a cultivation license there and is being kind of vertically integrated important to you guys in that state?

[Kim Rivers:]

Yes, again, we're excited about West Virginia and thinks that either from a strategic location perspective, with the proximity, and certainly the attachment to the Northeast and that hub that we're working to grow there is certainly, it's certainly a good -- a solid state and a solid contributor. As I mentioned, West Virginia is not finished in terms of the entire process on licenses and so we'll have additional comments from a strategy perspective. Once obviously, that's all finalized however. And certainly having a production license is a key license for us, because it gives us the flexibility to have both wholesale relationships with all dispensaries through the state, and we certainly would believe that we would have the ability kind of with or without a grow to contract for supply if we need to, and have the ability to have, again, control over kind of final product form factors and product mix, which again is we think, a key strategic requirement for us in that market. And then again, I think it remains to be seen in terms of, what the rest of the supply chain may look like.

[Paul Piotrowski:]

Okay, great, thank you.

[Operator:]

And now, we are moving on to our final question, a followup question with Andrew Partheniou with Stifel. Your line is open.

[Andrew Partheniou:]

Hi, thanks for taking some additional questions. Just wanted to followup on M&A. With the election having obviously contributed to significant enthusiasm, could you give a little bit of color on what you're seeing in terms of valuations and whatnot in the private markets?

[Kim Rivers:]

Yes, I think I mean, I think it continues to be, I can't say that I've seen significant changes with respect to evaluations. I mean, at the end of the day, certainly there's excitement, but the way that we look at least from our perspective, the way that we look at businesses and the way that we, have those conversations, both internally and with potential partners, really center again around pretty basic fundamentals. And, the reality is those fundamentals aren't necessarily changed, right? I mean, if you have four feet of production, that's what, there's only x-amount of, there's x-amount of products that can be produced there. And similarly, in terms of the fundamentals of this business, and so, I think for us, it's business as usual, head down, staying true to our valuation metrics, making sure that we're disciplined in terms of how we're looking at and how we're looking at partners, I think in increasing enthusiasm, and maybe a bit more of an understanding that scale will be important. And so perhaps, some of the operators who have considered or maybe have not considered partnering up into this point, maybe keeping your head up and saying, okay, either we're going need to get some additional capital and expand, right, or we need to think in a very real way about potentially partnering and so that we can be positioned for change, if it does, and when it does occur in their particular markets. But in terms of, how we're viewing M&A, I would say that we're continuing on the path that we've set for ourselves.

[Andrew Partheniou:]

Thanks for that. And just a follow-up, you talked a little bit about how maybe players are understanding that scale is important. Would you say that that was an important consideration in the acquisition of your PA assets, considering the attractive multiples that you guys executed on?

[Kim Rivers:]

Again, I'm not going to speak for our partners there. But I will say that relationship was developed over the course of a year. So that was not something that, that's not a transaction that we began conversations on in the last, 60, 90 days, and we thought that it was very important on both sides for us to appreciate and understand what each party was bringing to the table. And certainly I think that, there is a desire and a competitive spirit in both of those management teams and in the employees to want to continue to grow and win in their home state of Pennsylvania and we're very excited to be partners with them and to be right there with them as we achieve that.

[Andrew Partheniou:]

Thanks very much for the questions and congrats again.

[Kim Rivers:]

Thanks so much.

[Operator:]

I will now turn the call back over to CEO, Kim Rivers for closing remarks.

[Kim Rivers:]

Thank you for joining us today and we'll see you all next quarter.

[Operator:]

This concludes today's call. We thank you for your participation. You may now disconnect.