Green Thumb Industries Inc. (GTII) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Green Thumb Industries First Quarter 2021 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Ms. Jennifer Dooley, Chief Strategy Officer. Please go ahead.

Thank you, Lee. Good afternoon, and welcome to Green Thumb's First Quarter 2021 Earnings Call. I'm 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 will 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's Ben.

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining our first quarter 2021 earnings call. Since we were together less than 2 months ago, I will keep my remarks relatively brief and relevant to what we see ahead in 2021. Strong momentum in our business continued into the first quarter of this fiscal year. Following a solid fourth quarter in 2020, our first quarter revenue grew almost 10% quarter-over-quarter to more than $194 million or a 90% increase year-over-year. We posted our third consecutive quarter of positive GAAP net income of $10 million, adjusted operating EBITDA of $71 million and free cash flow from operations of $40 million. We are pleased with the quarter, but we know we are building something for the long term. Today's cash balance is over $300 million as a result of our successful debt rates, which follows the first quarter's equity rates. This puts our balance sheet in excellent position to play offense. We're off to a very strong start in 2021 and we are even more excited about the opportunity ahead for the balance of the year. We have said it many times, but it is worth repeating. We believe cannabis is the next great American growth story. Many of the classic American themes over the last 250 years exist in the story of cannabis in America in this century. We believe things are changing in America and [ increased ] on the well situated to take advantage of that change for our stakeholders. Rest assured, as large owners of the business ourselves, we are aligned with shareholders. As we look at the map of the U.S., we see a lot of opportunity. Top of everyone's mind is a position in New York and how we will leverage the adult-use opportunity. In a full circle moment for the industry, Green Thumb is turning a former federal prison that once incarcerated people for cannabis into our New York cannabis facility. We see this as a self-contained economic stimulus package, fueled by the demand for cannabis. When completed, it will create hundreds of jobs, generate a lot of tax revenue, enable well-being and continue to remove people's assumptions on cannabis. In New Jersey, we are expanding production capacity. We have 2 open stores in Paramus and Paterson, and a third store opening in coming months. This is in addition to the potential along the East Coast in places like Pennsylvania and Connecticut, Rhode Island, Maryland and Massachusetts to name a few. Tourism is coming back to Nevada as Americans crave experience and connection. Our Cookies on the Strip grand opening this Friday is well positioned and nicely timed. At the end of this week, we'll be on a Las Vegas trip with Berner and the Cookies team to celebrate and we anticipate a lot of excitement with this flagship opening. Looking [indiscernible], while it became common sense in 2020 to say cannabis is essential, there is still a large part of the country that does not have access, but this is changing. In April, Virginia became the 16th state to pass adult-use. And just over a week ago, Green Thumb announced the acquisition of Dharma Pharmaceuticals. Dharma operates a cultivation facility, 1 dispensary and was a first mover in the Virginia market. Following the close, this license gives us the ability to open 5 additional stores. We are bullish on cannabis demand in the Southeast. Our track record in Illinois serves as a road map for how to capture the opportunity ahead. Our business strategy has not changed. We enter highly desirable markets with large potential and then open in scale through methodical execution and a focus on the consumer at the right time, the right price and with the right products. That means we open retail stores, cultivation and production capacity at a pace to support the market, which takes careful planning and capital. Most importantly, we listen to what our consumers want. Our core objective has always been to be a leader in cannabis products that create real relationships and real experiences with the consumer. We believe it is fundamental to our long-term success. It has always been about quality over quantity for us and this has never been more important than it is today. We are seeking high-quality at scale delivering the best, safest and most exciting products to people. We are pleased with the momentum in the P&L and the revenue contribution from retail and CPG production, which we expect will continue to accelerate. Virginia is creating high-quality, honest, trusted products in several fold. First, great brands and products drive people to stores, whether it's our dispensaries or others. Rythm Brownie Scout flies off the shelves and Dogwalkers are sought after by name. Second, there are so many ways to continue to grow our portfolio through foam factor, flavor and experience. A recent event was our introduction of Snoozzzeberry under the Incredibles brand, which was specifically developed to help consumers looking for a better night sleep. We have a robust innovation pipeline across the portfolio and our team is always looking for ways to delight the consumer with new ways to meet their specific well beings or through creative partnerships. Last quarter, we announced our partnership with Cann, California's #1 cannabis beverage. We are excited to expand our beverage offering and will begin to roll out Cann across our markets. We launched Cann in Illinois ahead of 2020 to an awesome reception by consumers seeking an alternative to alcohol beverages. We are pleased with the consumer momentum and believe this is a glimpse into the future. For those of you 21 and over in Illinois, give it a try. You can do it. We have a lot of growth in the portfolio by leveraging our current assets and based on market conditions, M&A can be an attractive option. I'm not talking about environment trophy assets, but rather opportunities for geographic reach, our brand portfolio or our infrastructure. At the end of the day, Green Thumb is an execution-driven, consumer-focused, results-oriented team and that high standard puts card rails around all of our decisions. As I've said many times before, everything is on the table if it makes sense for our stakeholders. And while we're in a fortunate position to have strong balance sheet, you also know that every dollar we invest must have the potential to deliver strong returns for you, our shareholders. With that, I'll turn the call over to Anthony for his financial review and always engage in commentary. Anthony?

Thanks, Ben, and hello, everyone. Welcome to what is now our 12th earnings call as a public company. As Ben just highlighted, our team delivered record first quarter financial results, generating $194 million in top line revenue and over $71 million of adjusted operating EBITDA. Total net revenue grew 10% quarter-over-quarter, with credit CPG and retail revenue both growing by 8%. As a reminder, the difference between gross and net is in our company's revenue. The key drivers to our continued strong revenue performance. First, strong and growing demand for cannabis. When we are seeing an upward trend in cannabis consumption across the country, there is no doubt that this is particularly true in the markets within which we operate. The strategic bets we placed several years ago appear to be paying dividends. Second, our CPG product portfolio. We are cultivating flower and producing products that people are choosing to buy with their hard-earned dollars. Our efforts on facility design that focuses on quality over quantity as well as our product strategy that leads through the consumer is starting to establish true differentiation in the market. Third, execution. This boils down to a few civil contexts we live by here at Green Thumb. Number one, do what you say you're going to do. This holds sure with deal locks, whether that's consulting with patients, consumers or making an internal committed to another achievement. 2, let's go with a simple run, particularly in the start. This business and industry has enough complexity already. Third, embrace the team. We've said it before that our team is our greatest asset. We have passion, a thirst for knowledge and a competitive spirit that run through our house. So differently, we'd like to win. Back to financials queue, in addition to strong top line performance, the company continues to post robust gross margins with Q1 coming in at 57%. I know it's not as probably higher as earnings sale, but our intrinsic goal is to keep this metric at or above 50% over the long term. On the SG&A side, excluding D&A and stock-based comp, normalized operating costs totaled $42 million, a $4 million increase over the $38 million because of last quarter. A key goal of ours for this year was to build the company's infrastructure. So I would anticipate our gross SG&A spend to continue to increase in the coming quarters. Total other expense in Q1 approximated $9 million, largely driven by noncash charges and interest and warrant expense associated with our senior debt. As a result, the company generated over $71 million of adjusted operating EBITDA, close to 37% of revenue. In addition, we generated over $10 million in net income, our third consecutive quarter of positive EPS. On the capital front, we continue to leverage our balance sheet in a way that maximizes operational flexibility. We've asked about [indiscernible] up here, it's our version of a triple threat. With a sizable cash balance and positive cash flow from operations, we have the ability to buy, build, or sometimes our favorite move [ to leverage ]. Net of $156 million of equity we've raised in February, we ended the quarter with over $275 million of cash. As you work your way down the balance sheet, you'll see the following: low relative accounts receivable, a prudent inventory balance and a payables number of sub-$10 million for the first time since 2019. The technical accounting votes that puts our current ratio in [indiscernible]. Subsequent to quarter end, the company completed a $217 million self-conducted debt raise, adding over $100 million of net cash to our balance sheet and into leading interest rate. The net embracing cohort continue to create substantial value for shareholders and their fees at 0% of the amount raised stay intact. On a pro forma basis, the company has an excess of $300 million of cash. We [indiscernible] to put these dollars to work as we aggressively invest in our markets with this less than regulatory change. And while we are proud of our first quarter results, we can't help but focus on the future. As we tell the [indiscernible] buyers, we are still in the very early days in this industry. So butter up [indiscernible] and renew all assumptions. In the meantime, all our stakeholders, we will continue to run our math in math and execute our growth plans into entitled way of demand with less source. Back to you, Ben.

Thank you, Anthony. We are off to a great start and excited about 2021. We spent the last few years building a strong foundation brick-by-brick and our position today is stronger than ever. As the green wave continues to sweep the country, there is more optimism around state and federal legislation. It is still stable on at Green Thumb, so we'll keep taking a hard and fresh look at every opportunity to strengthen our business and to find innovative and new ways to delight our customers on their journey to well lean through cannabis. We are very privileged to participate in this industry. It is one of the fastest-growing industries in America today and has the ability to drive meaningful social impact, which we are firmly committed to. We continue to donate first day profits to every community where we open a new store. We have expanded our Dogwalkers donation program to include the daily legacy funds to support animal rescue organizations. In our home state of Illinois, we have been advocating to get Illinois social equity program started and look forward to the potential lottery for new dispensary licenses soon. The delay of the licensing process has created substantial financial burdens for summing up with the candidates, many of them who have been hardest hit by the pandemic. Hopefully, this process is beginning to move forward in Illinois. And in New York, we believe New York can lead in this respect by starting adult-use on January 1, 2023, not only with the incumbent operators, but also by issuing new licenses in a timely manner to new licensees, who, per the law, shall be heavily weighted for social equity entrepreneurs. Finally, we are committed to outstanding corporate governance and are especially pleased to welcome Swati Mylavarapu to our Board of Directors. Swati is a trustee of the Rhodes Trust, the world-renowned educational charity that supports exceptional students to study at Oxford University. She is also a Board Member for Vote.org that has increased voter turnout and strengthened American democracy. We are clearly aligned at our core principles. In closing, your company is stronger than ever and committed to becoming better every day. With that, we welcome your questions.

[Operator Instructions] Your first question comes from the line of Vivien Azer.

My first question, Anthony, is for you. It's a little bit more of a housekeeping item. Thank you very much for the commentary around your expectations for continued growth in SG&A as you invest behind the business. Can you please clarify whether you were talking about SG&A in absolute dollars or as a percentage of sales?

Great question, Vivien. It's Anthony Georgiadis. So I was referring to the gross spend in dollars, not in percentage. We'll see how much we can grow the top line, but we anticipate over time kind of maintaining that operating leverage within the business. But I think the gross SG&A dollar spend, we see an increase over the coming quarters.

Understood. That's very clear. And then my follow-up question, Ben, is for you. It's a little bit more of a strategic one. Clearly, on the flower side of your business, Brownie Scout has been a home run. We've been hearing about that for a number of quarters now. I recognize that the U.S. business and the way you hedge run your business is very, very different than Canada. But one of the kind of unfortunate learnings out of the Canadian marketplace is the consumer preferences in terms of flower streams can pivot. So -- and pretty quickly or at least it seems like it caught some of the Canadian operators off guard. So I'm just curious, how do you guys keep your finger on the pulse in terms of stream preference? And then if you could offer any kind of sense of the percentage of your overall flower sales that Brownie Scout accounts for, that would be helpful.

Sure. Yes, great question and insightful and you're right. Tastes evolve and strains evolve and things like that. So we're very heavily invested in breeding, evolving strain portfolio and delivering for consumers essentially the best strains around. And so while we don't talk about a lot of the other strains out there, whether it's the Sativa portfolio, Jack Orange and Sour Diesel, which right now are doing great or the White Durban that we recently released in the East Coast. There's a lot of great things in the portfolio. We just like to talk about one since it does so well. In terms of a percentage of revenue, it's not huge, I mean it's not a significant piece that I even know it off hand. We certainly want more. Consumers want more. Certainly, the effect for medical patient and for the relax effect of the Indica that it delivers is one of the kind. That's why it stands out, but we're not betting the company on us any single strain, which is nice if the Canadian supermarket realize it, but California due to the last couple of decades, strains matter and the genetics matter, and it's a very important nuance in the space.

Your next question comes from the line of Matt McGinley.

So on the CPG business, it looks like the gross value of product you sold in wholesale increased nicely sequentially, but the amount you sold internally decreased modestly. And then can we hope that you sell the product in your stores that the customer wants and not necessarily what you produce? But is there a geographic factor or something with product mix that would have caused that sort of mix shift or a slight decline in product that you're selling internally?

Anthony here. It was relatively flat, actually, kind of quarter-over-quarter. But given kind of the nuance, once you unpack that, there's a lot going on within each of the state markets that we operate in. It's really not a number that we kind of target or manage towards. It's one that naturally evolves within the business. And so while we didn't kind of see our company kind of revenue grow at the same cliff as we have historically, we're not -- we don't read too much into it just based on what we're seeing in the market for sales.

Okay. And on the capital raising and cash balances, between the equity raise and the debt, you got another $250 million year-to-date, and you're proven you've been able to generate cash, and I would expect that that would only improve. But even as you spend more on CapEx and even if you get a lot more M&A, almost all the deals we've seen this year, including this Virginia deal, yours is very heavily weighted to equity consideration. So the question is, how much cash you need to run this business? And are we reaching at the point with the company or the industry where you just sit on bigger and bigger balances because you don't know where you may need to pivot next kind of like a tech company where they just sit on these big balances and you don't know when they may deploy them that they'll have these larger balances. And just holistically in thinking like what's the right amount of cash that you need to run this business and drive?

Sure. Thanks, Matt. It's Ben. It's not an exact science. You sleep really well with the fortress-like balance sheet and cannabis being federally illegal, with the lowest cost of capital, even against others in federally legal domicile locations. And we think the opportunity is immense. So we're seeing annualized numbers crossing $20 billion. We see the number going way over to $80 billion, and it would make a lot of sense to have the capital on the balance sheet. We're investing aggressively in the business. I mean, both across the state opportunities, Illinois and Ohio, Pennsylvania, Maryland, New Jersey, New York, Connecticut, it keeps going. All of them have significant growth based on the size of the market, even if you take your conservative assumption and cut it by 20% or 30%. So we're not really managing the business from an amount of capital, the cash equity split, people want to own our stock. We're flattered by that. We're happy with that. We don't want to give it away. Obviously, it's the treasurer here, but we're comfortable with the share count we've got, we're managing that carefully, and we believe we can create very significant accretive value on whichever part of the income statement we want to measure and put a multiple on through the M&A. Otherwise we wouldn't do it. We would double or triple down in the business, which we're doing as well. So we like the cash balance, don't know where the capital markets are going. Sure, one day listing and safe and other things are going to happen, and it will change, but the business is pretty fantastic currently and we want to continue to invest in that. And I haven't thought for a moment that we have too much cash given the current situation.

Moving on, your next question comes from the line of Eric Des Lauriers from Craig-Hallum.

Congrats on another impressive quarter here. So a bit of a follow-up to Matt's question here. You have done a great job lowering cost of capital through these non-brokered, institutional capital raises. And yet, at the same time, your cannabis stocks in general continue to be negatively impacted by the significant capital and trading restrictions. So I'm just wondering if you can provide some color on the type of institutional demand that you're seeing beyond the public markets here and whether you're seeing any broad changes in compliance risk appetite, whether institutions are shying away or warming up to the idea of taking on U.S. cannabis exposure?

Yes, this is Ben. I'll take that. That's a great type of question because that's really a part of the core issue here. And I would say for folks that are putting their name in the press releases, there's more attention, but things are not simple. However, what you see Green Thumb do literally in every single way is bring new capital in its space. And that you know us and others do too. We are literally bringing in the capital on each one of these raises is not out of other cannabis companies, but new high quality, long-term aligned with management, institutional capital. And that's where the supply is going and we're bringing it in, but it's a slow movement. There needs to be more clarity. Things are very gray, whether it's custody, prime broker, different relationships, still can't buy the stock on Robinhood, CNBC still doesn't cover it properly or talk about it. And it's a very tricky situation. I think it continues to be the PMs and the investment analysts are unbelievably excited and cannot -- those who see it are sort of surprised by the, what we call, structural irregularity or market inefficiency that seems to be sort of a slow motion, at a time when the business on the ground bottom-up is an accelerated fast motion and in fact, accelerating. I mean, you had New York, you had New Jersey and New Mexico, there's more and more happening in that. You got Georgia, hopefully issuing licenses in Virginia just legalized. Even Mississippi and there's talk in other places. So we see an absolute dichotomy to the capital market inefficiency slowdown and on the ground acceleration. So that's why we won business with tons of cash with very, very aligned shareholders, and we're bringing in new capital. I can't speak to the other companies and the other countries or whatever else is happening because people are doing it differently. Not everybody -- it's not a one-size-fits-all situation. We're building a business for the long term for shareholders, investing capital and do a market opportunity in the U.S. that we think is somewhat unprecedented. We're fired up about it and we're aligned with the shareholders. So we're not having a hard time bringing the right kind of capital. We feel very sort of privileged in the spot we're in. But I think broadly, the capital markets are in their nascent stage.

Okay. Great. That's helpful. Great color there. And then as a bit of a follow-up. With that cash balance being the largest in span and you guys continue to increase your cash flow generation, could you just provide some insight or some color on sort of how you guys decide whether to sort of increase the scale of your projects or sort of spread that cash around and start to take on new projects, new geographies, maybe some smaller scale projects? Can you sort of help us understand how you guys think about that trade-off there?

Yes. We think about it like -- I mean, the ultimate gain, right? The capital allocation and how we put capital, where we put it in, what kinds of returns or what the business is going to be when and what the Board will look like. And it really is kind of a multidimensional situation with lots of different states and markets and things. So we look at our cards. Fortunately, we can see everybody else's cards. And we make the best based on the most basic principles possible. I can't remember this call another, we talked about fortune formula or the Kelly principle about how you make part of that and the way we think about wagers on behalf of shareholders that this is our money. And the chips are playing at a table where we're trying to take 1 plus 1 to make 4. We're putting 100 to create 500. And the simple math of make it up, say, $100 million investment to create $50 million or $75 million of EBITDA. At whatever multiple you think the market is going to trade the EBITDA at '20, make it up. $1.5 billion of market value creation. Where do we put that other to work? Well, guess what? There's many places we can put it to work because there's tens of millions, in fact, over 100 million Americans who are really, really interested and want that demand for the product. So it's about as simple as a set up as possible. So we're just going to play where we have the highest probability of success based on the chips that are out there.

Moving on, your next question comes from Camilo Lyon from BTIG.

Very nice quarter, guys. Congrats. Particularly in light of how difficult February was, so I'm curious to know after putting above, call it, a 10% sequential growth in Q1, what was the exit rates coming out of the quarter relative to that 10%? And any color that you could share as to the momentum that you've seen thus far in 2Q too would be very helpful.

Yes. It's a great question and insightful. I would say what we sat here with really the same seat in I think it was March 17, Wednesday, St. Patrick's Day, the day the stimulus checks came out. So the business you've heard from others who've seen it in the data, things changed in the back half of March as so the market woke up. So I wouldn't say that it's elevated above, it's sort of caught up to February being, low. Take the Illinois market data, 88, 80 and the back popping up above. You can see it state by state, and you really track the state data to show it. So I think your run rate exit is more first quarter flat situation versus some kind of dramatic acceleration. [Indiscernible] holiday and everything, but under the coverage even margins is a little stronger than April, not an unspecific but look at the markets, just every state gives you the data and you can see that. I don't know if you think which stores are open or what's happening. It's come through a change really in price. And our -- for Green Thumb's purposes, we have more scale coming out in the back half of the year. We talked about that towards the end of the year, particularly Illinois on some things coming at the beginning of 2022.

And that actually leads to my second question about your back half expansion plans. If you could just remind us what projects are coming on -- coming online in the second half in the states, that would be very helpful and how you should think about the really robust margin that you delivered in this quarter, understanding what you said, Anthony, about maintaining kind of like that 50-plus sort of baseline. But it really seems to be -- it seems to be that as more cultivation and harvesting comes online, particularly in the back half, you have an ability to at least maintain the starting point of this 57% margin rate through the balance of the year. If I'm thinking about that incorrectly, please correct me where I'm wrong.

I think that's right. On the ground, what I would say is, like Anthony mentioned, we were kind of -- we're now targeting at 57%, how do we get to 59%, Where do we have the trend? And so we feel like we're comfortable with how the gross margin is instead we're more like 50%. And we're okay investing into the business to scale this thing. We think there's a lot more production coming simply because there's a lot more demand. And if there's a lot more demand, people want a lot more of our products, we have to be thinking about it in that way. So we're very comfortable making investments into the business but if it means the margin goes down, fine. It's not a core focus. And so we're trying to build the infrastructure that really hits the SG&A line more with the revenue accelerating, and the gross margin scales an amazing thing. And also we start to work on yields. We start to see real details. And sometimes we don't talk about the exact details inside the business and that's not a coincidence because we're really working on that. We believe we a national model where we can bring premium indoor flower to consumers across the country who want it. It's as basic as possible. And there's more upside to go to next quarter, I don't know. But in 2023 and 2024, where this business is and the scale we have based on the capital we're putting in, based on the demand we see and just make it on New York and Virginia and New Jersey, that's as big as Canada alone. I think they're only 30 or 25 licenses there currently. And it's only the first mover. And then we think there's got to be a lot more people in the industry. And it's got to be access to capital and hopefully, D.C. gets around to doing a few things. But it sets us up pretty well.

Your next question comes from the line of Michael Lavery from Piper Sandler.

Just wanted to follow-up a little bit. The industry certainly is at an accelerating point with so much legalization momentum and your balance sheet, obviously, sets you up really well. Can you just give us a sense of how you're thinking about Capex and any ability to quantify what to think about for this year and maybe a range for something for 2022?

Michael, Anthony here, I'll take it. So in 2020, in kind of gross spend, it sounds like which is kind of before the sale-leaseback reimbursement. We spent about $113 million last year. In Q1, our gross spend was about $32 million. So I would anticipate our gross CapEx spend this year to certainly be greater than it was last year. As you know, we're not increasing by this CapEx specifics, but with the balance sheet that we have and the markets that we have and the regulatory changes coming, we're going to rename pretty aggressively. As I said in my same remarks, so I would anticipate that Q2 through Q4, the CapEx should accelerate from that $32 million number.

Okay. That's helpful. And a somewhat related follow-up, can you touch on -- obviously, you've got the debt at 7%, which is, by far, the best cost of capital among any in the industry. But can you just give a sense of if that -- is there still improvement from there? Is this kind of where you expect to stay? What would it take for that to move the needle again? But how do we just think about what settles into sort of a maybe baseline type of run rate?

Yes. I mean, for our purposes, that's not a thing you can just play around based on the day where the pricing is. For us, it's more aligned with the debt providers, where we think that cost of capital look. On year end, I talk about 6% to 7%. If we get 5%, we're not really like looking to refi quickly. The way the structure is for us, on our balance sheet is 3 years. We have an option for a fourth year. We think the next time we refi is when we're exposed to the sort of more normalized capital markets. We've been told the business performance and the P&L looks investment grade. And if you look to the U.S. investment grade yourself, 4%, 3%. If you look at the debt characteristics of the business, the trailing 12 months is like 1x EBITDA plus or minus. And even if you say the taxes are wonky, then it's 2x. Pretty under-levered for the growth we see. So we sleep really well with it and we just like where we are. Certainly, more interest, we can flex it up to $250 million. We don't need to pay the interest on more cash sitting on the balance sheet. It just doesn't make a lot of sense. You have a year to fill out the rest of it. We have the opportunities. I think I'm hopeful as everybody else in the industry to be able to continue to drive down our cost of capital also and that should happen. But it's -- the capital markets are thin as we've all seen. So we like our position. Is it only for us, we did the equity in debt and how we're going to work? And the same thing in 2019, people were a little surprised it happened in 2020, and we plan to be acting on 2023 talking about where the world is with cannabis.

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

So first question for me is a little bit around M&A. Great to see the acquisition on Virginia with adult-use coming online there in the next couple of years and flower starting. But would love to get your perspective in terms of how you think about potential additional M&A, particularly through the lens of the chance of there being some changes at the federal level or your thoughts on that? There's been some peers or others out there who have started to make some moves in anticipation of -- there might be new change at federal level. And how you guys think about that in the near term on your acquisitions?

Sure. This is Ben. I'll take that. So M&A, look, it's a high-level thesis is everything is on the table to make sense. We've said that for a while. But we're pretty aggressive in knowing what's going on in the states. We're very U.S.-focused. We think the action is here in the United States. We think this is an American story. And we think that as the U.S. executes that in the industry or country, the world will want what we have. Capital markets and supply-demand are pretty efficient here. So we're comfortable with that. If you just look at our history, we raise debt, we invested in the business, we're looking at what's happening with the cycle of capital markets. The fun part of our cannabis is it's in hyper speed. So we've had feast and famine, ups and downs. And we're comfortable with that. I would say that you should look for us to do M&A that's accretive to shareholders based on the exact thesis we've talked about. So whether it's going to be entered like the Virginia or scale like whatever the last year we bought a store in Connecticut, it just scales the business and other strategic plays like that. We've been active for 5, 6 years, sometimes like Anthony said, we do our favorite which is do nothing, and sometimes we do a lot. We think we're following what's going on in U.S. cannabis pretty carefully and we think we understand what's going on, on the ground. And therefore, it gives us a little bit of advantage with information by which to make decisions whether that's data-driven or personality-driven or legislatively driven, whatever, that's the recipe by which we use. Last on the point, that's all part of the Board that we see about how to bet at where it's going. The business is very good under the current situation. So I'm not likely to put a lot of capital into that's something that might happen later. We like where it is right now. We think there's opportunity to change, not a threat, and we're excited about that. We want to play a lot of offense. But at the moment, we feel tens of millions of Americans want cannabis and don't have it. So we need to make it really fast, really good, and that's what we're up to.

Okay. That's super helpful color. And then second question for me. So just given your strength in balance sheet, we've talked about Florida a couple of times. More recently, obviously, there's been some action there in terms of acquisitions this year. Hasn't been a ton allocated down there for you guys where you had some other high priority states. But just given your strength in balance sheet, you've often talked about you like the market longer term. So does that kind of give you some capital going to be put towards that market and look to grow there, especially with the potential of the use being on the ballot there in 2022?

Yes, I think that's insightful. Yes, as we had more cash, exactly right. We looked at it through that lens and that would lead you to think of that conclusion. And yes, we're not going to just sit with a lot of cash for a long period of time. We see 20 million Americans. We have a high interest in a very nice market. People have done a very good job down there. So it's an interesting market and we're studying it.

Your next question comes from the line of Pablo Zuanic from Cantor Fitzgerald.

Ben can I ask about -- I understand this is a growing industry and you have a lot of levers. But the 2% same-store sales growth sequentially, can you help give us some context around that number? I mean I could interpret that Pennsylvania, maybe too many stores. I know if that market is growing, can go rate eventually, but -- or other state, Illinois, new stores have open only recently. I'm surprised about the 2% same-store sales number. Can you give some context around that please?

Sure. Pablo, this is Ben. I can start. We look at -- we don't see any issues in the business. There hasn't been any major new turn-ons or things like that, whether it's adult-use or new store openings or conversions that sometimes give tailwind there. The thing I would do is look at state over state. What's happened in fourth quarter to first quarter, first quarter over fourth quarter by state. We don't see ourselves giving up a lot of market share. These are ebbs and flows of the market. First quarter was pretty slow until March 17. Like, no doubt about it. February was pretty rough in the country. There was 4 days of snow and I think that Ohio, Pennsylvania and New Jersey had multiple feet in snow and nobody wanted to go out. And the store wasn't open every day and it's a 28-day month. So I don't see any real read-through there. March came strong, but it is 2% on 48 stores. Other big thing is it's a big base. So the number is now have a comp base over a year of 40 and a sequential of 48. So you're not moving a needle in 48 stores, 30% across heading states. That's tough. The business is much bigger than it was before in terms of the amount of retail business we're doing on a daily, monthly, quarterly basis. I mean, they're a big barge and big market share, yes, the market is going to quadruple in front of all of us.

Right. And then just a follow-up on New York. How are you thinking about the potential there to open to have 8 medical stores? Do you have a view on that timing and your views in terms of when the second steps start selling flower, if you have some insight on that, on the medical side?

Sure. I can take that also. It's Ben. Look we think New York is an awesome market. With infrastructure, the market sets up well and now it's about execution. We've seen a good intent law somewhat on execution in Illinois, yet still has a chance to emerge successful. We believe to just put a dart out there that 01/01/23, January 1, 2023 would be a date that New York could open adult-use. And they can do such where it's not the current incumbents of which GTI is one of them only, like no grandfathering. And then instead, based on the time line and based on the laws of the region and the commission and all the things that New York is doing, they're pretty focused on doing a nice job. They can get new licenses and applications and those licenses would have a focus on social equity. And day 1, you could have new people enter the industry, new entrepreneurs with a chance to generate new wealth. We think that's a big part of it. There's no real product rules yet. In terms of the market, there's a lot. As you said, yes, the flowers, we've heard others who were really carrying a load and we're appreciative of that, pushing this forward because, obviously, the medical patients should have access to flower for well-being. It's common sense, yet rules are tough, regulators are new to the space. There's a lot of education and hard work that has to go on to bring that about. But in any way, it's supposed to bring New York to be a great market with plenty of demand. We'll go for our 8 stores, 3 of which can be dual really execute into it.

Your next question comes from the line of Graeme Kreindler from Eight Capital.

I wanted to follow-up on some of the earlier comments you made, Ben, with respect to the potential setup in the event of market has an interstate commerce element to it. The early days of the GTI story really talked about branded distribution at scale. And I'm wondering if you could elaborate a little bit more. There's been significant adds and diversification across the brand portfolio at GTI over the last little while. But when you talk about the distribution at scale, how does your potential Worcester, your existing asset base, factor into a situation where you're looking at distribution coast to coast. With the existing cultivation coming online, that's very much served to expand on the existing state markets and the demand coming on there. But do you see opportunities to leverage any of that infrastructure from a regional basis? Or would this really require some large greenfield type of investment or potentially using like third parties in the supply chain?

Sure, Graeme. Yes. I mean, it's the same story what the truth is. There's huge demand within the markets. And like we talked about on the last call and we said on this call, the business is very good under the current situation. We think there's an opportunity more than a threat with interstate. Certainly, they need more, but you got to think about the supply chain becoming more fragmented. There's more opportunities there. We think our brands win with the consumers, exactly what the supply chain looks like today is not something that we lose a lot of sleep over. We know what the products are, we want to be able to make them at scale. We're making them at scale in markets that have 12 million, 13 million people, 20 million people, 40 million people like out in California. So those are huge markets. And obviously, there's regionality and there's other things. But there's other models of consumer products that have built these sorts of things. So we don't think we're behind in any way, shape or form. We feel like we're in a pretty good spot and like where we are. I think what's also really crucial is the consistency of the product. We can't just make it everywhere and shipping it and then you like it to go, especially as you get closer to the flowers. You move further away into the refined products, you [indiscernible] easier, but the consistency of the product is very important.

Understood. Appreciate that insight. And then just as a quick follow-up here. With respect to the acquisition of Dharma in Virginia, there's been some chatter about the potential timing of the start of adult-use being brought forward. As that relates to your capital allocation decisions and the CapEx expectations that were outlined earlier in the call, how much of that make that directed to Virginia? Or how quickly could you start deploying capital based on what Dharma has built or potential plans that they've drawn up for significant expansion?

Sure. This is Ben and Anthony, don't be shy. The -- what's happening with the legislation, like I said many times, I think the legislation in the state or federal, federal being more so is a trailing indicator. So we see 8.5 million people that have a huge amount of demand. So we're putting in the pieces in place to serve that demand. We understand it's a medical, we understand it's going directly, there's a lot of nuances on how that works. But it really doesn't impact the capital decision. If we saw like a do-not-enter sign and a no chance for adult-use, we might change the plan. But the plan is 8.5 million people, $1 billion plus market, what's the multiphase approach. We've done this in many states. We know the consumers want the branded product and now we know how to make them in scale. And it's scale up at 8.5 million people. We're also thinking what states are around, how does this look, and what happens regionality to your question. But Virginia is a great market. It's a pleasure to see cannabis coming through an area of the country that really does not have it. We think that's a big deal.

Your next question comes from the line of Andrew Partheniou from Stifel GMP.

Congrats on the good quarter, guys. Maybe if I can come back to the discussion of dynamics in March and into Q2. Could you talk a little bit about the pricing or promotional environment? People receiving stimulus checks was highly anticipated. And wondering if there was a higher than normal promotion to capture that strong traffic after a tough January and February. What does April look like? And now what does May look like after the 4/20 and the stimulus check period?

Andrew, this is Ben, I'll take that. So I think what I'm trying to read into the question a little bit, you're essentially asking if we ran promotions in March to kind of combat the softness that we saw in the early part of the quarter. But it's really not the case. We continue to just kind of run the business. I'll remind you that one of the benefits of our business is that we still operate in a number of supply constrained environments. And so even other operators don't have a huge appetite to kind of do a lot of commercial activity. Some of the markets are getting more competitive, but that's just natural evolution. And obviously, we're kind of setting that, watching that, but there's nothing kind of abnormal or anything that we did where we had a discussion on the table saying, "Hey, we'll do something about this". So ran the business, ran the playbook and some of those similar checks came in and people did exactly what's kind of been. As I mentioned during the last call, they purchased more product. And I think probably, we're the only beneficiary of that.

And maybe just talking about New York a little bit more. The regulations haven't been out yet. Within the law, it gives the regulator a lot of power to place any kind of caps or restrictions. And yet you've already secured your platform for production there. I'm just curious if you could give us a little bit more color on your thoughts on how you think the regulations will play out, whether you think there will be any production caps and how your strategy with your production footprint that you've already acquired plays into that?

Sure. This is Ben. I can take it. We've talked about it. I'm not sure how much new news there is. I think there's going to be an immense amount of demand. We want to build the high-quality products at what we can make. We have an aggressive capital spend plan. State has not issued rules yet. The committee, they were pretty early on. You know the website, I think that's a strong sign. There's a lot of the intent to make this work and make it work well, and we're here as a partner to help. Like I mentioned, some of the current ROs work pretty hard on getting flower out and we're all kind of in it together, along with the new entrants. And so similar to what we did in Illinois in the LEAP program, which is an application assistance programs, it's hard to apply for a license. And so we can educate folks on coming into the space, we're going to make the products, we have our stores, we have others have stores. Like I mentioned, we're throwing the dart on 01/01/23, that's not based on any exact science and 0 lobbying. It's just based on what we think would set up well for the industry for everybody who's invested in this going really, really well. If it's 3 to 6 months earlier or 3 to 6 months later, you can make it work. But if we want something with a pretty lofty goal like bring others in day 1 and we're going to aggressively build what we know how to make. We think that we've had version 1, 2, 3 and 4, and make a lot of mistakes. And hopefully, we cannot make the same mistakes in New York.

Your next question comes from Scott Fortune.

And I'll be brief. Real quick thoughts on California, Ben. You opened up the [indiscernible] store. I know it took a while, but you're there. Any color on kind of trends there, momentum and thoughts around building out California at all?

Thanks, Scott. Yes. As we had opened, we see a lot of COVID restrictions still going on in California. I think that's opening up. So it's up to a nice start with good momentum up until the right. As we say, we'll continue to refine menu selection, build loyalty in the state. We're aggressively looking at what's going on in California. I think it would be foolish not to, but we're not aggressively spending. Things will make sense or it won't and we'll go there. But the places that we mentioned for aggressive spend are like in the now. So California, we're watching, we're studying, we like our position, which is not a lot of capital at risk.

Got it. And then 2 other states, you have mentioned much of Nevada and Massachusetts as things open up here. Are you seeing favorable trends from that standpoint? And these 2 states are like the Cann invest, makes sense to move forward into other states outside of Illinois? I think you'll want some other states going forward.

Yes. And we see little difference between Nevada and Massachusetts when that Massachusetts remains strong and give really transparency into that market. We plan to scale production. We need more of our product there and we plan to expand retail, not administrative. We're sitting with one. So we look for action to come in Massachusetts. In Nevada, we see -- our business has not been heavily levered to tourism. So it didn't soften the way it is. Now you see the surge, with 60 going to 80 on a monthly basis, a lot of tourism. Obviously, that's a heavy play of what we're doing with Cookies and Berner, which we think is great. So we plan to play that. But both those states give a pretty good transparency on a monthly basis see then come back. Pricing is firm to both states. There's a lot of momentum for our products and others as there's just good growth on both those markets. And we have a couple of more stores we can open in Nevada. We should have it this year, one in Reno and one more in the Vegas area, which are in the pipeline.

Your next question comes from the line of Andrew Semple from Echelon Capital Markets.

Congrats on another solid quarter. Ben, I think a couple of months ago, you gave us your kind of priority list in terms of capital allocation in certain markets where you're looking to prioritize capital spend. Just given the developments in New York and Virginia since that update, could you kind of swap those in and kind of give us a sense of where those fits in terms of priorities? And do you think New York is kind of at the top of that list and maybe a little bit more clarity on Virginia?

Yes. I mean both of them come in strong Tier 1 capital allocation opportunities. I mean it's a pretty basic math problem, 20 million people with 8.5 million people in the current market size [ to were to draw ]. You've seen the movie before. It's called Illinois or Pennsylvania. It's just literally -- it's not about anything that fancy, it's about how much products the consumers want. Major red flags in legislation, meaning some structural irregularity or like vertical or certain products or potency or something wonky. Most of these markets have a pretty set structure for how they're going to unroll. New Jersey right there as well, right, 9 million people are waiting on the rules and waiting for this thing to get going. A huge amount of demand.

That's great. And just a follow-up. I wanted to ask on the gross margin profile. There's been a very nice trend. The gross margins have been ticking up every quarter since Q1 of 2020. Just wondering on your thoughts on where we start to find the kind of normalized gross margin profile going forward? Do you think we're kind of approaching that level yet kind of the mid-Q1 period? Or do you continue to see wait in the room for that to move higher as you scale your production cultivation activities?

Yes. It's -- look, it's a great question. It's a really hard question to answer. So part of the reason is because given the growth of the business, we are -- what we had going on is we're obviously investing heavily on the CPG side of the business. So over time, that should become a greater percentage of the overall business. And when you unpack kind of the gross margin, the gross margin of retail is relatively static, right? CPG is where you get kind of real kind of gross margin leverage in the business. However, these sites take a while to kind of turn on and get the scale. And so what you have is if you unpack the portfolio when you lay it out, you have a number of facilities right now that are achieving scale or call it operating at scale and continuing to refine the more efficient. And then the same -- in the same breath, we also have a number of facilities that are just not turning on, that are not terribly efficient, right? So there's going to a drag, I guess, on that gross margin line. So I think it's difficult for me to sit here and tell you where I think it's going or where I think kind of the true kind of potential is in that line item. And one of the benefits of the business is that with solid cash flow from operations and a healthy cash balance, we wanted to sit here and manage the gross margin to a specific number. You can make bets that we know will pay off in 2 to 3 years from now, and we've got the luxury of doing that when we have these other states that are operating at scale. And so that puts us in a really nice position. It puts the shareholders in an even better position. And so I think you'll continue to see us lean in on the CPG side of the business where we know over time we can get more kind of gross margin leverage.

Our next question comes from the line of Mike Hickey from Benchmark Company.

Congrats on the quarter, guys. 2 quick ones from me. Just curious how you think about investment or development of cannabis lifestyle or cannabis media assets, it's sort of an ancillary growth opportunity for you. And then secondly, with your Cann beverage product line launching in Illinois, obviously it sounds exciting. But just curious, double click maybe on the learnings there in terms of manufacturing, maybe initial demand in the category potential outside of California?

Sure. I'm just taking the second one first. Cann, we're excited about the launch. We continue to see like everybody that beverages are not a big part of the category. We talked about off-prem versus on-prem, where all cannabis is off-prem. We think that's changing slowly. We want to be a part of that. We've made some place for that. We can launch well. We don't have any major news to share, except for the product that's fantastic. And for those of you who haven't tried it, you should because it's socially dosed, this is a light 2 milligram. You're not going to accidently drink 10 Canns, which would be the equivalent of 2 gummies. You might accidentally eat 2 dummies and that might be overserving, whereas 1 Cann is not going to be over, you can have a half. So bringing in people that don't smoke pot and aren't really familiar with that, don't want to get too messed up or whatever, ends up a very, very attractive entry and it's an instant situation where people love the flavor. Those guys have done an excellent job formulating the product, the brand, it works. And to me, that's what attracted us to it. Coming to your first question on media assets of that, I don't know. I would say everything is on the table that make sense. We're open. There's a lot more conversations happening broadly. It seems like everybody is interested in cannabis. Here we are with a series of unique assets and a perspective of what's going on. So we're open to a lot of conversations.

Thank you. And there are no further questions at this time. Presenters, you may continue.

Great. Thank you, everybody, for dialing in. We'll back in a few months. We'll see you in Vegas and enjoy the ride over the next 90 days. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.