Green Thumb Industries Inc.
Q2 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Good morning and welcome to the Green Thumb Industries Second Quarter 2021 Conference Call. Please note, this event is being recorded. I would now like to hand the conference over to Ms. Jennifer Dooley, Chief Strategy Officer for Green Thumb Industries. Please go ahead.

[Jennifer Dooley:]

Thanks, Andrea. Good afternoon, and welcome to Green Thumb’s second quarter 2021 earnings call. I am here today with Founder and Chief Executive Officer, Ben Kovler; and Chief Financial Officer, Anthony Georgiadis. Today’s discussion and responses to questions may include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. These risks and uncertainties are detailed in the company’s reports filed with the United States Securities and Exchange Commission, and Canadian Securities Regulators, including our quarterly report on Form 10-Q, which we expect to be filed tomorrow. This report, along with today’s earnings press release, can be found under the Investors Section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and SEDAR filings. Please note all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now, here is Ben.

[Ben Kovler:]

Thanks, Jen. Good afternoon, everyone and thank you for joining our second quarter 2021 earnings call. Strong momentum in our business continues. Our revenue for the quarter was $222 million, up 14% sequentially and up 85% year-over-year. To give you a sense of the growth, this quarter’s revenue exceeded our entire annual revenue in 2019, just 18 months ago. We hit our fourth consecutive quarter of positive GAAP net income, we continue to have positive free cash flow from operations and adjusted EBITDA grew 11% sequentially to $79 million, more than double the level from a year ago. During the quarter, we raised $217 million in a non-brokered private placement of senior debt and we feel very comfortable with the balance sheet. We ended the quarter with cash and cash equivalents of $360 million, which gives us a significant financial flexibility to invest for the future and strong returns for our shareholders. We continue to attract new U.S. institutional investors who are aligned with our long-term vision to create cannabis experiences that connect people and improve communities. To enact our vision just last month, we launched a brand called Good Green and announced the LEAP, Bake Off both initiative dedicated to creating more opportunity for underserved communities in the areas of education, employment and expungement. In addition to high quality products and authentic brands, our team’s passion for these products is real. And I am proud it is part of Green Thumb’s DNA. Regardless of the current barriers limiting access to the capital markets, U.S. institutions are demonstrating an appetite for greater access to cannabis investments and we are excited about the momentum. The first half of the year felt very solid and we continued to focus on execution. We are looking beyond the current year to optimize the tremendous potential when adult-use sales begin in New York, New Jersey, Connecticut and our recently entered of Virginia. In each of the new adult-use markets coming online over the next few years, we anticipate a surge in demand that will mirror what we’ve experienced first in Nevada, then in Massachusetts and most recently in Illinois. History does not repeat it rhymes, our home state of Illinois continues to bode record sales every month and our team is preparing for the next few chapters. Demand remains strong across the country. It has been a busy few months for us as we expand and enter new markets. In addition to Virginia via Dharma, we closed on the acquisition of Liberty Compassion, a Massachusetts cannabis operator, adding greater capacity for us to serve a growing East Coast consumer base. We also expanded into Rhode Island with the acquisition of a vertically integrated Summit. This broadens our footprint to 14 states and 62 retail locations and puts us in solid position in a highly desirable Northeastern market, where we now have operations in the contiguous states of Connecticut, New Jersey, New York, Massachusetts, Rhode Island and Pennsylvania. We love the map. We accomplished this by remaining committed to our discipline strategy to enter markets that meet our supply demand requirements. These are highly coveted space that offers tremendous potential as we scale distribution of our cannabis products and retail experiences. The flower and the service keep getting better and better. On a personal note, I’m excited that our acquisition partner to chose Green Thumb, they didn’t have to, they did so because of our reputation as a trustworthy and proven operator and a shared alignment of vision, principles, people and community. I am committed to making sure we deliver on that. I am also very proud of what our team accomplished in the 90 days since our last conference call. As you could imagine, negotiating critical M&A deals and then integrating people culture and systems requires considerable time and effort. The team gets this done while completing other growth critical initiatives, like the first expansion harvest ahead of the schedule in Open Rise in the Illinois. Moving forward with our site in Warwick, New York, which is transforming a former prison to a cannabis campus and building out capacity in states like New Jersey, Ohio and Pennsylvania. We are also optimizing brand distribution, including can beverages, which continued to perform very well. Cookies on the Strip had a rousing opening as it becomes a top tourist destination in Vegas. We’ve got our own brand portfolio, we seek to create some of the highest value, most well brands and cannabis experiences that bring well-being to people and communities. We have brands distributed in 12 states and we continued to scale our capabilities. There is still tremendous potential to build depth and breadth of brand distribution. We are also enjoying success with limited seasonal offerings like canned pineapple jalapeno, and the incredible sports bar. At the core, we believe that Find your Rhythm, means the more wellbeing for America. We know Americans want edibles, but are bit nervous. That is why incredible, the credible edible can build trust and help lay the path. And we know that good dream can help anyone be good, feel good and do good, together and over time we can actually make things better. As I mentioned, we pretty close to parody between our retail and CPG businesses on a gross basis. And over time, CPG growth will continue to accelerate as distribution meets the demand ahead. That is our focus every day. We have many levers for growth that will expand access to wellbeing through cannabis, strong execution for our customers and disciplined capital allocation for our shareholders remain our top priorities as we continue to deliver sustainable growth and returns. Today really is day one for the great American cannabis growth story. And there’s so much opportunity for so many people in communities to win along the way. I’ve been saying that for a long time, so let me try to quantify it a bit for you. Legal U.S. cannabis sales are currently on a run rate of $24 billion. That’s because of the second quarter of 2021 sales were $6 billion. That’s a new record. $24 billion is very big, but it’s just a start. We think it more than triples in the next decade. As an example, California grew 9% quarter-over-quarter, a phase of about $1 billion as the legal regulated market grows. Colorado grew 25% in its seventh year of legal adult-use sales. Places like New York, Virginia, Ohio, New Jersey are not even in the $24 billion number. That’s 50 million Americans. Green Thumb has a nice position in each of those states because of this top-down and bottom-up analysis focused on the data and the consumer, we think are $80 billion industry size is too low, but even if you think it’s around $80 billion, that means there’s about $60 billion, more of legal sales to come. We have confidence in those legal sales in the United States, regardless of the federal policy. And we believe that will lead to at least $100 billion of new market cap. That’s $100 billion of new wealth creation. That’s an unbelievable set up and honestly, very American. But the real questions are how do we handle it? Who participates? And who we will be pleased in 10 years, looking back? I’m focused on that for Green Thumb and for the industry and I’m excited about the days ahead. We understand the privilege and we understand the responsibility of this position. With that, I’ll turn the call over to Anthony for his financial review. Anthony?

[Anthony Georgiadis:]

Thank you, Ben and good afternoon everyone. Appreciate you joining us today. Before we begin, I’d like to give a special thanks to our team and shareholders for all their hard work, dedication and trust. We delivered yet another record quarter, not in which would be possible without our extensive and growing Green Thumb family. Those that have been with us in the early days, we’ve shown that if you plant dice, you’re going to harvest win. Those had just arrived, the ride on the Green Thumb rocket ship is just getting started. So buckle that seatbelt. Today is day one for all of us. In the second quarter, the company generated $222 million of top line net revenue, $79 million of adjusted operating EBITDA. Total net revenue increased 14% over Q1 with growth in CPG revenue growing 13% and gross retail revenue growing 15%. As a reminder, the difference between gross and net is intercompany. Similar to last quarter, there are three primary drivers to our top-line trajectory growth, robust consumer demand, high quality differentiated product and execution. Number one, the tidal wave of demand for cannabis is real. Across the board in every market we operate in consumer demand for legal cannabis is going up into the right. Number two, our differentiated product offering continues to resonate in our respective markets. We believe in quality over quantity and leading with the consumer. No every day visit for our crew here at Green Thumb, we want the fire and more of it. Last, operational execution. We said it since our first call as a public company in 2018, enter, open, scale. In the face of tremendous growth and a myriad of complex regulatory environments the team made it look easy. Whenever sold everything above is another highly profitable quarter where the company generated gross margins in the mid-50s. While, these figures slightly declined over Q1 when we unpack the numbers it made sense to ramp up the costs related to our CPG expansions. I would assume that the business will continue to incur these sorts of expenses, while still maintaining our intrinsic goal of keeping gross margins at or above 50%. On the SG&A side, excluding G&A and stock-based comp normalized operating costs approximated $47 million, a $5 million increase over the $42 million incurred in Q1. As we head into the second half of the year, we plan to continue to accelerate our investments in our team and our infrastructure. We need a bigger boat and more team helping us operate the boat. In Q2, total other income approximately $2.4 million, primarily driven by non-cash gains and losses associated with our investment portfolio and the refinancing of our senior debt facility. As a result, the company generated over $79 million in adjusted operating EBITDA, close to 36% of revenue and over $20 million in net income, our fourth consecutive quarter positive earnings per share. Moving on to the balance sheet. We ended the quarter with approximately $360 million of cash, which is $80 plus million greater than last quarter that was supplemented by the $217 million non-brokered debt rate we completed in April. With this cash, we intend to double and triple down our bets in a number of key markets. Our patients and consumers have spoken, they want more Rhythm, Dogwalkers and incredibles and our capital spend should help address this. In closing, we wanted to welcome the Liberty, Dharma and Summit teams into the Green Thumb’s family. We’re excited about the additional businesses and teams provide as we continue our expedition into Probation 2.0. You don’t ever want to do in the balance of their summer, look forward to speaking with you again in a few months. Back to you, Ben.

[A - Ben Kovler:]

Thank you, Anthony. Before we go, I want to share a little more about the programs I mentioned earlier, and our efforts to expand access to opportunity and wellbeing in underserved communities, especially those harmed by the war on drugs. In this country today there’s a 90% racial wealth gap between white and black Americans to this systemic inequality. There is not a person that drinks was in trouble by the shocking disparity. And so in July, we joined forces with NinetyToZero. This group is developing a roadmap to advance racial equity by growing black talent and increasing capital to black businesses. With the support of leading CEOs from companies like Starbucks, Goldman Sachs and the United Way and with the help of two times NBA MVP, Steph Curry, we are honored to be the first company to represent cannabis in driving this change with NinetyToZero. We also announced the upcoming launch of our new brand called Good Green. To advance our mission of expanding access to wellbeing through cannabis, sales of Good Green products will fund grants to nonprofits that support the brands three pillars, education, employment and expungement. We encourage you or a 501(c)(3) you know, or people you know, who know that 501(c)(3) that fits our mission to apply in our website good.green. It give the program a head start before actual product sales, we are proactively committing at least $1.3 million over the next 18 months. I mean, application process is now open. The application process is a means to figure out who and where to give the money in order to generate the largest impact. This builds on our existing social impact program, growing for good, which is committed to advancing diversity and inclusion, restorative justice and social equity within the cannabis industry. Our entire team’s dedication to these important social issues is inspiring. I am also excited Green Thumb’s landing in the number two spot of Crain’s Fast 50 list of rapidly growing companies in Chicago. We feel the growth and we are ready for more. In terms of COVID, we can only hope that the Delta variant will not lead to a repeat of 2020. Based on the data we encourage Americans to get vaccinated to protect yourself, the elderly and our kids, while it’s still too early to determine the ultimate impact of COVID this time around, we have learned how to live with the pandemic and we fully appreciate the essential role cannabis and our industry plays in providing wellbeing and comfort to tens of millions of Americans. Rest assure that your company is stronger than ever and committed to becoming better every day. And finally, I want to say thank you to Jennifer Dooley. Many of you remember her from the road show five years, tantalizing brands, one IPO, 13 conference calls, lots of laughs, lots of learning and lots of good fun. So on behalf of the shareholders, we appreciate your contribution and wish you well in your next chapter of life. Thank you, Jen. With that I’ll turn the call over to the operator for questions.

[Operator:]

And our first question will come from Matt McGinley of Needham. Please go ahead. Matt, your line is open. You muted on your end.

[Matt McGinley:]

I apologize for that. My question is on retail. I’m impressed with the sequential growth in the retail business. I think most of the new unit additions in the back half will be acquired medical dispensaries, and I think new medical units in Pennsylvania and Florida. Would you expect this to impact the average retail productivity or is there still enough momentum with the rising productivity on your overall store base where you could sustain your average unit volume into the back half?

[Ben Kovler:]

Yes. Thanks for the question, Matt. I think one quarter is too short to judge. Last quarter, I think the number was 2%, people said, hey, it’s too low, and now it’s higher. I think over time, we’re seeing very strong consumer demand. We’re seeing the markets and Anthony said in every single market, go up into the right. And so we’re analyzing those, we’re understanding opening the box and really the evolving consumer and what that looks like. So like the retail business, and you can see though a majority of our – a majority of our capital is going into the production business, branded consumer product production.

[Matt McGinley:]

Okay. Great. And my second question is on the G&A in the back half. You made a comment – I think Anthony had commented that the investing in June and the back half. Can help, quantify what type of increase we should expect from that $47 million core number that you had in the second quarter? And then additionally, I would think that most of the recently acquired assets would likely be lower margin. If they just operate on a lower scale than what we do at GTI consolidated, would that have an impact on the margins in the back half or are they just kind of small enough where the rest of the system is just operating at such a scale it just sort of gets mixed up and wouldn’t really have a margin impact.

[Ben Kovler:]

Yes, Matt, I’m trying to understand the root of your question. Do you mind just kind of repeating it?

[Matt McGinley:]

Yes, absolutely. So you made the comment of the core G&A in this quarter was $47 million, but you also said that you would be investing in the back half. Can you help us understand how much of an increase we should expect to see on G&A investment into the back half? And then the second part of that was you’ve recently acquired these assets across these several different states. Presumably those are all lower margin businesses than what you have with core GTI today. Would that have an impact on margin in the back half or is it just not – I think just small enough, it wouldn’t really have an impact on overall GTI consolidated just because you’re operating at such a scale for the rest of the business, would just get washed away and not have an impact.

[Ben Kovler:]

Sure. Okay. Now I totally bought out. G&A, just got jump. So look, I think we’ve said before, as the business continues to grow and what we’re seeing, we’re building the team in advance of the tidal wave that’s coming. And so our foot is on the gas in terms of the infrastructure that we’re building here. At the same time, we’re ramping down the CapEx in the back half of the year, which will be at, or above where we spent to date. And so we anticipate that G&A number to continue to increase. Now, do I think that’s going to result in some margin dilution kind of over time? Candidly, no, because I think the top line is lot.

[Anthony Georgiadis:]

On the second part of your question on the retail margin dilution of the acquisitions, you answered it correctly. It’s not a factor. We’re looking out at what these assets mean and the touch points with the consumer, what it means about our brands in those markets, state tax revenues, state jobs we like those assets. We’re not thinking about our dilution of acquired retail boxes.

[Matt McGinley:]

Okay, perfect. Thanks for the answers and congrats on a great quarter.

[Ben Kovler:]

Thanks.

[Operator:]

The next question comes from Vivien Azer of Cowen. Please go ahead.

[Vivien Azer:]

Hi. Thanks very much. I wanted to dive in on your consumer packaged goods business. Clearly, nice quarter on that and appreciate the desire to continue to invest behind that as you build a portfolio of brands. One of the traditional metrics then that we talk about in CPG is ACV right, as a measure of the distribution. But I think for you guys, it’s not just about getting one SKU in a competitor door and you’re calling that a win. So how do we think about kind of distribution opportunities kind of over the medium-term in terms of kind of what percentage of your portfolio is well-represented in third-party doors and how much runway you have there? Thanks.

[Ben Kovler:]

Yes. Good question and something we’re looking at it and obviously tracking which states, which brands at which distribution and what’s going on with the consumer. There’s elements of the regulatory of the structure at which products are allowed, edibles are not allowed in PA, no pre-rolls to Pennsylvania and things like that. But we focus on full brand distribution. We want to meet the consumer where they are. And so we’re looking at 100% distribution in many of the states we are in Illinois, Pennsylvania, Maryland as we scale product in Massachusetts, a lot of the catalyst behind the acquisition was more Rhythm, more incredibles, more Dogwalkers. Consumers wanted, so we got to get it to them and we got it to them at the right retailer, which means everywhere. I think the consumer and I think the industry is evolving fast. And so we want to play where they’re going to be a little bit. So sometimes we have the unfortunate decision where we can’t do mass distribution to everybody or we’re doing strategic things where a certain proximity or certain places because of limited supply.

[Vivien Azer:]

Yes. Understood. And my follow-up kind of along the same, I was wondering if you could comment on Canada. I was recently at a competitor dispensary in Downtown Boston. I saw products on display. There wasn’t any available for sale. You’ve noted in your press release the aspiration to continue expansion beyond Illinois. So perhaps, if you could give us a more real time update, is that product available for those samples in Massachusetts? And how many states could we expect canned to be in by your end? Thanks.

[Ben Kovler:]

Great. Yes, we’re going to scale on the East Coast, if you think about some of the markets that we’re really targeting and again, it’s not about this quarter or the end of the year, that year or the first half of next year, we’re thinking a few years out who that consumer is and where they are. States like New Jersey and New York don’t even have rules for how the rec program is going to go, you can see Connecticut moving forward pretty quickly. Massachusetts is an unbelievable opportunity. And your experience is the experience I hear about often, which is a one more time and I can’t get it. That’s a high class good problem to have, and we’re scaling operations of the business. I think the business will have a few more states by year end or over the next 6 to 8, 10 months. And we plan to go pretty big in a few of the states to be ready. We think, again, the consumer experience in cannabis is evolving and canned be really a part of that. 2 milligrams social experience reduces the fear of entry into the product and we open ourselves up to a brand new super base. It’s big and if you were in Chicago, give us a call, come on back.

[Vivien Azer:]

Thanks for the color.

[Operator:]

The next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

[Pablo Zuanic:]

Thank you. Anthony, I think in your prepared remarks, you said something about doubling capacity in Pennsylvania, New Jersey, Ohio. You also mentioned that in the Illinois just completed an expansion there. Can you give more color in terms of the timing when that kicks in? And did I hear you right about doubling capacity in those four states? And again, if you can put your metrics around it, some people go at square feet of canopy and also timing. I’m just asking that in the context that yes, your gross wholesale accelerated, right, plus 15% this quarter compared to 6% in the first, but in the second half last year, each quarter, you were up about 70%, right? So those capacity ramp ups continue to drive significant growth. So more color there would help. Thank you, Anthony.

[Anthony Georgiadis:]

Sure. Great question, Pablo. So we’re not doubling and tripling capacity, obviously in every market. We’re doing that on a market by market basis, but the big capital projects that we have going on right now that we anticipate will be completed by the end of the first half of 2022 are in the places that you just indicated, Ohio, New Jersey, Pennsylvania. Ohio, we don’t currently have cultivation online, but we brand new. So we were capping out the cannabis space as the state allows us. New Jersey, we were certainly doubling and fastening and then PA approximately that amount as well. So in terms of timing, look, we all know that these projects take a long time and even when they’re finished and the plans need to get to a point where they can be harvested, packaged and sold. And so the guidance that we’ve been getting at least internally and externally is that those projects should be completed by the end of the first half of next year.

[Pablo Zuanic:]

Got it. Thank you. That’s helpful. And Ben, can I ask you this one on international brands? When I hear some companies in Illinois, one of your competitors licensing Cookies and local farms for pre-rolls, right. How do you think all of that companies that are relying either on celebrities for brands or use or licensing brands from other vendors to operate in their states? I suppose you are happy with your brand portfolio, you need to rely on that? And unrelated to that question in the case with Cookies agreement in Nevada, that’s just to rebrand one store, or can you sell the Cookies brand itself across all your stores in Nevada. Thank you.

[Ben Kovler:]

Sure, Pablo. Thanks. Great questions. So the last question first. In Nevada we have a deal on one store – the retail and wholesale product, right? Cookies is a lifestyle brand that connects in many respects from products to retail to experience to merchandise, et cetera, et cetera. So our deals were one retail experience. We are distributing the product, there’s other product in the state. And we think that there’s edge and growing high quality indoor premium product, which is really what our team specializes in. As Anthony mentioned in his prepared remarks, I think there’s an edge there. So that’s the Nevada story and that can help drive business around the state, but also particularly in the Strip – Cookies on the Strip. And we’re excited to welcome you out there. I don’t know when you’re coming. In terms of Illinois brands, we just think consumer reversed. So consumers love those brands. They should be here and they should win there’s quality issues, there’s production issues, distribution and the brand promise. It’s very hard to take a brand nationally. We’ve seen fits and starts and we’ve seen things go very, very well. So we’re excited because the consumer gets more choice.

[Pablo Zuanic:]

Thank you.

[Operator:]

The next question comes from Eric Des Lauriers of Craig-Hallum Capital Group. Please go ahead.

[Eric Des Lauriers:]

All right. Thanks for taking my questions guys and congrats on yet another strong quarter here. One theme that you guys keep hitting on is, faster than expected growth in U.S. cannabis really across the board here. My question is, if you’re seeing that on the beverage side with can, it’s good to hear you guys building up more distribution assets for beverages but this has been a sort of 1% of the market, or maybe even lower historically. Is this something that you see sort of increasing in share here, is this something that you expect to move the needle in the near-term, or should we continue to think of this more as a sort of a longer-term debt customer acquisition tool? Any comment on the growth you’re seeing on the beverage side specifically? It would be great. Thanks.

[Ben Kovler:]

Sure. Yes. Great question. Thanks, Eric. The short answer at the beginning is no, we don’t see outsize growth there, maybe we see major growth in U.S. cannabis and the core products. This flower, pre-rolls, edibles, concentrates, 95% of the basket I think. And that’s where we’re really investing. The minute in time versus impact time and that in the short and medium term is mismatched in the beverage versus portfolio, if that makes sense. But we like the understanding, what’s going to happen out there. So to answer the question correctly, with it’s a longer-term player, customer acquisition, I don’t even know it’s understanding the customer, understanding the product and being able to be a leader, understanding first mover and sort of making the mistakes along the way, so that we can win as the game enters a larger stakes.

[Eric Des Lauriers:]

Yeah, that makes sense. All right. And then you also mentioned in your prepared remarks, seeing increased appetite from U.S. institutions. I’m not sure if that’s just referring to some of the purchases that you’ve done over the past few months here. But with these stocks seemingly trading more on sort of capital dynamics than fundamentals, could you elaborate on that comment anymore? Just provide any more detail on that increased appetite any color, I’m sure it’d be helpful to anyone on the call here. Thanks.

[Ben Kovler:]

Sure. Let’s set the stage a little bit. Here we are three years after going public and being part of really the first class, the first group of MSOs to go public and bring U.S. cannabis in the public markets for the investors sophisticated or not to try and get access to this. There’s been a lot of work and you’ve met many of the people on the call and around in our road shows, as people were interested, they’ve heard of it, I’ve seen another product. They’re intrigued. There has been issues in Canada. And people having to understand what’s going on in the U.S. That appetite is growing. So the comment there is – there is not – I mean there is no $24 billion brand new consumer product industry, that’s going to 80 billion. There just isn’t one. You don’t see same-sort of sales like you do in the cannabis industry. You don’t see the returns on invested capital. And the business fundamentally is quite exciting. People are interested in growth. This is American capitalism and things trade on those sorts of metrics. If you looked down to where we are as Green Thumb, you see $500 million plus or minus a new capital coming into the space. We do it without a bank. We do a gross equals net on behalf of shareholders because the return on that invested capital is so dramatic into this kind of growth. And what we’re – the fruits of today are what we planted from basically the debt, the 2019. And now with the balance sheet flush with cash, the foot on the gas, the capital investment ramping, we’re excited about where this is going. That’s basically what we said.

[Eric Des Lauriers:]

That’s great. Thank you.

[Operator:]

Your next question comes from Camilo Lyon of BTIG. Please go ahead.

[Camilo Lyon:]

Thank you. Good afternoon. I was hoping to get a little more color on Anthony on your comments around gross margin and in particular the ramp up costs and your CPG expansion. And how to think about when you start to see the return of those increased investments through either greater CPG growth, which would probably have some sort of offsetting margin benefit. So if we can – can you help us bridge those two that’d be wonderful?

[Anthony Georgiadis:]

Sure. So that’s a near impossible question to answer just given the number of variables, right? So, obviously, as we bring on additional capacity, there is a ramp up period. And during that ramp-up period, you’ve got – you’re onboarding expense before you’re bringing on revenue, material nature, and these facilities after a couple harvest, they really start to produce kind of the yields that you initially underwrote when you invest in the capital. Now what’s interesting with our business, if we were just doing one or two of these, the payback on that would flow through the P&L rather rapidly, but effectively what you’re going to start to see is we’ll finish one and then we’ll start another. And so – and given kind of the exposure that we have and the number of states where we have capital projects that have either started today, or that will start over the next 12 months, it’s a very difficult question to answer because effectively we’re going to continue to keep our foot on the gas as we’ve said before. And so I would expect that we’re going to continue to run expenses at gross margin line, at the same time generating kind of additional scale from the capacity expansions that were recently completed. So, I think, then that kind of answered your question. It’s really hard for me to kind of tell you where that number is going. I can tell you again – and again I’ve said this number of times, and I apologize if I sound redundant, but our goal is to keep our gross margin line at or above 15%. If we can do that, we can drive massive operating leverage and scale into the business, down to the – down to our EBITDA line and that’s going to produce great returns for shareholders.

[Camilo Lyon:]

And so just to be clear, outside of the COVID region expansion projects, are there any other costs that were driven in Q2 that affected your gross margin?

[Anthony Georgiadis:]

Nothings gets material in nature.

[Camilo Lyon:]

Okay, perfect. That’s what I was really trying to get out. And then just shifting gears to Virginia, I’d be curious to hear what your thoughts have been on how that market is developing? Now that you’re in it officially, you’re just trying to ramp up, how do you see that the consumer behavior, if any, if it’s at all different from other markets and assuming it’s not in any sort of views on the plans rollout through the back half of this year, the expansion rollout through the back half of this year.

[Ben Kovler:]

Sure, I mean, it rhymes a lot with the other markets we’ve seen. This is a medical program where there is access. Product offering is limited. Flower is not available yet. And we’re seeing big demand. I think there is five stores opened in the States plus or minus. We opened the most recent one, which was the first remote store, standalone store, not connected with one of the cultivation sites in its infancy. There’s a half million people plus or minus in Virginia. And the story on the demand is pretty simple. Story on the supply is the CapEx. We’re really bullish on what the demand will look like both with flower and with adult-use. And the math is just like as basic as you could do, but you do – a lot of them really work and a lot of the stuff. I mean it’s that simple for us, but we’ve got to build the infrastructure, not easy, got massive eight figure, approaching nine figure CapEx projects, combined with the state from all the operators and I believe it’s the largest CapEx projects industry in the state. There is supply chain – global supply chain issues. We’re able to wrestle through those in order to put the infrastructure here but there is a progressive thought to put this infrastructure in place. This is going to create hundreds of millions of dollars of state tax revenue. If you want to employ thousands of people and there’s going to be a net positive for the community and for the economy. So we’re positive on it. We’re excited to be there. We love the new team. We love the product coming out of it. And really the consumer, I mean, as I stated a little bit last week, 10 days ago or so, rousing reception, people are very excited as we can bring the rise of consumer experience to people in Virginia. We’re really excited about that. We’re going to learn and get better along the way. So look for it to go up and to the right.

[Camilo Lyon:]

Got it. Good luck.

[Ben Kovler:]

Thank you.

[Operator:]

The next question comes from Michael Lavery of Piper Sandler. Please go ahead.

[Michael Lavery:]

Thank you. Good afternoon. Just following up on…

[Ben Kovler:]

Good morning.

[Michael Lavery:]

Hey there. Quick question on your trajectory. It looks like you’re in health service area three. Is that geographic limitation intact still? And if so, will that change when recreational use comes on board?

[Ben Kovler:]

So, not going to comment on the rules that aren’t written, but we have the geographic situation based on the current rules of medical. There is delivering, there are stores, consumers are moving around and product is moving around. There’s limited supply, limited products that look forward to evolve over time, but I’m not intimate enough on the details to give you any guidance on that. Again, I think the state will see up into the right, and I think everybody understands first it’s about patients, and then it’s about the adult use market; safe, regulated, 2021 and over, generating productive jobs, massive state tax revenue.

[Michael Lavery:]

Okay. Great. And then just following up on a comment you made earlier when you were giving some of the industry color and pointing to the momentum at the $24 billion now. The first states you called out, part of that was California. What does it take to get that more interesting for you to be directly involved there?

[Ben Kovler:]

That’s a good question. It’s really the same as script here. We’re studying it, and a lot of consumers there. You see in the market in California go 9% quarter-over-quarter, which was $950 million to $1,040 million quarter-over-quarter, now that’s a tremendous growth. So what’s happening? What is going on with supply chain? What is our return on invested capital? Look like they’re standalone. And then however, you want to think about it, we called it, optionality maximization or weighted probability or other things, again, everything else happening in the business. What’s our cost of capital? What’s our access to capital? And what’s the best move for shareholders based on where we think this is going to be being in our position kind of in the wave out where we are. So it’s very much on the table. We’re constantly evaluating it. But we really like what’s happening east of the Mississippi. We like the set up. And we like participating in California being close to the consumer, understanding the participants there certainly seen as due to significant things with brands out of California. And we think we’re very close to the consumer there and it hasn’t cost shareholders any money. So we like that set up and we continue to really invested in it and be a part of what’s happening there. I think time in Canada has really accelerated. So I think you’re seeing several turnovers in the market. I think you’re seeing accelerated consolidation or whatever capital markets cycle you want to call it. Eventually, there will be profitable entities that capital will go to the strength. So I think that’s where – we’re ready watching and kind of waiting for that to go down.

[Michael Lavery:]

Okay, great. Thanks so much.

[Ben Kovler:]

Thanks, Michael.

[Operator:]

The next question comes from Aaron Grey of Alliance Global Partners. Please go ahead.

[Aaron Grey:]

Good evening. Thanks for the questions and congrats on the quarter.

[Ben Kovler:]

Thank you.

[Aaron Grey:]

Absolutely. So first question for me, I want to dive back to CPG. So it looks like the percentage of your products flowing through your stores, at least looking at percentage of retail have come down over the past few quarters. So I understand part of that looks to be because of supply, but as that supply kind of comes up for you guys, just want to kind of think about how you look to allocate product either between your own stores rather than your near-term higher margin or the argument to kind of maybe bring about more brand awareness and distributing to other stores. So it’s how best to think about that when you’re in this kind of supply constraints stay with your CPG brands. Thanks.

[Anthony Georgiadis:]

Hey, Aaron, Anthony here. There’s not a really silver bullet to answer the question. I think the way we approach it is on a market by market basis. And so certain markets really require us to supply more of our own product to our own stores. Other markets, there’s – a healthy amount of available supply out there. And if that provides better offering for the consumers, then we go with that. Really what we’re trying to do is optimize our situation in each market and sometimes, what we’re looking to optimize different, right. If we were just looking to kind of optimize the top line, we may do one thing in the market and if we’re looking to optimize profitability, we do another. So for us, it’s really kind of looking at each market on a market by market basis. And then really each week that goes by and when the allocation decisions would have to get made, when products coming out of wholesale, that’s something that we spend a lot of time looking at and looking to optimize because it’s important to the business.

[Aaron Grey:]

Okay, great. Thanks for that color. And then second question from me is on M&A, you guys have gotten a little more active this year just entered a new state of Rhode Island, seems to be on the precipice of adult use legalization. So just let me get some color. You talked about really like an east of the Mississippi, so kind of going forward, how do you think about other new markets, especially looking at Delaware, that’s another small one. You have main, which recently legal exercise. So this maybe where you guys are thinking today in terms of the M&A landscape, where you guys are seeing valuations in the marketplace and how you think about it. Thanks.

[Ben Kovler:]

[.:]

At the same time, we’re paying very close attention to everything else going on. So the number of states isn’t even that many have an opinion on what’s going on, the bar is high in order to go there, it’s the same thing I’ve said, but each one of these deals sets up as meeting that kind of criteria. It’s not even that complicated of math for us as things make sense or don’t we’re happy to say no, we do a lot as always, but really everything’s on the table, if that makes sense. And then we’re here for the long-term.

[Aaron Grey:]

Okay, great. Thanks.

[Ben Kovler:]

Thank you.

[Operator:]

The next question comes from Scott Fortune of ROTH Capital Partners. Please go ahead.

[Scott Fortune:]

Good afternoon, and thanks for the questions. Just real quick in lighter the modest sequential growth kind of May, June and reporting 13% since growth here in the second quarter, what’s the x-ray coming out of the quarter relative to the 14%, any color on the momentum from July and third quarter so far would be helpful. And then are you seeing consumers’ shifts purchasing more closes or reopening kind of traffic in the stores and helping out average ticket size? How should we look at kind of the consumption side of it from the consumers from a basket size of things?

[Ben Kovler:]

Yes. We’re not seeing that kind of stuff we saw in March, April, May with COVID changing consumer behavior. We continue to see increase demand and consumers finding cannabis. We continue to see, I mean, Anthony said, every state is up into the right to go week by week and what’s happen this weekend versus that weekend is not our style. I think quarter-to-quarter $6 billion, you go through every single state and look at what happens in every single state even monthly, if you want, and something in that screams to us, if there’s any issues which is sort of, I think at the core we think this thing is going to go up and to the right, that’s both the same state sales, same state sales beating the state, they’re already open at least a year, what they’re going to come out. And then the states that opened like a store or new stores coming online, new states coming online. And literally the horses in the stable and haven’t even got out at the track yet are big, strong, and going to run a really fast. Their names are like New York and Virginia. And then we like our position, everybody capital to make those horses really work for shareholders, work for the market, work with state. That’s just as simple as we look at it. So no cause of any worry, which I think we hear about February to come on out to any of the stores are or otherwise in any of these things. And I think you can feel it in a few days.

[Scott Fortune:]

I appreciate that. And it really big picture, glad to see your initiative towards social equity with 90 to zero, the green and lead program. And you can outspoken about moving forward in Illinois to add for licenses. We’re starting to see that unlock and also in New York as more states come on board, but big picture what do you see as key to accelerate and then implement these equity programs is safe banking at the federal level critical and really helpful to gain their jumpstart the cause unlike Senator Booker, we believe from that standpoint, how do you look at that from a federal level and kind of accelerating the social equity part of this?

[Ben Kovler:]

Yes. Thanks, Scott. Good question. The first, we don’t think it’s a federal move to accelerate this and I wish I knew the answer to the core of your question, which is how do you get state governments to move along the line of logic and common sense. It’s difficult. We’re learning along the way. We’re trying to be proactive, honest here to talk, here to meet, here to move the ball. We have a very unique perspective, because we’re super active in so many states. We understand the mistakes, we can learn from them and we can try to put them in place in the new state. And so how is New Jersey, Connecticut and New York, for example, which all three governors signed legalization going to implement social equity. Are they going to learn from what happened in Illinois, which was slow? But now, here we are. We’ve had two rounds of lotteries, 120 licenses, great group of many different people. We’re going to do a bake off. Other operators are very in order to make sure, there’s new successful people in the industry. But I don’t know how to get state governments to move faster and function on the decision tree that we do. But I’m open to suggestions along the way.

[Scott Fortune:]

I appreciate the color. Thanks.

[Operator:]

The next question comes from Andrew Partheniou from Stifel GMP. Please go ahead.

[Andrew Partheniou:]

Hi, thanks for taking my questions and congrats on the great quarter. Maybe talking about consumer behaviors and trends that you’re seeing, obviously, during COVID, there wasn’t a lot of tourism happening, but now with COVID restrictions easing. Because you give it a little color on what you’re seeing with regards to the tourism front, we’ve got some pretty good data out of Illinois on out-of-state sales, but hard to put a finger on some other states. Any color on that could be useful.

[Ben Kovler:]

Sure. I think the best example of the tourism bid comes from Nevada, you’re seeing records out of there, you’re seeing bigger operators there be successful in growing them. So just looking at the data here, obviously this is all public then you’re seeing numbers around $80 million, $87 million, even March 2021 was $97 million in Nevada, obviously the weather was cooler, it’s 108 degrees outside there in these few months. But more tourists are going to be more cannabis buying. We think that’s pretty basic going underneath to see what’s happening in the state is pretty difficult. You’re seeing the out of state bid in Illinois, like you mentioned, which is great. It’s nice. The state provides that kind of transparency. How much is tourism versus people over the border, not really clear, but not something we super focus on. Again, we see a huge amount of consumer demand for the product and we want to offer it safely, compliantly and in a way that creates better experiences for consumers.

[Andrew Partheniou:]

Thanks for that color. And I do following up on a previous question around M&A, appreciate you want to keep your cards close to your chest on strategy, but maybe looking at valuations, we’ve seen public market shares retreating to the presented runoff levels. Wondering, if you’re seeing something similar on the private side or any kind of color you can provide on that.

[Ben Kovler:]

Yes. Good question. The public market is mark-to-market every day. There’s a bid ask the markets are thin or not, and the moves around. It doesn’t happen in the private markets. So the short-term swings of public stock prices and seller sentiment on what their value is do not correlate one-to-one and seems the reaction. When there’ve been big droughts in the market and things are different, people understand there’s no capital available and they may change a little bit. But it’s much more about sentiment. I think it’s a little less on the mark-to-market of the current public markets. And to your comment just on the pricing, it’s not something we focus on much. We just think it’s good for the buyers essentially. We’re building a business of both for what’s to come out for awhile. So that’s exciting for me and for us for this kind of opportunity.

[Andrew Partheniou:]

Definitely would agree on that. Thanks for taking my questions and congrats again.

[Ben Kovler:]

Sure. Thanks, Andrew.

[Operator:]

The next question comes from Graeme Kreindler of Eight Capital. Please go ahead.

[Graeme Kreindler:]

Hi, good afternoon, and thanks for taking my question here. I appreciate the comments at the top of the call and then Q&A with respect to the capital spending and setting the stage for the large projects expected to come online in the first half of 2022. I was wondering, given the balance sheet strength of the company right now, I was curious what the thoughts are with respect to capital allocation in the state of Florida. That’s a market that I think you’ve been very, very strategic and how you want it to allocate capital there. And with the resources that you have, is there an opportunity to potentially advance some spending there get a bit more aggressive or maybe look at that as a growth platform sort of in two years out situation. Just would be curious on thoughts on that. Thank you very much.

[Anthony Georgiadis:]

Sure. Graham, Anthony here. Yes, I mean, look, we’ve got a lot of cash in the balance sheet. I would say that we’ve got a lot of opportunities to deploy that capital within the business. We talked about the projects that we have kind of currently – that are currently underway in Ohio, New Jersey and Pennsylvania. We also have very large other projects that are contemplated that have not yet started. Right. So, think of a place like New York, Virginia, we’re going to continue to deploy capital in these other markets, those projects have not get started. Specifically as it relates to Florida, given the cash in our balance sheet, given the cost of capital, we are going to –we are going to start to deploy capital. We have a great site, covered right off Highway 75. And that will be a project that should get started here within the next three months or so. Obviously there’s a lot going on. There’s a lot of capital being deployed there by other operators as well. So my guess is, we’ll deploy the capital, see how it performs and then revisit.

[Graeme Kreindler:]

Okay. Understood. Thank you very much.

[Operator:]

The next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.

[Andrew Semple:]

Hello and good evening everyone, congrats on another solid quarter.

[Ben Kovler:]

Hi Andrew, thank you.

[Andrew Semple:]

Just the first question here. Just wanted to see if you guys have any insights or perspectives on the New York and Virginia medical programs, and when we might see timing for a smoke bowl dried flower products approved within those medical markets?

[Ben Kovler:]

Yes. The core answer is marketing. Obviously it’s been time in the log. Former governor of New York was not a huge fan. We now have a new governor pretty perspective that advice. So my guess is it would be quicker now than it would have been before, but I don’t really know. It seems to be part of the laws. It’s so more ridiculous than medical patients who would benefit from this. And now it’s a law to not have access, products it’s available in the market. We know a lot of operators and team are working on this. In terms of Virginia, I think the timing is, I don’t want to say the wrong thing, so we’ll have to circle back, but I think it’s known and that’ll be coming soon, and we anticipate similar to you’ve seen in every other market, that flower comes on as increased demand. This is the core product in the category. And obviously the core part of our focus, which is high-end indoor premium flower, I think find your rhythm, works and I’m excited to bring that rhythm brand to New Yorkers, Virginians and everybody across America.

[Andrew Semple:]

That’s great. Thanks for that color. My next question here just want to go back to your comments about significantly expanding your production capacity in several of your core markets, I guess it just raises a question about how you feel about your current supply situation today? Do you feel supply constrained at all in any of your core states and is this activity, or is this investment activity kind of a proactive move in anticipation of faster growth ahead?

[Ben Kovler:]

Good question. And the answer is both. We have more broad. We have more sales. And the markets are growing. Our products are good. People want. Doesn’t mean every single day, every single one there’s lot we can learn as we go, we develop and innovate and at the core more Rythm, more incredibles, more Dogwalkers, more Beboe is a path to win. We’ll be coming out with good dream and we will be more supply. We anticipate masters sales there as the consumers want the value proposition of that product and to feel to do good about how they buy. So again, both we’d have more sales today in the current markets, but look at the month-over-month growth, some of our core markets, and I think Illinois was 10%, 17% last month. That’s a serious growth curve, and I was going to be a doubling of the point of sale for consumers to go get the product. So, inventory in the system’s going to go up, and sales are going to go up. It’s like not a mystery. So, we need more product to serve both of those. And as it goes, and as people say, own your market share and retail go down, but that’s fine, because you go up with more consumers, more walls to be created, more participants and then we just do that all the net positive.

[Andrew Semple:]

That’s great color. I appreciate your insights.

[Ben Kovler:]

Sure. Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.

[Ben Kovler:]

Sure. Thank you everybody for joining us. We’ll be back about 90 days with an update. Bye.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. And you may now disconnect.