Trulieve Cannabis Corp. (TRUL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to the Trulieve Cannabis Corporation Second Quarter 2021 Financial Results Conference Call. My name is Sarah, and I will be your conference operator today. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Lynn Ricci, Director of Investor Relations for Trulieve. You may begin.

Thanks, Sarah. Good morning, ladies and gentlemen, and thank you for joining us. 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, individual shareholders, the media and other interested parties. Please remember statements we make during this call that are not statements of historical fact constitute forward-looking statements, and that these statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecast, including the risks and uncertainties described in the company's periodic reports filed with the Securities and Exchange Commission and those related to the completion of our transaction with Harvest. Although the company may voluntarily do so from time to time, it undertakes no commitment to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, management will also discuss certain financial measures that are not calculated in accordance with United States Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures should not be considered in isolation or as a substitute for Trulieve's financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our earnings press release that is an exhibit to our current report on Form 8-K that we furnished to the SEC today and can be found on the Investor Relations section of our website. Lastly, at times in our prepared comments or responses to your questions, we may offer metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide these additional details in the future. This morning, we reported results for the second quarter of 2021. A copy of our earnings press release may be found on the Investor Relations section of our website, trulieve.com. 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.

Thanks, Lynn, and good morning, everyone. It is an exciting time here at Trulieve, achieving a number of firsts and records for the company with 14 consecutive quarters of profitability, crossing the half-million mark in customers served, becoming the first medical cannabis operator to start planting in West Virginia and positioning the company to enter its seventh state with a win in Georgia. We exceeded consensus, achieving revenues of approximately $215 million and adjusted EBITDA of approximately $95 million, representing an EBITDA margin of 44%. On the back of our Q1 results, which represented a 15% quarter-over-quarter increase, our Q2 revenue reflects an increase of 11% and demonstrates strong continued growth. Yesterday, Harvest shareholders voted to support the transaction, and we are now fully focused on the next step towards regulatory reviews and approvals. The closing of the Harvest acquisition will be a transformational event for Trulieve. Harvest's strong Q2 performance, as reported on August 10, demonstrates the potential of the combined company. On a combined basis, second quarter revenues would have been $317.6 million, and on an adjusted EBITDA basis, Trulieve and Harvest would have generated $122.9 million in the quarter. These combined results for Q2 will be the strongest performance of any public reporting U.S. cannabis company. In addition, today, Trulieve and Harvest together would stand at 140 stores, which represents almost 30% more stores in our closest competitor with 40 of those stores located outside of Florida. In order to support that footprint on a combined basis, we would have over 3 million square feet of cultivation, over 1 million square feet more than our closest competitor, exceeding their cultivation footprint by 50%. This capacity solidifies our position as the leading operator with true scale in the U.S. The Harvest deal will be the next step in the evolution of our organization as we execute on our regional hub strategy. The transaction will transform our Southwest hub in a very real and exciting way, most notably with substantial expansion into Arizona, additions to our Northeast hub with Maryland, and an increased market presence in Pennsylvania as well as supplementing our Southeast hub in Florida. Neither company has slowed down since the May announcement. We continue to open stores in some of our strongest respective markets, complete tuck-in deals and win applications. Since the time of our May announcement, the store footprint outlined for the deal has increased by 14 stores, including Harvest opening its 16th store in Mesa, Arizona. Congratulations to Harvest on the excellent quarter. We look forward to their continued strong performance in the back half of the year as they remain focused on operational efficiency and delivering profitability. The second quarter was also meaningful for Trulieve, celebrating the 5-year anniversary of our first sale on July 26, 2016. We've accomplished more than just incredible revenue and a profitable growth trajectory during those 5 years. To name just a few, we've grown from approximately 50 employees when we opened our first dispensary to approximately 7,000 employees today, expanded cultivation from our original 20,000 square feet in Quincy, Florida to over 2.2 million square feet across the country, grown our patient base from under 800 to over 575,000, and increased our store footprint from our first store here in Tallahassee to 96 stores across the country. In addition, when looking at sales during our first 6 months of operations compared to the first 6 months of 2021, we were selling 2.4 milligrams of oil -- 2.4 million milligrams of oil in 2016 compared to 2.2 billion, with a B, milligrams or approximately 900 times more in 2021. For flower, we sold 72 ounces of flower as vaporizer cuts in 2016 compared to 781,000 ounces or approximately 11,000 times more in 2021. We have a generational opportunity in front of us. And we believe this next chapter will be an exciting one, bringing our -- an ability to leverage our national scale and diversify across our combined platform to accelerate our growth trajectory and enter into additional adult-use recreational markets more to come. And speaking of more to come, this morning, I have Georgia on my mind. As we recently announced, the State of Georgia notified us of its intent to award Trulieve 1 of only 2 Class 1 production licenses available in the state. As the eighth most populated state in the nation, Georgia is an ideal location in addition to our Southeast hub. This license would allow us to grow and manufacture cannabis oil products and we will also be authorized to open 5 dispensaries across the state. The registry is quickly growing, with over 18,000 patients in the state already. It was a highly competitive licensing process with around 70 competing applicants. So Trulieve's success speaks volumes. We are thrilled to be positioned to enter our neighboring state to the North and are prepared to break ground and rapidly provide much needed relief to patients in Georgia. Much like in other states, Trulieve thoughtfully selected a majority minority community, the City of Adel as the site for our production operations. Working closely with the city, workforce development partners, and other stakeholders will bring hundreds of promising new jobs and meaningful community investments to Adel and the surrounding South Georgia community. We also have established beneficial partnerships with higher education institutions like Morehouse School of Medicine, organizations like the Greater Georgia Black Chamber of Commerce, and the Georgia Minority Supplier Development Council and Workforce Development Centers like the Wiregrass Technical Institute as well as dozens of small and diverse businesses. Given our close proximity here in the Panhandle, we already employ a number of Georgia residents and we look forward to broadening our job creation in the state. Our ability to act quickly to build our operations in Georgia has been demonstrated by our execution in our home State of Florida. In Florida, we continue to add dispensaries and aggressively add indoor cultivation capacity each month to stay ahead of the continued patient growth expected in the space. That patient growth has been explosive, with over 134,000 new patients in Florida so far this year. Our commitment to serving the needs of every patient is evidenced by our dispensary additions. We currently have 87 dispensaries in Florida, which represents approximately 24% of the dispensaries across the state, while providing on average over 45% of the medicine our patients need. We have maintained our market share in the face of tight labor markets due to COVID factors, increased waiting periods for construction permitting, and nationwide shortages of building materials. We have been very fortunate over the years to build a company in Florida. Our dedication to the production of safe, quality products coupled with the authentic connections with patients we've nurtured in the state has earned us the strong customer retention rates and store outperformance numbers we continue to experience. We look forward to continuing the strong performance in our Northeast hub, where there has been a flurry of activity. Expanding to the metropolitan Philadelphia area, commencing operations in West Virginia, welcoming Connecticut to adult-use, and opening our doors in Massachusetts. Let me briefly touch on each of those markets. In Pennsylvania, I would like to highlight the strong performance of our PurePenn and Solevo operations. PurePenn wholesales to 100% of the Pennsylvania market and was the #4 wholesale operator during Q2, achieving this with flower only making up 5% of sales. Our McKeesport, Pennsylvania cultivation and processing facility continues to grow and has recently more than doubled its capacity to 80,000 square feet. We are bringing more high-quality flower to the state, positioning us for increased market share. As in Florida, our goal is always to be #1. We also closed on the previously announced acquisition of Keystone Shops in early July. Keystone Shops immediately adds 3 dispensary in the Greater Philadelphia area to the Trulieve family. Pennsylvania is a state we remain excited about and is a key piece of our national expansion. In West Virginia, we executed a rapid cultivation build-out and were first to get plants in the ground in the state. We are ramping now, building out our teams, and moving forward with our first dispensary sites. Patients in the state continue to grow and we look forward to opening our first dispensary and providing access to medical cannabis before year-end. As many of you are aware, Connecticut signed a bill in June to legalize adult-use. Our store in Bristol has given us great insight into the patients and brands in the state, and our existing operations will allow us to take advantage of the grandfathering provisions of the new legislation. Not only will we be able to begin adult-use sales when it launches in the state sometime in 2022, but we will also pursue cultivation and production opportunities. We began our dispensaries operations in Massachusetts in June with the ribbon-cutting in our Northampton store, and we look forward to opening our brand new Worcester dispensary this Saturday with a block party. We will be closing the street for the majority of the day and we'll have music, food trucks, and partner tables as a way to meet the community and start to quickly build relationships with consumers in the area. Worcester is the second largest city in Massachusetts and we're looking forward to branching into these new community. We're also looking forward to opening our store in Framingham, which will be our largest store in the base state and launching wholesale operations. We are quickly scaling up wholesale with the goal of matching our outperformance in Pennsylvania. Our wholesale strategy will allow us to spread the Trulieve brands in Massachusetts. Speaking of brands, we've recently introduced new product lines, Momenta for wellness, Muse for creativity, Sweet Talk, which is our edible line of chocolate and gummies, and a fan favorite from Florida, our Cultivar Collection, which is premium hand-trimmed flower released in unique small-batch strains. With the canna-curious to the canna connoisseur in mind, these brands offer a variety of options to serve a spectrum of consumer motivations and need states. Trulieve's brands center around the opportunity for customers to unlock their own potential through cannabis to live their best life. With that, let me turn the call over to Alex for more details on our second quarter results.

Thank you, Kim, and good morning, everyone. Our focus in the first half of the year has centered on execution, expansion, and integration and we'll continue to do so throughout the remainder of the year and into 2022. This spans across our external strategic initiatives as well as internal priorities such as our continued preparation for Sarbanes-Oxley readiness. We are excited about launching in Massachusetts, expanding our footprint in Pennsylvania and ramping our operations in West Virginia and, of course, Georgia. As we enter the second half of the year, we remain highly focused on ensuring the successful integrations of our recently closed acquisitions and supporting the strategic vision for and the anticipated major integration of Harvest. We believe the Harvest acquisition will be transformational for both companies and the industry. We look forward to leveraging the combined capabilities of both organizations and setting the stage for an exciting year ahead. As Kim covered at the top of the call, we had record revenue of $215.1 million, an increase of 11% sequentially over the $193.8 million of revenue achieved in the first quarter. Our quarterly revenue was $94.4 million higher than Q2 2020, an impressive 78% growth year-over-year. The company achieved gross profit of $144.4 million or gross margin of 67% in the quarter compared to $135.3 million or 70% in the first quarter of 2021. Absent macroeconomic events related to pricing and tight labor markets, gross margin would have been approximately 71%. Our margins in our core operations are in line with our plan in the first half of the year. As we have shared in the past, our gross margin in all markets can fluctuate a few basis points in either direction from quarter-to-quarter depending on inventory flow-through and product mix. In this regard, we benefited in Q1 by finishing the quarter with the largest volume of finished goods on hand that we ever had at the end of the quarter. During Q2, we capitalized on our leverage and scale to set market prices and maintain customer bases in our core markets. The leveraging of our ability to strategically increase discounts when necessary led to an approximate 2% reduction in margins in the quarter. As a result, we moved through finished goods at a faster rate than in Q1, ending the quarter with a higher amount of product in work in process, which carries a lower cost than finished goods. The timing of inventory flow-through impacted margins by approximately 3% in the quarter. Contributing to this dynamic was the impact of tight labor markets with demand outstripping available candidates, which we experienced primarily in our processing centers. As you know, this is not specific to Trulieve spanning a number of companies and industries. We have responded and adjusted our hiring initiatives accordingly and look forward to improvements in the back half of Q3. These reductions were offset by an approximate 2% pickup in our new markets as cultivation and production ramped in the quarter. As a reminder, in general and not specific to a quarter or time period, there is downward pressure on gross margin as we enter new markets without full vertical integration as we have in Pennsylvania through the earn-out period in 2021. Similar to the Massachusetts process, we are now ramping our infrastructure in West Virginia, incurring expenses in advance of revenue. I will now turn to expenses. SG&A expenses in the second quarter, excluding depreciation and amortization were $61.5 million or 29% of revenue compared to $57.3 million or 30% in the first quarter of 2021. We expect increases in the back half of the year, as we ramp integration efforts in Pennsylvania and prepare to welcome Harvest. As a reminder, we typically add back transaction and integration costs in calculating adjusted EBITDA. Our operating income for the quarter was $76.3 million, a 5% increase over the $72.6 million earned in the first quarter. Net income was $40.9 million for the quarter compared to $30.1 million for the first quarter. We generated earnings per share of $0.31 on a fully diluted basis. Keep in mind that go-forward net income and EPS will be impacted by transaction and integration costs, the increased depreciation on our aggressive CapEx ramps, increases in share-based compensation, the fair value flow-through of inventory from acquisitions, and the amortization of intangibles from acquisitions. While these get added back to adjusted EBITDA, there is a downward impact on EPS. Turning now to adjusted EBITDA. We believe adjusted EBITDA, a non-GAAP measure, provides valuable insight into our performance. Adjusted EBITDA excludes from net income as reported interest, tax, depreciation, amortization, noncash expenses, COVID-related expenses, share-based compensation, acquisition and transaction costs, fair value step-up of inventory from acquisitions, and other income. We report adjusted EBITDA to help investors assess the operating performance of our business. For the second quarter of 2021, adjusted EBITDA was $94.9 million or 44% compared to $90.8 million or 47% for the first quarter of 2021, where we exceeded plan. This is reflective of the margin dynamics discussed earlier, but is in line with first half expectations and guidance. Absent the macroeconomic margin impacts, adjusted EBITDA would have been approximately 48% for the quarter. We ended the quarter with a cash balance of $289.2 million bolstered by our cash flow from operations through the first half of the year. In the quarter, we paid approximately $80 million in federal taxes. As a reminder, cash flow from operations in the second quarter is typically impacted by a double tax payment. As such, [ the invested ] cash flow from operations on a year-to-date basis, where we generated $49.2 million through the end of the second quarter. Our strong cash position allows us to quickly leverage the foundation we have built to capitalize on expansion opportunities, organic growth, and to go deeper in the states where we operate. At the end of the second quarter, we had a total of $112.6 million of inventory. This compares to $103.9 million of inventory at the end of Q1 2021. Company-wide CapEx spend for the quarter averaged just over $22 million per month inclusive of all markets and was in line with the plan. We continue to build out stores and cultivation facilities and invest in new markets. We planted our initial cultivation in West Virginia and we'll be building out our facility there throughout the year. And in Georgia, we expect that we will be breaking ground and ramping up investments in that market. CapEx investments will continue to ramp throughout 2021 and 2022 to support our expansion efforts and add depth in the Southeast and Northeast hubs, as we capitalize on the positive patient trends, we are experiencing and prepare for future tailwinds. In closing, I would like to note that I'm proud of the flexibility we have shown across all functions of the organization over the past year, allowing us to quickly adapt to changing market conditions and capitalize on opportunities. We see a lot of the same strengths in the teams at Harvest and look forward to closing the acquisition and continuing our integration efforts and our national expansion as a combined organization. I would also like to recognize and welcome Marcum as our new auditors, as previously announced in July. We thank our previous auditors, MNP, and want to note that our move to Marcum reflects their substantial audit experience with U.S. reporting companies. MNP served us well and Marcum is ready to take on our accelerated growth profile, particularly in anticipation of the Harvest acquisition. With that, I will turn the call back over to Kim.

Thanks, Alex. As a company, we have experienced tremendous growth over the last 5 years. We've developed from a small start-up, founded by a few nursery men and a recovering lawyer to the most profitable, publicly-traded multi-state operator in the U.S. Through hard work, strategic forethought, financial discipline, and skilled execution, Trulieve is positioned as one of the leaders in our industry, but as I said earlier, our story is just beginning. We are in the midst of tremendous change. The recent political movement to decriminalize marijuana with the Cannabis Administration and Opportunity Act draft and cry from business leaders and politicians to move forward with the SAFE Banking Act signals the readiness in this country to create a clear and supportive path forward for the cannabis industry. The American people's voices are getting stronger and regardless of what happens at the federal level, the states are not slowing down and neither is cannabis growth across this country. With this backdrop, the completion of the Harvest acquisition on the horizon, plus operating at an unmatched scale today, Trulieve is well positioned and financially prepared to leverage and execute on the changes coming. Trulieve is a story about future growth, strategic vision, execution, and building shareholder value. Together, we're uniquely positioned to define the future of cannabis. Thank you so much for joining us today. And as I always say, onward.

Operator, we can now open it up for questions.

[Operator Instructions] Our first question comes from Derek Dley with Canaccord Genuity.

Congrats on a strong quarter. Kim, I just wanted to follow up on a comment you made there just regarding pricing. I mean, it's pretty widely speculated that there were some aggressive pricing tactics by some of your competitors this quarter more so than in previous quarters. Did this change the -- this mix -- the product mix or skew it more towards the value side or the premium side, and then was this aggressive pricing across all categories?

Yes. Thanks, Derek. So certainly, we saw some increased, very aggressive pricing from the competitors. I would say that strategically we are very thoughtful in terms of how we approach -- how we approach our product portfolio and how we think about brand and integrity of brand over the short and, of course, long term. And so we certainly did not nor would we want to match, for example, week-long 50% off discounts, et cetera. What we did do though was that, we did become, and I think this was a great exercise for us, right, we were able to look across our product portfolio, really analyze on a SKU level, where our products were that had one, of course, demand, and 2, depth, and also, of course, good margin to really be more thoughtful in terms of how we were responding to those pressures. In terms of product mix, it's interesting, we really did not see large swings from -- from on a category basis if you talk about from value to premium. So we saw approximately the same from on a percentage basis sell-through in both premium and value that we saw in the -- sorry, in those categories in the previous quarter. So that remains stable. We certainly are continuing to see the barbell effects that we've been talking about quarter-over-quarter, that remains true. We are seeing strength in both value and in premium categories, that remains true. And what I would say is that, I think that look, the market share numbers and our strength speaks for themselves in terms of just last week we had our strongest flower day ever, right, with about 53% of the market in flower. We also over the quarter had a record day in oil sales. So I think that our brands are maintaining strength and maintaining integrity. We did, as we mentioned, have a couple of points more on the discount front, but certainly nothing near what our competitors felt like they needed to do as they try to I think unsuccessfully, quite frankly, buy long-term market share in the State of Florida.

Yes. Okay. No, that makes sense. And actually, just one more if I could, just in terms of, you mentioned that the Trulieve brand and how strong it is, you called out Cultivar in particular, but when we think about Massachusetts and Pennsylvania, 2 markets that have wholesale obviously, I guess it's a 2-part question. One, are you still seeing a big sort of under-supply in those markets where wholesale prices are quite robust? And 2, what is your target or what is your plan in terms of the mix within your own stores of Trulieve branded products versus third-party products?

Yes. So it's interesting, and I think that other folks have commented right on just really how it is absolutely challenging given the checkerboard of regulatory regimes across the country to achieve continuity of brand from market to market. I mean, that's certainly what we're all attempting to do. But where there's challenges are, of course, therein lies the opportunity as we like to say. And so with the launch and that recent press release of these core brands that we will be looking to launch across the country that will of course also be true in Pennsylvania and in Massachusetts. It's interesting in Massachusetts, those brands have already launched. And so the Cultivar Collection, for example, is available in Massachusetts now. We're really excited about having a full suite of those products available at our new grand opening this Saturday, I'm going to put a quick plug-in in Worcester. If you're in the area, come join us, it's going to be a lot of fun, big block party. And so we're able to launch a full catalog of products in Massachusetts, of course, with also having some shelf diversity with buying in other key brands in that market as well. In Pennsylvania, of course, a little bit of a different story because we purchased a company that already had really strong brand affinity and was successfully wholesaling products across the state. The opportunity there is that we've been very successful there in the oil category. Great reputation for the higher end or premium oil sales there, and now we're looking to layer in and really plus that up with the addition of additional flower, which you heard me mention on the call. I should note that we're not done growing. In Pennsylvania, we've got additional expansion projects underway there, and that we will see our market share increase, I believe, through the back half of the year with the onboarding of additional capacity in that flower category, particularly, and again, particularly focusing on that higher end Cultivar Collection in Pennsylvania as well. And so we do believe that it's very important to have expertise in both product segments, in both branded derivative products in oil, as well as flower. We don't think that especially, on the high end, again that Cultivar Collection premium flower, we don't believe that that's going away anytime soon. And that, that really is your quality calling card for customers, and plan to have that calling card available in the states that we operate in -- so -- where we can. So we're excited about doing what we can to roll those brands out across the platform. And certainly, once we get Harvest integrated, we'll also be integrating some of their top brands into our portfolio, so that our combined portfolio of products, I think really will be second to none.

Our next question comes from Russell Stanley with Beacon Securities.

And congrats on the quarter. First question just around the Harvest transaction and obviously, great to see the shareholder approval yesterday. I think in one of the recent filings, Harvest dedicated an anticipated close about by February, end of February next year. Just wondering your thoughts as to whether that's a conservative time line, might we see it get done earlier, and which approvals -- to the extent you can say, which approvals are likely to prove the most time-consuming, especially in a COVID world?

Yes. Thanks, Russ. We certainly, as I mentioned on the call, are very focused. We're all very focused on getting that transaction closed, and, of course, are very excited about the strength of the combined company. It's definitely difficult to pin down exact timing. I can tell you that we absolutely have had successful communication with every single one of our regulators in each one of the markets that we'll be operating in. We don't see any major roadblocks in any of those markets. However, we do have to go through each state's very exacting process to make sure that we have all -- of course, all of the regulatory -- required regulatory approvals in place to get to closing. As many of you know, part of the transaction in Florida is the selling of a license in Florida that Harvest is -- and Harvest is quarterbacking that process, that's going through an auction process right now. So there is a couple of more steps involved in the Florida transfer. Again, positive momentum on that front though. And there are just some markets that take longer than others. So -- and as you mentioned, with kind of this second wave of COVID, we are, of course, not sure how that may or may not impact how we -- how quickly we're able to get those approvals to move forward. So we're all focused on it. I can assure you of that, and we're working very diligently on it. And it's all of our intention is to get the deal closed as quickly as possible.

That's great. Thanks for that. And maybe, if I could just lob in a crystal ball question. I know they're favorites, but New Jersey obviously expected to open its adult-use market either late this year or early next depending on who you ask. Just wondering with neighboring Pennsylvania legislature so far has been reluctant or opposed to even discuss it, just wondering what your thoughts are on the potential for movement on that front, obviously, there are some tax dollars at stake, so any thoughts on the possibilities there would be great?

Yes. Yes. I -- your guess is probably as good as mine, Russ. I mean, certainly, Pennsylvania, as I've mentioned, is a key market for us. We are kind of, I'll call it, Trulieve proper, if you will, is continuing to invest dollars there. We just opened another or closed on another 3 dispensaries in Philadelphia area. We are very bullish on Pennsylvania as a market as it stands today. We are looking forward to combining with Harvest also for really that footprint to be a significant footprint in our portfolio. And so -- and like I said, we're going to continue to invest there. So we do believe that Pennsylvania has a lot of growth ahead, and that we'll be working diligently to ensure that we are in a pole position to take advantage of that growth. And certainly, at some time in the future, we believe it's a matter of if, it's not a matter of -- or it's a matter of when, not a matter of if. We'll be well poised to take advantage of a switchover to adult-use when the time comes.

Your next question comes from Andrew Partheniou with Stifel GMP.

Maybe starting off on Pennsylvania and continuing with the previous question and some comments you had around that. You mentioned that your market share capture in the quarter in that state was mainly on extracts, it jives with our Headset data, but you also had a pretty big expansion in that state. I'm just wondering when could we see some movement on flower? Obviously, that's an attractive category for you that you guys haven't really tapped in yet. You also talked about some future expansion plans in that state. Should we be thinking about this first expansion was mainly to bolster your offering around extracts and then flower could come afterwards in the next expansion cycle or should we still be expecting some incremental movement on flower with your doubling of capacity here recently?

Yes. So no, the flower expansion is coming through now. So you should -- we should begin to see that come through in the numbers. I can tell you in reality that is coming through now, so -- and has been very well received. As you mentioned, there is I think a lot of demand around flower, and so we're going to continue to push more right through that channel. I think one thing we have to always be cognizant of, right, there is a demand on both -- on -- for both. So it's all about making strategic decisions in terms of what to put in what category, right. But we're seeing a lot of strength in -- which is, look, it's a great problem to have, right. So but certainly, as I've said pretty consistently here for gosh, I don't know, 6 months, and that certainly has been a focus of ours is to get more volume through that flower category and that is beginning to happen.

Definitely, a good incremental opportunity for you given that you've grown so much just with extracts. Maybe switching gears and taking a step back, thinking about overall strategy. You guys have done a couple of tuck-ins, you've got the large Harvest transaction, which is obviously transformational, but you're still looking at organic license wins. So just thinking about beyond what you guys already have now, how do you think about what markets you want to be targeting? Obviously, Georgia kind of looks like Florida at the beginning of its medical program. So just thoughts around that would be helpful.

Yes. I mean, we are really excited about Georgia, and it looks very, very familiar to us and very similar to Florida when it started. Actually, I think we're maybe in a little bit of a better space in Georgia than Florida. Many folks don't remember that Florida started as a CBD-only state. And so when Trulieve was first awarded our license, it was as a CBD license, and then it moved to a very, very limited, end-of-life program under Right to Try. And so it was -- Georgia already, as I mentioned, has patients that have been building up. They've over 18,000 patients that are already registered in the Georgia program. And it's going to be a great -- I think a really strong market as it develops over time. We continue to be very focused on executing on our hub strategy, and we evaluate market-based and through that strategic lens. We look at synergies to other markets. We look at our ability to leverage expertise as it relates to other markets, and then, of course, we look at the licensing structure and the profile of an individual program. So certainly, we remain very, very focused on continuing our dominance in the Southeast, and then our continued focus also, of course, on the Northeast as we think about how we can leverage that hub that we've been very focused on over the last year. And then, of course, with Harvest, that's going to be a game-changer in terms of our ability to have a true hub in the Southeast, which we can then begin to build around and optimize as well. And so from us, again, there are a lot of factors when we think about expansion, but certainly, we have particular criteria and particular modeling that we do around ROI as well as around our ability to execute and execute quickly, because we do think that especially in an application environment, getting -- it's not just winning, right, it's winning and then absolutely, immediately, executing and doing what we've done successfully in the past through organic growth. But we think that there are -- there remains to be which I think some folks maybe lose sight of, there is a lot of white space out there and a lot of opportunities that have yet to be realized that we plan to be -- certainly take a leadership position in those markets as well.

Our next question comes from Matt McGinley with Needham.

You mentioned macro factors center around the pricing, labors, headwind to gross margin in the quarter. Can you expand on what you're seeing here? And it sounded like -- in the prepared remarks, it sounded like you thought that would improve in the back half, but if labor rates are structurally higher, why would that change later in this year? And is labor availability actually impacting your inventory position or is it just the cost of the inventory that's being impacted here?

Hey, Matt. No, we experienced the labor dynamics mainly in our processing centers, that was really the movement from the work in process state into finished goods.

Okay. And why would that change in the back half?

We're just trying to bring in more folks, right, so tight labor market, and then we're increasing hiring practices just to bring in more people.

Yes. So Matt, what we've seen particularly in North, I can speak to North Florida, which I understand and appreciate that our dynamics around COVID may have been a bit different than the rest of the world in some respect. And what we saw -- is we saw, I mean we've got manufacturing jobs and look, I think in a lot of industry, other industries right there, quite frankly, we're just folks that we're choosing to not work and take advantage of unemployment as well as federal benefits that they were -- that they've been receiving. We definitely adjusted some of our approaches from a labor perspective and have seen improvements already in our ability to attract and also kind of reengage some of that workforce that previously decided to maybe not working for a lot of reasons, right. I mean, it's -- they have children at home and I mean it's not -- I don't want to make it sound like there weren't justifiable reasons that folks made this decision. So we've already started to see improvement on that, Matt, but we definitely had pressure, particularly on where our processing center was located in, in that particular area of our -- of the state. So and again, not unique to us. There were a lot of businesses that were in a similar geographic position, also in a similar wage position that, that have faced the same issues. I can tell you that proactively also we have -- we are opening another production facility in Tampa, in the Tampa area, which is a completely different labor market, and we think quite frankly an improved labor market for some -- for a number of reasons. That facility is coming online actually this month. So again, having some diversification as it relates to where we're pulling labor from. So there are absolute reasons why we believe one, we're already seeing it, and 2, we're going to have diversity of labor pool that's going to come through in Q3 and certainly going into Q4.

Thank you. And on the debt refinance for Harvest, one of the big milestones required to advance that deal is to refi that debt. Do you have any thoughts on what you -- if you were to retire a portion of that debt or if it would make sense to refi the full amount to keep your cash balances, and trying to think through like what your cap structure look like whenever this deal closes?

Yes. So that actually is not a milestone to the deal. I think that what you're referring to is that there were some specific call-outs in the documents around, if Harvest chose to do -- and reposition some of that debt before closing, there would have been an impact to some of the ratios or the specifics in the deal, which is true. But that is only again triggered on if Harvest took some action prior to closing. So those are kind of 2 different things, right. And I think that, that speaks for itself in terms of the details as the deal documents reflect. I think that your second question is really around what are we going to do and how is that going to be positioned as a combined company. What I can tell you is certainly, what we believe in Trulieve is that one of our strategic advantages in this transaction is that, of course, the Trulieve financial statements and our strength as a company, we will be able to reposition that debt on significantly better terms than what Harvest has. And then we also have the flexibility, of course, if we choose to do a combination of pay-downs and/or refinances and refinancing or restructuring the debt. And so, of course, our goal always is to make sure that we're maximizing the interest of both the company, of course, and the shareholders, which we fully intend to do. You'll get more details on that as we have more visibility there, but obviously, we think that there'll be a positive outcome for everyone as it relates to the restructuring and repositioning of the debt.

Our next question comes from Aaron Grey with Alliance Global Partners.

So first question for me, Kim, I always like to talk about loyalty program. Given some of the pricing competition that you're seeing there, you had mentioned in previous quarters kind of a revamp of the loyalty program. So would love to get some commentary on the progress of that potential timing? And maybe a mid -- this competition that you're seeing, maybe some tweaks that you're looking to do that. So kind of bolster up some barriers to kind of protect you guys on market share and brand?

Yes. Sure. So we absolutely are -- and you -- it's -- there are some things that you're going to start to see externally from us here in the near term. We've been working on, from a systems perspective, being able to have additional transparency and visibility to segment more specifically and make all of our programs, including our loyalty program more personal, which I think is a really -- that's a key strategic initiative for Trulieve, again, kind of on the back end, if you will, going into next year. So we certainly believe that the folks that are going to win in cannabis and really in, I think CBD in general, you have to get personal with your customer and we're certainly seeing that trend throughout other industries as well. And so we have been as opposed to just putting together kind of a -- lock together a loyalty program that would be quite frankly pretty easy to do. We have taken a time out and have really looked at and been working on implementing systems in back-end tech, so that we are able to make it extremely personal in terms of our offerings and targeted to those consumers. So I'm very, very excited about what we're developing there, and you can look for kind of the beginning glimpses of that here very, very soon. The other thing that we've been focusing on is a complete website revamp. We're also going to be doing some upgrades into our POS systems, which again really lead into that ability to capture at a more granular level, the customer data that is then -- will then feed into that loyalty program, so that we can make it meaningful and impactful. So we are working on it, but we want to do it the right way, Aaron. And I think initially, we're focused on this tiered approach, which I think still has some validity, but within that tiering, we again think that it's critical for us to be personal and thoughtful. So that again that stickiness is -- and also the barrier to entry for someone to replicate it is more of a barrier as opposed to just an off-the-shelf solution.

All right. Thanks for that color. That's really helpful. Second question for me, it's nice you guys have Pennsylvania close ramping up Massachusetts on the wholesale side. Just curious whether or not you can -- may provide some color in terms of how much wholesale you've contributed to the quarter and maybe how you think about wholesale versus retail mix for the company in the near-term, excluding Harvest coming into the fold?

Yes, Aaron. We don't -- as I know that Alex has mentioned, currently, right, we don't segment out, so we don't report that way. And we hear you guys, we know that you all would like for us to segment out and to report wholesale versus retail. And so what I can say is that we're going to be looking at how we report on those numbers particularly right as it becomes more meaningful and particularly, as we look at kind of Trulieve 2.0 post Harvest. So what I would say is that I mean, you can -- you know, right, I mean, obviously, in Florida, there's not -- there is no wholesaling allowed in Florida. So when you look at Florida compared to the rest of our current platform, and Florida, of course, is a large part of that contribution. So compared to Pennsylvania, Pennsylvania obviously, if you look at that market as a whole, wholesale is a large part of what we do in Pennsylvania and would be a significant contributor. But as you know and I know appreciate, it varies market by market. But as we have more of a balanced mix, again post Harvest, will -- we will absolutely be talking about and also talking about with our auditors in terms of how and when we begin to break that out.