Cresco Labs Inc. (CL) Earnings Call Transcript & Summary

Good day, and welcome to Cresco Labs' Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Good morning, and welcome to Cresco Labs' Third Quarter 2020 Earnings Conference Call. I'm joined today by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our Chief Financial Officer, Dennis Olis; and our Chief Commercial Officer, Greg Butler, who will be available for Q&A. Prior to this call, we issued our third quarter 2020 earnings press release. This document has been filed with SEDAR and is available on our Investor Relations website at investors.crescolabs.com. We plan to file our financial statements and MD&A for the 3 and 9 months ended September 30, 2020, on SEDAR, subsequent to this call. Before we begin our remarks, I'd like to remind everybody that certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian securities legislation as well as within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include estimates, projections, goals, forecasts or assumptions, which are based on current expectations and not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations. Additional information about the material factors and assumptions forming the basis for our forward-looking statements and risk factors can be found under Risk Factors in Cresco Labs' public filings available on www.sedar.com. Cresco Labs does not undertake any duty to publicly announce the results of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco Labs will refer to some non-IFRS financial measures, such as adjusted EBITDA and operational gross profit, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for the calculation of these measures and a reconciliation to most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Please also note that all financial information on today's call is presented in U.S. dollars, unless otherwise noted, and all interim and financial information is unaudited. With that, I'll now turn the call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

Good morning, everybody, and thank you for joining us on the call today. We hope you and your families remain healthy and well. We have the privilege of speaking with you today about the fastest-growing industry in the United States. For those who have participated in the U.S. cannabis sector for a long time as an investor, a patient, an employee or a business owner, we echo your excitement for where this industry is heading. Simply put, cannabis is well on its way to $100 billion industry, and is now a permanent feature of our economy, producing the highest organic revenue growth in this sector for the second quarter in a row. Cresco Labs has substantiated itself within the very top-tier of the industry. I'll begin with some highlights from the third quarter and review the 5 specific ways Cresco Labs has been delivering growth in shareholder value in 2020. Dennis will provide a discussion of our financial results and capital position, and then we'll conclude our remarks with some comments on the recent U.S. election and its impacts on our industry. After that, we look forward to answering your questions. Our thesis remains, you, in this industry, by building the most strategic geographic footprint, establishing meaningful material positions in each of those markets and prioritizing the middle 2 verticals of the value chain. The acceleration of our growth this year is a reflection of the value of our differentiated strategy. We're telling a unique story of strategic breadth, depth and execution. Because of the investments we've made, the changes we've managed through and the hard work devoted by our team over the last 12 months, Cresco Labs entered the third quarter firing on all cylinders. Revenue in Q3 was $153 million, an absolute increase of $59 million or 63% sequentially. This is our third consecutive quarter of more than 40% sequential top line growth. With $90 million in net wholesale revenue, we are the #1 operator in the industry, focused on the wholesale distribution of branded products. With nearly $63 million generated from our 19 stores, our retail platform is outperforming. During Q3, we also substantially increased operating leverage and profitability with adjusted EBITDA of $46.4 million or 30% of revenue. To top it off, we generated our first full quarter of positive free cash flow in addition to positive net income. We started off 2020 by completing the construction on 2 transformational expansions of our cultivation facilities in Illinois and Pennsylvania. We knew that focusing on the build-out of wholesale operations would be a less linear path to revenue growth than prioritizing new retail stores. But we also knew that by focusing on the middle 2 verticals of the value chain, we would gain leading market positions in the largest key markets, drive sustainable growth on the top and bottom line and have a more versatile and scalable business model long term. As we look toward our next phase of growth, it's rinse and repeat. The playbook will be applied to more states, and again, we will achieve meaningful material market positions. In Q1, we introduced the framework of 5 specific ways Cresco Labs are delivering growth and shareholder value in 2020. We remain committed to our plans and continue to execute on the strategy that got us here. Number 1, we're investing our resources in the most strategic markets. Illinois has now crossed the $100 million a month mark and currently has an annual run rate of over $1.2 billion. There are approximately 76 retail stores supporting the market today. And as the incumbents continue to open their second locations and the state issues the next batch of licenses, we expect a significant unlock of consumer demand and an expansion of opportunities for our wholesale business. In Pennsylvania, consumer demand continues to absorb every gram of new supply. In Pennsylvania as well as New York, the governors have given constructive commentary on the passage of adult-use legislation in the coming year. Including Arizona's new adult-use law, this means that 7 of our 9 states could potentially be adult-use markets in the next 12 to 18 months, whereas only 3 of our states were adult-use markets just 1 year ago. In Q3, California recorded its first quarter of more than $1 billion of sales, an increase of 21% sequentially. In Massachusetts, growth has not only returned, but accelerated since the shutdown of adult-use. And in Michigan, state sales increased 37% sequentially in Q3. We are equally excited about the flourishing medical markets in Ohio and Maryland, both highly regulated limited-license states with the potential for exponential growth as patient accessibility expands, new product forms are introduced and supply becomes more robust. 6 of our 9 states are now on annualized run rates of more than $1 billion. We've built the most strategic footprint in cannabis, and it's allowed us to take leading market shares in multiple key states and diversify our growth for near and long term. Now let's look at how we're taking share in these markets. Number two, we are the #1 operator focused on the wholesale distribution of branded products. Net wholesale revenue was $90 million, an increase of nearly 65% or $35 million sequentially. Across our footprint, we increased wholesale penetration by 15%, while average revenue for wholesale account increased 25% over Q2. We've expanded the reach of our brands with the launch of Good News in Illinois and California, the introduction of Remedi to New York and the extension of the Cresco brand with a 1 gram Liquid Live Resin cartridge. The step change in our wholesale growth this quarter was driven by the expansion of our cultivation facilities in Illinois and Pennsylvania as well as our execution as the industry's premier wholesaler. Our competitive advantages in cultivation allow us to reach target yields faster and deliver an industry-leading portfolio of consumer brands. In Illinois and PA, during 2020, we developed our playbook on investing in infrastructure, executing in cultivation and accelerating the distribution of our brands on nearly every retail shelf. We made the investments in 2019, built out the new supply, and now we're reaping the benefits in Q3. Heading into 2021, we've deployed the same playbook to build leading positions in more markets and generate high returns on invested capital. Number three, our retail platform is outperforming. Retail revenue in Q3 was approximately $63 million, a 60% increase sequentially. Same-store sales grew 178% year-over-year on a base of 10 stores, and 15% sequentially on a base of 15 stores. While average basket size was relatively flat quarter-over-quarter, number of tickets increased by 74%. Our Sunnyside retail model is producing strong same-store sales, attracting more customers and earning a disproportionately large share of the market. We opened 2 new Sunnyside locations during the third quarter, both in Illinois, bringing our total stores in the state to 9. We recently announced that our 10th Illinois Sunnyside store will be located in Naperville, which should make Cresco Lab the first operator to open our maximum of 10 stores in the state. Not only are these new Sunnyside stores contributing phenomenal average revenues, but they're also accretive to our wholesale strategy. Retail allows us to showcase our brands, build trust and education with consumers and patients and gain important insight into what shoppers want from our brands. With more Sunnyside stores planned to open in Pennsylvania, Massachusetts and Ohio in 2021, we will continue our measured approach to build out retail in advantageous markets. Number four, we're taking share in California, the largest, most competitive cannabis market in the world. In Q3, while state sales grew 21%, Cresco Labs' total California revenue increased by 56%. In the world's most competitive cannabis market, our brands continue to be received exceptionally well. Revenue from our Continuum distribution platform increased 69% in Q3, driven by own brands like Cresco, FloraCal and High Supply, up 66% sequentially. Wholesale penetration was up 15% in the quarter, while average revenue per wholesale account grew by 25%. The growth of our California business in 2020 is a result of a successful ability to integrate acquired assets. Our ability to rightsize and optimize the platform and a critical focus on improving top line and gross margin. Looking ahead, we'll focus on driving increased wholesale velocity by adding new partner brands to round out our distribution portfolio. Now that we have operating leverage in the platform and a dominant distribution business, we expect our performance to accelerate into 2021. To build a truly national consumer brand, winning in California is a prerequisite. With improving regulations and state sales projected to reach $7 billion by 2025, California will continue to be a key driver of growth for Cresco Labs and the industry. Number 5. We're generating substantial operating leverage as we scale. Comparing Q1 to Q3, we increased revenue by $87 million, while holding SG&A flat. The investments we made to support our growth are paying off. And as a result, our profitability has grown dollar-for-dollar with gross profit. With SG&A at 31% of revenue, the Cresco Labs team is more efficient than ever and poised to deliver profitable growth ahead. The U.S. cannabis industry has seen massive growth this year, and Cresco Labs has continued to outpace it. We have just delivered our third consecutive quarter of more than 40% sequential top line growth, record operating leverage and profitability and our first quarter of positive free cash flow. I'd like to take a moment to highlight another achievement. Core to our values as an organization, during the quarter, Cresco Labs has awarded the Bill Leslie Visionary Award by the Cabrini Green Legal Aid Center, recognizing our commitment to criminal justice reform and our work helping hundreds in Chicago and take steps towards criminal record expungement. By living our core values, our team has moved mountains over the last 12 months and further into our vision of being the most important company in cannabis. The record-setting results in Q3 clearly prove the value of our differentiated strategy and demonstrate our best-in-class ability to execute it. I could not be more proud of this team. I'll now pass the call to Dennis, our CFO, to provide highlights from our financial results and to discuss our capital position.

Thank you, Charlie, and good morning, everyone. I'll start by saying that as a company and as a management team, we could not be more proud of the results this quarter. Our team has shown an outstanding ability to execute our strategy. And after a period of investing in our infrastructure, the hard work is now being shown in the numbers. I'll begin my remarks by reviewing the financial highlights from the third quarter, then discuss our balance sheet and capital position. Please note that all numbers are stated in U.S. dollars. Revenue in Q3 was $153 million, an increase of $59 million or 63% sequentially. Allow me to repeat that. We grew our top line revenue by 63% in 1 quarter. This marks the third consecutive period of more than 40% sequential revenue growth. Revenue mix in the third quarter was comprised of 59% wholesale and 41% retail. We're achieving growth across our footprint as we continue leading in our top 3 states and see increased contributions from other markets. On top of the substantial top line growth in Q3, we also had record operating margins, increased profitability and positive free cash flow. Third quarter operational gross profit grew 82% sequentially to $80.6 million, and margins increased by 600 basis points to 53%. As we expected, the cost associated with the expanded cultivation facilities normalized in Q3, and we saw a material increase in gross profit. We're very pleased with the margin improvement this quarter and believe there is additional upside as we strengthen our vertical operations in other states. Q3 SG&A as a percent of revenue was 31% compared to 48% in Q2. Including share-based compensation and onetime costs, SG&A was 26% of revenue compared to 35% in Q2. As Charlie mentioned, comparing Q1 to Q3, our revenue increased by $87 million, while our SG&A expense was flat. As we continue to make investments in our people and our platform to support future growth, we expect SG&A as a percent of revenue will continue to trend downward. Third quarter adjusted EBITDA was $46.4 million, a 182% increase from Q2. As impressive as the sequential revenue growth was, the growth of adjusted EBITDA quarter-over-quarter was even more remarkable. Net income for the third quarter was $4.9 million. We continue to believe adjusted EBITDA is the best measure of our performance as it does not include the impact of biological assets and other mark-to-market items, which can cause quarter-to-quarter volatility. Q3 operating cash flow improved significantly to $18 million compared to a negative $10 million in Q2, a swing of approximately $28 million sequentially. Operating cash flow would have been even more impressive, but for this year's unique concentration of tax payments in Q3. Third quarter CapEx was approximately $10 million as we opened 2 new retail stores and made investments in automation at several of our production facilities. At the end of Q3, we still had approximately $50 million in tenant improvement allowances available to fund the expansions of our cultivation production facilities in Michigan, Massachusetts and Ohio. This $50 million is in addition to the cash on hand. The combination of these items resulted in our first quarter of positive free cash flow. Cash and cash equivalents at quarter end was $57.7 million. Along with our tenant improvement allowances, we expect to be able to fund our near-term growth projects without the need for additional capital. As we look to deepen our market positions in our existing geographical footprint and evaluate opportunities in other states, we will remain opportunistic. While our track record of execution and results give Cresco Labs ample access to capital, we will continue to be responsible stewards of capital, make decisions that align with our growth plan and act in the best interest of our shareholders. Because of the investments we've made over the last 12 months and the hard work devoted by our team, Cresco Labs entered the third quarter firing on all cylinders. Our results substantiate the value of our differentiated strategy, and we will continue to execute on our plan to capture growth in the years to come. Thank you for your time today, and I'll now pass the call back to Charlie for his final remarks.

Thanks, Dennis. On November 3, 5 out of 5 states passed new cannabis use laws through ballot initiatives. Included were states like Montana, South Dakota and Mississippi, with historically conservative constituencies. We've always known that cannabis makes good policy. But if this election has shown us anything, it's that cannabis has become both good policy and good politics. And, that provides a very positive outlook for this industry. The U.S. cannabis market has become a permanent feature of the U.S. economy, growing at a faster rate than every other industry in the country, and it's doing so with one hand tied behind its back. As any responsible organization should, we've taken critical steps to prepare our business for any possible scenario related to national reforms on cannabis. However, regardless of changes at a federal level, the reality is, the U.S. cannabis sector will continue its exponential growth, and Cresco Labs will continue to execute its vision of being the most important company in the industry. Thank you for your time today. I'll now ask the operator to open the line for questions.

[Operator Instructions] And our first question comes from the line of Kenric Tyghe with ATB Capital Markets.

I think simply wow probably covers it better than congrats this morning on the size of that beat. So very well done to the team. If I could, just quickly on my -- on a question here. Charlie, can you speak to, in Illinois and in Pennsylvania, where was demand pull for your increased capacity strongest? And to the extent you can, can you provide any color on whether you saw share gains or -- of any consequence or rather the quantum of those potential share gains in either of those 2 markets?

I sure can. Thanks, Kenric. Thanks for the nice compliment, too. So Illinois and PA, as it relates on where, I guess, more demand came from for our increased supply, I would say it was absorbed well by both states. Both of these states are currently, and will remain for the foreseeable future, supply-constrained markets. So very encouraged by what we've seen in both of those markets and our new capacity in both of those markets. And the -- sorry, could you repeat the second part of the question on that?

And then just with respect to share gains in channel and your take as to how your share exits at the quarter.

We did. And I'll start it off, and then I'll ask Greg for -- if he has some additional color. But we definitely saw share gain from the additional supply that we brought to market in both of those states. And it does -- it sets us up well for 2021 as well. Greg, any additional?

Yes. No. And thanks for the question. I think if you look at Illinois, Illinois had a great quarter. It was up 31%. So this market, to Charlie's point, is a very healthy, strong market that's continuing to show growth. We're happy that we are outperforming that growth number, still taking share. Pennsylvania, as you know, a little bit more tricky on getting a volume read on the market. Our estimates kind of have us in that market is growing similar, it's not even a little bit ahead of Illinois. And again, our performance, really strong in Pennsylvania. And so in both of those, particularly in Illinois, where we do have state data, we are growing ahead of the market.

That's great. And then just a quick follow-up. With respect to California, what, to your mind, has been the single biggest change you've seen either in market or in your own operations and market that has supported the sort of performance that you reported here this morning?

Sure. So this is Charlie. So as far as the market, I think you're just continuing to see the development of the regulated market in California. And as we look at California as a state, whether or not it would fit the Cresco strategic plan, California really just became a regulated market at the beginning of 2018. So we fully expected that it would take some time to mature. And it does favor operators that understand how to work in a complex regulatory environment, and that's Cresco. As far as the biggest changes that we've seen from our side, this is just the continued maturation of the California assets, right? Keep in mind, we just added those assets at the very beginning of the year. So what we're seeing is a very effective integration capability and it's also part of our organizational restructure with the RVPs that we announced earlier this year, having local leadership on-site in-state that are managing the business with 100% of their attention is a phenomenal improvement for us. So very, very encouraged by what we've been able to develop in that state and also the way that it sets us up for the future. Greg, do you have any additional?

The only thing I'd add too is, as we talked in previous quarters, California was always a question mark in its growth, and California had a huge Q3, right? Becoming a $1 billion track market. So I think that leads for us, no doubt, that is a really, really important market to be in. As Charlie said, we've really focused on strengthening our position in the doors that we're in, in that state that matter, and we're seeing really strong velocity growth in those doors. And so we're encouraged. And as that market continues to grow, we're really excited about our ability to continue to take share.

And our next question comes from the line of Derek Dley with Canaccord Genuity.

I'll echo those congrats. A phenomenal quarter. Look, one thing I found really impressive here was just the SG&A leverage. And I get -- it looks like you've built up some of the SG&A in Q1 and Q2 in advance of the strong revenue growth. But can you just sort of give us some more color in terms of what you're looking at in SG&A? And is this sort of an appropriate run rate going forward?

Thanks, Derek. Dennis, you want to take this?

Yes. Thanks, Derek. So we basically held SG&A flat for the first 3 quarters. There's little volatility between the different quarters, but it's essentially flat from one quarter to the next. We'll -- as we move into Q4 and beyond, we will continue to make some investments in our people and our platforms. We'll make some investments in automation in our back-ends, and then also in our systems. So while we will see some increase in total SG&A absolute dollars as a percentage of revenue, it will continue to decline.

Okay. Great. That's really helpful. And then your comment on sort of rinse and repeat, what you've done in some of your core states like Illinois, Pennsylvania. I guess when we look ahead to 2021, what additional states are going to be more of a focus in 2021 versus 2020?

Sure, and this is Charlie. So for us, I think we'll -- not only have we've sort of built the infrastructure here in these critical markets, the Illinois, Pennsylvania, California that will continue to develop and pay off as we go into 2021, but as we've talked about, and especially with the rinse and repeat of a repeatable playbook here, we did some sale leasebacks earlier in the year to get the capital needed to build out infrastructure in Massachusetts, Ohio and Michigan. Arizona is another state, too, where we've got opportunity to optimize the effort that we have there. So I think those are really the 4 states where we see the same playbook that's already started to be deployed that will have material impacts as we get into 2021, really the second half of 2021.

And our next question comes from the line of Vivien Azer with Cowen.

So given the substantial beat relative to certainly our estimates as well as consensus, I was wondering if we could revisit your philosophy around guidance.

Yes, thanks, and fair question. For us, this year, all of this is new, right? The scale, the investments in infrastructure, the organizational restructure that we started to develop and deploy in 2019, these were all very new components. As we talked about in our Q4 call at the beginning of this year, there was a lot of execution risks. So for us, it was a lot of matters of first impression, mixed with a global pandemic that we had to change the way that we operate it as a business at the corporate level, at the production level, at the retail level. So I think what 2020 has proved for us is that we're capable of creating the infrastructure that can create this type of scale. We can execute with these new investments and tools that we have and that we manage change well. And so we're optimistic about what that means for 2021, 2022. And going forward, as far as guidance, we're not in a position. There's still a lot of unknowns as we enter 2021 at a macro level and outside of the industry. So we'll continue to evaluate. We'll continue to communicate, and we'll continue to deliver.

Certainly, that's fair. And my follow-up question, I love asking about California. I've been hearing from some other operators in the space that there have been some impact the wildfire in terms of just market pricing more broadly. I was wondering if you could comment on that at all.

I'll start, and then I know Greg's got some great insight on this. It is. The wildfires potentially have an impact on the market out there. But keep in mind, there's also pretty significant outdoor cultivation that happens in California, too, that gets harvested right around this time of year. So there's kind of the tale of 2 different events converging. So Greg, additional insight on that?

Vivien, I think just to add on that, we are what they call in troughtober, which is where you do tend to see some softness on price as inventory hits the market. I think to Charlie's point, those 2 factors of fires and then the harvest period are likely going to blend themselves out. We're not seeing anything significant that would be of meaning for us to highlight concern on.

And our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

Charlie, congratulations on a great quarter. Look, obviously, we know the market data. So we have a good sense of what's happening at the state level in terms of growth in California and in Pennsylvania, right? So it sounds like we all -- even though it was at $124 million, I was still $30 million short. So obviously, we miscalculated the share gains that you're having. So it's a 2-part question. Number one, is there anything that we should consider in the fourth quarter that could imply share loss, either you're seeing other operators having a lot of cultivation capacity in Illinois and Pennsylvania? Or even some phenomenon in California we should consider? But also related to that, walk us through the math into the fourth quarter, if you're not giving guidance in terms of how much more capacity or yields or productivity are you getting on the assets in Illinois and Pennsylvania in terms of output for the fourth quarter. And same question for California, right? You -- revenue per account up 25%, the market is up 20%. Total wholesale up 56%, so you're gaining new accounts. How much room do you have to add more accounts in California? Or is it going to be more an issue about revenue per account? Just help us model that out in terms of how to think about the fourth quarter next year. We have the market data. So I have that number, right, but congrats again.

And thank you, Pablo. So the -- as it relates to share loss in PA and Illinois, I don't think we're anticipating share loss in Q4. And as much as both of these markets, they need more doors to open, right? So in Illinois, I think in the Q3 data, I think there were 72-ish contributing dispensaries. I think there might be 75 or 76 that are open today. As you can see, that's only like an incremental 21 doors that have opened in the state this year, and we're 4 of them. So we need some more additional doors to open. As we mentioned, that will be an unlock in the prepared remarks. I know that there's more second stores from the incumbents. There's the 75 additional licenses that hopefully will come online here after the New Year. So we need some more doors to open. As far as the way that we're looking at revenue for Q4, we're thrilled with how we've been able to execute the expansion this year. Our results proved that the strategy of focusing on wholesale is the most valuable approach. But now that we've harvested from all rooms in the full quarter, now is a stage where we're investing in that automation, optimization, downstream ops to increase fulfillment and believe that will manifest in more growth in the first half of 2021. And then we'll also have additional capacity projects openings that will be happening on the front part of next year as well. As far as California, California is a little bit different, and again, because of the access to the flexibility, I guess, that's associated with that market structure out there. So it's not only your own internal capacity, but you have the ability to source. It's more of the business model out there. So there's more flexibility. I don't know if Greg has additional color on California and share going forward?

Pablo, I think the only thing to add is what you -- similar to what you said in Illinois, as we think of California, it's really about volumes through the doors as we go to grow. And so we expect that market will continue to show healthy growth going into Q4 and that we want to increase our velocities across the doors that we have exiting Q3. But on Illinois, to reference Charlie's point, too, while we think the doors need to open in the state to really continue to drive some significant growth in the state, we have no anticipation to give up any inch of share as we go into Q4 or into 2021.

That's good. And just a quick follow-up. So there was looking at your total number of operating stores, right, 19. That looks very small compared to peers, but obviously, it's not having an effect on your numbers. I mean, sales up 60% in retail. Just remind us of the plans to add more stores, whether in the fourth quarter or 2021? Or that's just definitely not a priority, it's all about wholesale capacity?

It's a great question. And this is Charlie. The -- I think we have one more store in Illinois, right? That will be our 10th store in Illinois, which make us the first operator to get to all 10 stores open. We anticipate that, that comes online before the end of the year. It's possible that, that slides into the very beginning of next year. And then we have a couple more that will be coming on in the first half of 2021. And yes. So we have a couple more that we think first half 2021 towards the end of it. But retail, it's not that it's -- as you mentioned, it's not that it's deprioritized from our perspective. It's a valuable asset, but we do believe that investing and continued investment on the production side and the ability to produce the branded products and get those on to all of the other shelves that open provides the longest term value for the organization.

And our next question comes from the line of Michael Lavery with Piper Sandler.

How do you think that interstate commerce could evolve in the event of federal legalization? And how does that impact how you make and think about cultivation investments?

So -- and this is Charlie. The prospect for interstate commerce is, look, we -- I will tell you, when I thought about getting into the industry, the idea of interstate commerce was front and center, right? And so from the early stages of developing the strategic approach to the industry that was always a component of building a long term viable, successful, sustainable business model. And so it's not a coincidence that we focus on the middle 2 verticals of the value chain. At some point, if interstate commerce -- or when interstate commerce is available, focusing on brand and distribution of brand will help us mitigate the risk that some that aren't as focused on the creation of branded products and the distribution of branded products into other people's stores. It mitigates risk to a greater extent than potentially some other strategic models. Now looking into the crystal ball, do I think that interstate commerce is a near-term possibility? I would say it's less likely than likely. But we're prepared for however this develops at a federal level. And we're -- we pride ourselves on the level of engagement that we bring to government affairs. So it's -- we're present. I'll put it that way.

That's helpful. And then just a follow up on vapes. Can you just give a little color on the Live Resin vape launch? And what you're seeing there and how that's progressing?

Sure. Greg, do you want to add some color on that one?

And I think your question is, we've had Cresco Liquid Live across our core markets for some time now, and we've obviously launched that in some of our newer markets. So far, Liquid Live as a segment of vape continues to show some very nice growth. And so that right now is a great segment to be in. We still have a dominant share in our core markets and a very strong position in our core markets with our vape products, and we are seeing that growth in our new emerging markets, too.

And yes, I was thinking more like Illinois, California. On the California side, how much was that a driver of your gains there? Or was it some of it, but really, the upside was some just execution on distribution and pivot then?

Yes. Thanks for -- this is [ Paul Bernard ]. I think the -- if you look at California, as we've talked about in previous earnings calls, our plan for that state was to get to a healthier core set of both accounts and core set of brands. And so the growth you're seeing in the is us, not only getting to that right set of customers, but driving velocity growth across those customers. And right now, we would contribute more of that velocity growth of just the incredible flower that we're seeing in our facilities in that market and also strength in driving partner brand growth in California across those existing doors.

And our next question comes from the line of Andrew Partheniou with Stifel GMP.

I'll echo pretty much everybody's comments on the absolutely incredible results here. Guys, well done. Maybe just continuing on California. We've heard a lot of operators struggling to have a successful business model there. But it seems like you guys are generating good traction. Could you give a little bit more color on kind of the pitfalls that maybe other operators have done that you guys are successfully avoiding? And is it really just getting the right customers and driving revenue through those doors? And how much -- how many more doors throughout the state do you think that you guys can still have more runway to go?

Thanks for the question. This is -- and the complement. This is Charlie. I'll start, and then Greg has more context. But I think California, look I don't think anybody argues against the fact that California is the largest cannabis market in the world. But also true is it's very competitive. And it's also sort of very, I would say, protective. There's a bit -- there's a cultural component to operating in California, and you've got to figure out how to solve the riddle. And you have to execute. You have to execute operationally at a different level. And that's why I think if you're looking at the peer set and reluctance to go into the state, look, it's complex. It's not easy to figure out how to solve the California riddle. And I'm far from saying that we've figured it out. I think we're just bringing our model to California. We're bringing a level of engagement and focus, and we're putting the resources there that we traditionally do in every one of our other markets, and that is proving to be successful for us. More detailed than that specifics, Greg, do you want to touch on?

Sure. Andrew, as Charlie said, California, obviously, a very large market, which makes it on top of mind for everyone, but one of the most competitive markets probably also in the world. So you're absolutely correct. It is a difficult market to fight in. If I were to say what's driving our growth to date? One is we've got just an incredible team out in California. Across the board, we have just amazing cultivation coming down with some great genetics, which is helping us really win in the flower segment of the market with some of the most astute flower consumers out there. We also have a really, really strong team that we acquired through Origin House on the Continuum platform who are out there ensuring that we're in the right doors and driving growth in those doors. And so that's something we're very pleased about. I know we've talked about what we're doing with that asset in the last 2 calls. It was a bit of me explaining, here's what we're doing. You're going to have to trust us. And now you're seeing the results of that come to life in Q3, which we're very encouraged with. As we look forward, obviously, we do want to stay within the doors that matter in the state, and that changes quite a lot. We want to ensure that we are bringing both our manufactured goods now to the market as well in addition to really strong flower growth, which we believe we have upside there. And as we've right-sized the cost structure of the continuum platform, we're in a really nice position now, too, to start looking at other partner brands that we could service in the platform, which would -- which help us grow. So there's a couple of ways in that we can get growth in the future out of California, but if you're asking what was the secret sauce, I really think we've got a really, really great team in the market that's putting out some incredible products and buildings some really strong relationships with customers.

And just switching gears on capital allocation. You guys mentioned this is the first quarter that you're generating free cash flow, likely not the last. But you also have apparently, CapEx funded through sale leasebacks in your other states. So with that in mind, what would we say is -- you say is the prioritization of your free cash flow? Could we see potentially a return to the M&A market? Enter new states? Or maybe something else?

This is Charlie. I'll start, and then Dennis has some perspective on that as well. Look, we're observing what's going on in the industry. Again, 2020 was big for us to prove execution and confirm the playbook. So rinse and repeat becomes a reality. And we're looking at, of course, continuing to invest in the portfolio that we built. We strongly believe that we've built the most strategic geographic footprint in the space. But there's opportunities if there's -- especially if they make sense from a balance sheet standpoint, from an income statement standpoint, we're evaluating opportunities. And we'll just be -- we'll continue to be very strategic in the way that we move forward with those. So, Dennis?